UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________
FORM 10-K
____________________________
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED December 31, 2019
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 814-00852
__________________________
Sutter Rock Capital Corp.
(Exact name of registrant as specified in its charter)
____________________________
Maryland | 27-4443543 |
(State of incorporation) | (I.R.S. Employer Identification No.) |
One Sansome Street, Suite 730, San Francisco, CA | 94104 |
(Address of principal executive offices) | (Zip Code) |
(650) 235-4769 | |
(Registrant’s telephone number, including area code) | |
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered | ||
Common Stock, par value $0.01 per share | SSSS | Nasdaq Capital Market | ||
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o No x
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 periods as 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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer x |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Emerging growth company o | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES o NO x
The aggregate market value of common stock beneficially owned by non-affiliates of the Registrant on June 28, 2019, based on the closing price on that date of $6.40 on the Nasdaq Capital Market, was $125,739,814. For the purposes of calculating this amount only, all interested directors and executive officers of the Registrant have been treated as affiliates. There were 17,326,632 shares of the Registrant’s common stock outstanding as of March 13, 2020.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement relating to the Registrant’s 2020 annual meeting of stockholders (the “2020 Proxy Statement”), to be filed with the Securities and Exchange Commission (the “SEC”) within 120 days following the end of the Registrant’s fiscal year, are incorporated by reference in Part III of this annual report on Form 10-K as indicated herein.
SUTTER ROCK CAPITAL CORP.
TABLE OF CONTENTS
PAGE | ||
PART I. | ||
Item 1. | ||
Item 1A. | ||
Item 1B. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
PART II. | ||
Item 5. | ||
Item 6. | ||
Item 7. | ||
Item 7A. | ||
Item 8. | ||
Item 9. | ||
Item 9A. | ||
Item 9B. | ||
PART III. | ||
Item 10. | ||
Item 11. | ||
Item 12. | ||
Item 13. | ||
Item 14. | ||
PART IV. | ||
Item 15. | ||
i
PART I
Item 1. | Business |
Sutter Rock Capital
Sutter Rock Capital Corp. ("we", "us", "our", “Company” or “Sutter Rock Capital”), formerly known as GSV Capital Corp. and formed in September 2010 as a Maryland corporation, is an internally-managed, non-diversified closed-end management investment company. The Company has elected to be regulated as a business development company ("BDC") under the Investment Company Act of 1940, as amended (the “1940 Act”), and has elected to be treated, and intends to qualify annually, as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).
On and effective March 12, 2019, our Board of Directors approved internalizing our operating structure ("Internalization") and we began operating as an internally-managed non-diversified closed-end management investment company that has elected to be regulated as a BDC under the 1940 Act. Prior to March 12, 2019, we were externally managed by our former investment adviser, GSV Asset Management, LLC (“GSV Asset Management”), pursuant to an investment advisory agreement (the “Investment Advisory Agreement”), and our former administrator, GSV Capital Service Company, LLC (“GSV Capital Service Company”), provided the administrative services necessary for our operations pursuant to an administration agreement (the “Administration Agreement”). See "— Internalization of Operating Structure" and "Note 3 — Related-Party Arrangements" to our consolidated financial statements for the year ended December 31, 2019 for more information.
The Company’s date of inception was January 6, 2011, which is the date it commenced its development stage activities, and it commenced operations as a BDC upon completion of its initial public offering (“IPO”) in May 2011. The Company’s common stock is currently listed on the Nasdaq Capital Market under the symbol “SSSS” (formerly "GSVC"). The Company began its investment operations during the second quarter of 2011. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this Form 10-K.
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 acquire our investments through direct investments in prospective portfolio companies, secondary marketplaces for private companies, and negotiations with selling stockholders. We may also invest on an opportunistic basis in select publicly traded equity securities or certain non-U.S. companies that otherwise meet our investment criteria.
Our investment philosophy is based on a disciplined approach of identifying promising investments in high-growth, venture-backed companies across several key industry themes which may include, among others, social mobile, cloud computing and big data, internet commerce, financial technology, mobility, and enterprise software. Our investment decisions are based on a disciplined analysis of available information regarding each potential portfolio company’s business operations, focusing on the portfolio company’s growth potential, the quality of recurring revenues, and path to profitability, as well as an understanding of key market fundamentals. Venture capital funds or other institutional investors have invested in the vast majority of companies that we evaluate.
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. Typically, our preferred stock investments are non-income producing, have different voting rights than our common stock investments and are generally convertible into common stock at our discretion.
We seek to create a low-turnover portfolio that includes investments in companies representing a broad range of investment themes.
Our common stock is traded on the Nasdaq Capital Market under the symbol “SSSS”. The net asset value per share of our common stock on December 31, 2019 was $11.38. On March 11, 2020, the last reported sale price of a share of our common stock on the Nasdaq Capital Market was $6.06.
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Internalization of Operating Structure
On and effective March 12, 2019 (the “Effective Date”), our Board of Directors approved our Internalization and we began operating as an internally managed non-diversified closed-end management investment company that has elected to be regulated as a BDC under the 1940 Act.
In connection with our Internalization, the Investment Advisory Agreement and the Administration Agreement were terminated and Michael T. Moe resigned from our Board of Directors as of the Effective Date. As of such date, we entered into a Consulting Agreement with Mr. Moe (the former Chairman of our Board of Directors and the Chief Executive Officer and Chief Investment Officer of GSV Asset Management), pursuant to which Mr. Moe provides certain services to us in connection with our transition to an internally managed operating structure. We also entered into an Amended and Restated Trademark License Agreement with GSV Asset Management to permit us to to use the trade name “GSV”, and other state or unregistered “GSV” marks, including the trading symbol “GSVC”. Effective as of July 30, 2019, we changed our name to Sutter Rock Capital Corp. and effective as of August 1, 2019, we changed our trading symbol to “SSSS”. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Rebranding to Sutter Rock Capital Corp.”
Except as otherwise disclosed herein, this Form 10-K discusses our business and operations as an internally managed BDC during the period covered by this Form 10-K. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this Form 10-K for additional information regarding the forgoing and our Internalization.
Operating and Regulatory Structure
We are a Maryland corporation formed in 2010 that operates as an internally managed, non-diversified closed-end management investment company. Our investment activities are supervised by our Board of Directors and managed by our executive officers and investments professionals, all of which are our employees.
As a BDC, we are required to meet regulatory tests. See “—Regulation as a Business Development Company.” Also, while we are permitted to finance investments using debt, our ability to use debt is limited in certain significant aspects. See “Risk Factors” in Part I, Item 1A of this Form 10-K for more information.
We have elected to be treated as a RIC under Subchapter M of the Code and expect to continue to operate in a manner so as to qualify for the tax treatment applicable to RICs. See “—Material U.S. Federal Income Tax Considerations” and “Note 2—Significant Accounting Policies—U.S. Federal and State Income Taxes” and “Note 9—Income Taxes” to our consolidated financial statements for the year ended December 31, 2019 for more information.
As of December 31, 2019, we had six employees, each of whom was directly employed by us. These employees include our executive officers, investment and finance professionals, and administrative staff. All of our employees are located in our principal executive office in San Francisco, California. Carl Rizzo, a director at Alaric Compliance Services LLC, served as our Chief Compliance Officer during the fiscal year ended December 31, 2019 pursuant to an agreement between us and Alaric Compliance Services LLC. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments".
Investment Opportunity
We believe that society is experiencing a convergence of numerous disruptive trends, producing new high-growth markets.
At the same time, we believe that the IPO markets have experienced substantial structural changes which have made it significantly more challenging for private companies to go public. Volatile equity markets, a lack of investment research coverage for private and smaller companies and investor demand for a longer history of revenue and earnings growth have resulted in companies staying private significantly longer than in the past. In addition, increased public company compliance obligations such as those imposed by the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) have made it more costly and less attractive to become a public company. As a result, there are significantly fewer IPOs today than there were during the 1990s, with prospective public companies taking longer to come to market.
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Investment Strategy
We seek to maintain our portfolio of potentially high-growth emerging private companies via a repeatable and disciplined investment approach, as well as to provide investors with access to such companies through our publicly traded common stock.
Our investment objective is to maximize our portfolio’s total return, principally by seeking capital gains on our equity and equity-related investments. We have adopted the following business strategies to achieve our investment objective:
• | Identify high quality growth companies. Based on our extensive experience in analyzing technology trends and markets, we have identified several technology sub-sectors, including social mobile, big data and cloud, marketplaces, and education technology, as opportunities where we believe companies are capable of producing substantial growth. We rely on our collective industry knowledge as well as an understanding of where leading venture capitalists and other institutional investors are investing. |
We leverage a combination of our relationships throughout Silicon Valley and our independent research to identify leaders in our targeted sub-sectors that we believe are differentiated and best positioned for sustained growth. Our team continues to expand our sourcing network in order to evaluate a wide range of investment opportunities in companies that demonstrate strong operating fundamentals. We are targeting businesses that have been shown to provide scaled valuation growth before a potential IPO or strategic exit.
• | Acquire positions in targeted investments. We seek to selectively add to our portfolio by sourcing investments at an acceptable price through our disciplined investing strategy. To this end, we utilize multiple methods to acquire equity stakes in private companies that are not available to many individual investors. |
Direct equity investments. We seek direct investments in private companies. There is a large market among emerging private companies for equity capital investments. Many of these companies, particularly within the technology sector, lack the necessary cash flows to sustain substantial amounts of debt, and therefore have viewed equity capital as a more attractive long-term financing tool. We seek to be a source of such equity capital as a means of investing in these companies and look for opportunities to invest alongside other venture capital and private equity investors with whom we have established relationships.
Private secondary marketplaces and direct share purchases. We also utilize private secondary marketplaces as a means to acquire equity and equity-related interests in privately held companies that meet our investment criteria and that we believe are attractive candidates for investment. We believe that such markets offer new channels for access to equity investments in private companies and provide a potential source of liquidity should we decide to exit an investment. In addition, we also purchase shares directly from stockholders, including current or former employees. As certain companies grow and experience significant increased value while remaining private, employees and other stockholders may seek liquidity by selling shares directly to a third party or to a third party via a secondary marketplace. Sales of shares in private companies are typically restricted by contractual transfer restrictions and may be further restricted by provisions in company charter documents, investor rights of first refusal and co-sale and company employment and trading policies, which may impose strict limits on transfer. We believe that the reputation of our investment professionals within the industry and established history of investing affords us a favorable position when seeking approval for a purchase of shares subject to such limitations.
• | Create access to a varied investment portfolio. We seek to hold a varied portfolio of non-controlling equity investments, which we believe will minimize the impact on our portfolio of a negative downturn at any one specific company. We believe that our relatively varied portfolio will provide a convenient means for accredited and non-accredited individual investors to obtain access to an asset class that has generally been limited to venture capital, private equity and similar large institutional investors. |
Starting in 2017, we began to focus our investment strategy to increase the size of our investments in individual portfolio companies. While this will likely have the effect of reducing the number of companies in which we hold investments, we believe that the shift towards larger positions will better allow our investment professionals to focus our investments in companies and industries that are more likely to result in beneficial returns to our stockholders.
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Competitive Advantages
We believe that we benefit from the following competitive advantages in executing our investment strategy:
• | Capable team of investment professionals. Our executive officers, investment professionals, and Board of Directors have significant experience researching and investing in the types of high-growth venture-capital-backed companies we are targeting for investment. Through our proprietary company-evaluation process, including our identification of technology trends and themes and company research, we believe we have developed important insight into identifying and valuing emerging private companies. |
• | Disciplined and repeatable investment process. We have established a disciplined and repeatable process to locate and acquire available shares at attractive valuations by utilizing multiple sources. In contrast to industry “aggregators” that accumulate stock at market prices, we conduct valuation analysis and make acquisitions only when we can invest at valuations that we believe are attractive to our investors. |
• | Deep relationships with significant credibility to source and complete transactions. Our executive officers and investment professionals, are strategically located in San Francisco, California, allowing us to fully engage in the technology and innovation ecosystem. Our wide network of venture capital and technology professionals supports our sourcing efforts and helps provide access to promising investment opportunities. Our executive officers and investment professionals have also developed strong relationships in the financial, investing and technology-related sectors. |
• | Source of permanent investing capital. As a publicly traded corporation, we have access to a source of permanent equity capital that we can use to invest in portfolio companies. This permanent equity capital is a significant differentiator from other potential investors that may be required to return capital to stockholders on a defined schedule. We believe that our ability to invest on a long-term time horizon makes us attractive to companies looking for strong, stable owners of their equity. |
• | Early mover advantage. We believe we are one of the few publicly traded BDCs with a specific focus on investing in high-growth venture-backed companies. The transactions that we have executed to date since our IPO have helped to establish our reputation with the types of secondary sellers and emerging companies that we target for investment. We have leveraged a number of relationships and channels to acquire the equity of private companies. As we continue to grow our portfolio with attractive investments, we believe that our reputation as a committed partner will be further enhanced, allowing us to source and close investments that would otherwise be unavailable. We believe that these factors collectively differentiate us from other potential investors in private company securities and will serve our goal to complete equity transactions in compelling private companies at attractive valuations. |
Our primary competitors include specialty finance companies including late-stage venture capital funds, private equity funds, other crossover funds, public funds investing in private companies and public and private BDCs. Many of these entities have greater financial and managerial resources than we will have. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider more investments and establish more relationships than we do. Furthermore, many of our competitors are not subject to the regulatory restrictions the 1940 Act imposes on us as a BDC. For additional information concerning the competitive risks we face, see “Risk Factors—Risks Related to Our Business and Structure” in Part I, Item 1A of this Form 10-K.
Investment Process
Concentrated Technology-related Focus
Our executive officers and investment professionals have identified five key investment themes from which we have seen significant numbers of high-growth companies emerge: social and mobile, financial technology and services, big data and cloud, marketplaces, and education. However, the opportunity set of high-growth venture-backed technology companies extends beyond these key investment themes into much broader markets. These broad markets have the potential to produce disruptive technologies, reach a large addressable market, and provide significant commercial opportunities. Within these areas, we have identified trends that could create significant positive effects on growth such as globalization, consolidation, branding, convergence and network effects. Thus, while we remain focused on selecting market leaders within the key investment themes identified, our executive officers and investment professionals actively seek out promising investments across a diverse selection of new technology subsectors.
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Investment Targeting and Screening
We identify prospective portfolio companies through an extensive network of relationships developed by our executive officers and investment professionals, supplemented by the knowledge and relationships of our Board of Directors. Investment opportunities that fall within our identified themes are validated against the observed behavior of leading venture capitalists and institutional investors, as well as through our own internal and external research. We evaluate potential portfolio companies across a spectrum of criteria, including industry positioning and leadership, stage of growth, path to profitability, and several other factors that collectively characterize our proprietary investment process. We typically seek to invest our assets under management in the equity of well-established and growth stage companies, and debt investments of emerging companies that fit within our targeted areas. Based on our initial screening, we identify a select set of companies that we evaluate in greater depth.
Research and Due Diligence Process
Once we identify those companies that we believe warrant more in-depth analysis, we focus on their total addressable market, revenue growth and sustainability, and earnings growth, as well as other metrics that may be strongly correlated with higher valuations. We also focus on the company’s management team and any significant financial sponsor, their current business model, competitive positioning, regulatory and legal issues, the quality of any intellectual property and other investment-specific due diligence. Each prospective portfolio company that passes our initial due diligence review is given a qualitative ranking to allow us to evaluate it against others in our pipeline, and we review and update these companies on a regular basis.
Our due diligence process will vary depending on whether we are investing through a private secondary transaction on a marketplace or with a selling stockholder or by direct equity investment. We access information on our potential investments through a variety of sources, including information made available on secondary marketplaces, publications by private company research firms, industry publications, commissioned analysis by third-party research firms, and, to a limited extent, directly from the company or financial sponsor. We utilize a combination of each of these sources to help us set a target value for the companies we ultimately select for investment.
Portfolio Construction and Sourcing
Upon completion of our research and due diligence process, we select investments for inclusion in our portfolio based on their value proposition, addressable market, fundamentals and valuation. We seek to create a relatively varied portfolio that we expect will include investments in companies representing a broad range of investment themes. We generally choose to pursue specific investments based on the availability of shares and valuation expectations. We utilize a combination of secondary marketplaces, direct purchases from stockholders and direct equity investments in order to make investments in our portfolio companies. Once we have established an initial position in a portfolio company, we may choose to increase our stake through subsequent purchases. Maintaining a balanced portfolio is a key to our success, and as a result we constantly evaluate the composition of our investments and our pipeline to ensure we are exposed to a diverse set of companies within our target segments.
Transaction Execution
We enter into purchase agreements for substantially all of our private company portfolio investments. Private company securities are typically subject to contractual transfer limitations, which may, among other things, give the issuer, its assignees and/or its stockholders a particular period of time, often 30 days or more, in which to exercise a veto right, or a right of first refusal over, the sale of such securities. Accordingly, the purchase agreements we enter into for secondary transactions typically require the lapse or satisfaction of these rights as a condition to closing. Under these circumstances, we may be required to deposit the purchase price into escrow upon signing, with the funds released to the seller at closing or returned to us if the closing conditions are not met.
Risk Management and Monitoring
We monitor the financial trends of each portfolio company to assess our exposure to individual companies as well as to evaluate overall portfolio quality. We establish valuation targets at the portfolio level and for gross and net exposures with respect to specific companies and industries within our overall portfolio. In cases where we make a direct investment in a portfolio company, we may also obtain board positions, board observation rights and/or information rights from that portfolio company in connection with our equity investment. We regularly monitor our portfolio for compliance with the diversification requirements for purposes of maintaining our status as a BDC and a RIC for tax purposes.
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Managerial Assistance
As a BDC we are required to offer, and in some cases may provide and be paid for, significant managerial assistance to portfolio companies. This assistance typically involves monitoring the operations of portfolio companies, participating in their board and management meetings, consulting with and advising their officers and providing other organizational and financial guidance. We will provide such managerial assistance on our behalf to portfolio companies that request assistance. We may receive fees for these services, subject to review by our Board of Directors, including our independent directors.
Portfolio Overview
The following table shows the fair value of our portfolio of investments by asset class as of December 31, 2019 and 2018:
| December 31, 2019 | December 31, 2018 | |||||||||||
| Fair Value | Percentage of Portfolio | Fair Value | Percentage of Portfolio | |||||||||
Private Portfolio Companies: | | | | ||||||||||
Common Stock | $ | 59,209,559 | | 24.5 | % | $ | 48,517,824 | 16.2 | % | ||||
Preferred Stock | 125,448,358 | | 51.9 | % | 99,856,159 | 33.4 | % | ||||||
Debt Investments | 1,644,155 | | 0.7 | % | 5,584,994 | 1.9 | % | ||||||
Warrants | 5,283,506 | | 2.2 | % | 267,446 | 0.1 | % | ||||||
Private Portfolio Companies | 191,585,578 | | 79.3 | % | 154,226,423 | 51.6 | % | ||||||
Publicly Traded Portfolio Companies: | | | |||||||||||
Common Stock | — | | — | % | 44,589,406 | 14.9 | % | ||||||
Total Portfolio Investments | 191,585,578 | | 79.3 | % | 198,815,829 | 66.5 | % | ||||||
Non-Portfolio Investments | | | |||||||||||
U.S. Treasury Bills | 50,000,000 | | 20.7 | % | 99,994,000 | 33.5 | % | ||||||
Total Investments | $ | 241,585,578 | | 100.0 | % | $ | 298,809,829 | 100.0 | % | ||||
Determination of Net Asset Value
We determine the net asset value of our investment portfolio after the conclusion of each fiscal quarter in connection with the preparation of our annual and quarterly reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or more frequently if required under the 1940 Act.
Securities that are publicly traded are generally valued at the close price on the valuation date; however, if they remain subject to lock-up restrictions they are discounted accordingly. Securities that are not publicly traded or for which there are no readily available market quotations, including securities that trade on secondary markets for private securities, are valued at fair value as determined in good faith by our Board of Directors. In connection with that determination, our executive officers and investment professionals will prepare portfolio company valuations using, when available, the most recent portfolio company financial statements and forecasts. We also engage an independent valuation firm to perform independent valuations of our investments that are not publicly traded or for which there are no readily available market quotations. We may also engage an independent valuation firm to perform independent valuations of any securities that trade on private secondary markets, but are not otherwise publicly traded, where there is a lack of appreciable trading or a wide disparity in recently reported trades.
For those securities that are not publicly traded or for which there are no readily available market quotations, our Board of Directors, with the assistance of its valuation committee (the “Valuation Committee”), will use the recommended valuations as prepared by our executive officers and investment professionals and the independent valuation firm, respectively, as a component of the foundation for its final fair value determination. Due to the uncertainty inherent in the valuation process, such estimates of fair value may differ significantly from the values that would have resulted had others made the determination using the same or different procedures or had a readily available market for the securities existed, and the differences could be material. Additionally, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the gains or losses implied by the valuation currently assigned to such investments. For those investments that are publicly traded, we generally record unrealized appreciation or depreciation based on changes in the market value of the securities as of the valuation date. Publicly traded securities that remain subject to lock-up restrictions are discounted accordingly. For those investments that are not publicly traded and for which there are no readily
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available market quotations, we record unrealized depreciation on such investments when we believe that an investment has become impaired and record unrealized appreciation if we believe that the underlying portfolio company has appreciated in value and our equity security has also appreciated in value. Changes in fair value are recorded in the consolidated statement of operations as the net change in unrealized appreciation or depreciation.
We generally determine the fair value of our investments by considering a number of factors. The following represent factors that, among others, could impact our fair value determinations:
1. | Public trading of our portfolio securities, taking into consideration lock-up requirements and liquidity; |
2. | Active trading of our portfolio securities on a private secondary market, where we have determined that there is meaningful volume and the transactions are considered arm’s length by sophisticated investors; |
3. | Qualified funding rounds in the companies in which we invested, where there is meaningful and reputable information available on size, valuation and investors; and |
4. | Additional investments by us in current portfolio companies, where the price of the new investment differs materially from prior investments. |
There is inherent subjectivity in determining the fair value of our investments. We expect that most of our portfolio investments, other than those for which market quotations are readily available and that may be sold without restriction, will be valued at fair value as determined in good faith by our Board of Directors, with the assistance of our Valuation Committee. Furthermore, when calculating net asset value, we also consider our recognition of a deferred tax liability for unrealized gains on investments for those investments held in our taxable subsidiaries. See “Note 1—Nature of Operations” to our consolidated financial statements for the year ended December 31, 2019 for a list of our taxable subsidiaries.
Investment Advisory Agreement
The following disclosure regards the Investment Advisory Agreement, which was terminated in accordance with its terms on the Effective Date in connection with our Internalization. See “—Internalization of Operating Structure.”
Management Services
GSV Asset Management served as our investment adviser until our Internalization and termination of the Investment Advisory Agreement on the Effective Date. Subject to the overall supervision of our Board of Directors, GSV Asset Management managed our day-to-day operations and provided us with investment advisory services.
Under the terms of the Investment Advisory Agreement, GSV Asset Management:
• | determined the composition of our portfolio, the nature and timing of the changes to our portfolio and the manner of implementing such changes; |
• | determined what securities we would purchase, retain or sell; |
• | performed due diligence on prospective portfolio companies; |
• | identified, evaluated and negotiated the structure of the investments we would make; |
• | closed, monitored and serviced the investments we would make; and |
• | provided us with such other investment advisory, research and related services as we, from time to time, would reasonably require for the investment of our funds. |
GSV Asset Management’s services under the Investment Advisory Agreement were not exclusive, and it was free to furnish similar services to other entities so long as its services to us were not impaired. For example, GSV Asset Management also managed: Coursera@GSV Fund, LP, Coursera@GSV-EDBI Fund, LP, and GSV@CS, LP, special purpose vehicles each comprised of an underlying investment in the capital stock of Coursera, Inc. (the “Coursera Funds”); GSV@SP, LLC, a special purpose vehicle
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comprised of an underlying investment in the capital stock of Spotify Technology S.A. (the “GSV@SP Fund”); and GSV@LT, LLC, GSV@LT II, LP, and GSV@LT III, LP, special purpose vehicles each comprised of an underlying investment in the capital stock of Lyft, Inc. (the “Lyft Funds”). The Company has no ownership interests in the Coursera Funds, the GSV@SP Fund or the Lyft Funds.
The 1940 Act prohibits the Company from making certain negotiated co-investments with affiliates unless it receives an order from the SEC permitting it to do so. To the extent that the Company competed with entities managed by GSV Asset Management or any of its affiliates for one or more investment or disposition opportunities, GSV Asset Management would allocate any such opportunity across the entities for which the opportunity was appropriate, consistent with (1) its internal conflict-resolution and allocation policies, (2) the requirements of the Investment Advisers Act of 1940, and (3) certain restrictions under the 1940 Act regarding co-investments with affiliates. In situations where a particular investment or disposition opportunity was appropriate for both the Company and another entity managed by GSV Asset Management, even where co-investments were permissible under the 1940 Act, GSV Asset Management would first offer any such opportunity in its entirety to the Company. In the event that the size of such investment or disposition opportunity exceeded the Company’s capacity, other funds managed by GSV Asset Management could have been offered the opportunity, but only to the extent that the Company and its Board of Directors confirmed that any such investment or disposition by an affiliated entity was permissible under the 1940 Act and otherwise in the Company’s best interests. The Company’s Chief Compliance Officer and Board of Directors would monitor on a quarterly basis any such allocation of investment or disposition opportunities between the Company and any such other funds.
We, GSV Asset Management, and certain of our affiliates submitted an exemptive relief application to the SEC to permit us to co-invest with other funds managed by GSV Asset Management or its affiliates in a manner consistent with our investment objective and the conditions to the application. As a result of our Internalization, we and GSV Asset Management withdrew such exemptive application on April 2, 2019 because the relief sought was no longer necessary.
As a business development company, we are prohibited under the 1940 Act from participating in certain transactions with certain of our affiliates without the prior approval of our Board of Directors, including the independent directors, and, in some cases, the SEC. The affiliates with which we may be prohibited from transacting include our officers, directors and employees and any person controlling or under common control with us, subject to certain exceptions.
Management Fees
We paid GSV Asset Management a fee for its services under the Investment Advisory Agreement consisting of two components — a base management fee and an incentive fee.
The base management fee compensated GSV Asset Management for its work in identifying, evaluating, negotiating, executing and servicing our investments. Under the terms of the Investment Advisory Agreement, the base management fee was calculated at an annual rate of 2.00% of our gross assets, which was our total assets as reflected on our balance sheet (with no deduction for liabilities). Effective January 1, 2017 through January 31, 2018, however, pursuant to a voluntary waiver by GSV Asset Management, we paid GSV Asset Management a base management fee of 1.75%, a 0.25% reduction from the 2.00% base management fee payable under the Investment Advisory Agreement. On February 2, 2018 GSV Asset Management voluntarily agreed to reduce fees payable under the Investment Advisory Agreement (the “Waiver Agreement”). Pursuant to the Waiver Agreement, effective February 1, 2018, the base management fee was reduced to 1.75% of the Company’s gross assets, as further described below. The waiver of a portion of the base management fee was not subject to recourse against or reimbursement by the Company.
The base management fee was payable monthly in arrears, and was calculated based on the average value of our gross assets at the end of the two most recently completed calendar quarters, and appropriately adjusted for any equity or debt capital raises, repurchases or redemptions during the current calendar quarter. The base management fee for any partial month or quarter would be appropriately prorated.
Under the Investment Advisory Agreement, GSV Asset Management's incentive fee was determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement, as of the termination date), and would equal the lesser of:
• | 20% of our realized capital gains during such 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 |
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• | 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. |
Our realized capital gains from each investment, expressed as a non-compounded annual rate of return on the cost of such investment since we initially acquired it, would be compared to a hurdle rate of 8.00% per year. We would only pay an incentive fee on any realized capital gains from an investment that exceeded the hurdle rate. We would pay GSV Asset Management an incentive fee with respect to our realized capital gains from each investment as follows:
• | No incentive fee would be payable on the amount of any realized capital gains from an investment that, when expressed as a non-compounded annual rate of return on the cost of such investment since we initially acquired it, did not exceed the hurdle rate of 8.00% per year. |
• | We would pay as an incentive fee 100% of the amount of any realized capital gains from an investment that, when expressed as a non-compounded annual rate of return on the cost of such investment since we initially acquired it, exceeded the hurdle rate of 8.00% per year but was less than a rate of 10.00% per year. We refer to this portion of our realized capital gains from each investment (which exceeded the hurdle rate but was less than 10.00%) as the “catch-up.” The “catch-up” was meant to provide our investment adviser with 20% of the amount of our realized capital gains from an investment that, when expressed as a non-compounded annual rate of return on the cost of such investment since we initially acquired it, exceeded a rate of 10.00% per year. |
• | We would pay as an incentive fee 20% of the amount of any realized capital gains from an investment that, when expressed as a non-compounded annual rate of return on the cost of such investment since we initially acquired it, exceeded a rate of 10.00% per year. |
However, pursuant to the Waiver Agreement, certain high-water marks were required to be reached before any incentive fee was paid to GSV Asset Management under the Investment Advisory Agreement. In addition, in no event would we pay an incentive fee for any calendar year that exceeded 20% of our realized capital gains, if any, on a cumulative basis from inception through the end of such 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 following is a graphical representation of the calculation of our incentive fee under the Investment Advisory Agreement with respect to a single investment, assuming certain "High Water Marks" (detailed below) were met:
For accounting purposes, in order to reflect the theoretical capital gains incentive fee that would be payable for a given period as if all unrealized gains were realized, we were required to accrue a capital gains incentive fee based upon realized capital gains and losses during the current calendar year through the end of the period, plus any unrealized capital appreciation and depreciation as of the end of the period. It should be noted that a fee so calculated and accrued would not necessarily be payable under the Investment Advisory Agreement, and may never be paid based upon the computation of capital gains incentive fees in subsequent periods. Amounts paid under the Investment Advisory Agreement would be consistent with the formula reflected in the Investment Advisory Agreement, except as modified by the Waiver Agreement.
We seek to deploy capital primarily in the form of non-controlling investments in our portfolio companies. Although we primarily invest through private secondary markets, to the extent we made a direct minority investment in a portfolio company,
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neither we, nor GSV Asset Management, would have the ability to control the timing of when we realize capital gains or losses with respect to such investment. We expected the timing of such realization events to be determined by our portfolio companies in such cases. To the extent we had non-minority investments, or the securities we held were traded on a private secondary market or public securities exchange, GSV Asset Management would have greater control over the timing of a realization event. In such cases, our Board of Directors would monitor such investments in connection with their general oversight of the investment management services provided by GSV Asset Management. In addition, as of the end of each fiscal quarter, we would evaluate whether the cumulative aggregate unrealized appreciation on our portfolio would be sufficient to require us to pay an incentive fee to GSV Asset Management if such unrealized appreciation were actually realized as of the end of such quarter, and if so, we would accrue an expense equal to the amount of such incentive fee. Any such accrual of incentive fees would be reflected in the calculation of our net asset value.
In no event would we pay an incentive fee for any calendar year that exceeded 20% of our realized capital gains, if any, on a cumulative basis from inception through the end of such 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. See “Note 3—Related-Party Arrangements” to our consolidated financial statements as of December 31, 2019 for details of incentive fees paid and accrued.
The cost of both the base management fee payable to GSV Asset Management, and any incentive fees earned by GSV Asset Management, were ultimately borne by our common stockholders. In aggregate, inclusive of accruals and reversals, GSV Asset Management earned $14,588,355 under the Investment Advisory Agreement during the fiscal years ended December 31, 2019, 2018 and 2017. Refer to our Consolidated Statements of Operation as of December 31, 2019, 2018 and 2017 included in Part II, Item 8 of this report on Form 10-K for details of management and incentive fees earned and waived.
Waiver Agreement
On February 2, 2018, GSV Asset Management voluntarily agreed to reduce the fees payable under the Investment Advisory Agreement pursuant to the Waiver Agreement. The Waiver Agreement was effective February 1, 2018 and changed the fee structure set forth in the Investment Advisory Agreement by: (i) reducing our base management fee from 2.00% to 1.75%; and (ii) creating certain high-water marks that were required to be reached before any incentive fee would be paid to GSV Asset Management. In addition to the foregoing changes to the fee structure, GSV Asset Management also agreed to a one-time forfeiture of $5.0 million of previously accrued but unpaid incentive fees.
Pursuant to the Waiver Agreement, effective February 1, 2018, the base management fee was reduced to 1.75% of gross assets. The base management fee was calculated based on the average value of gross assets at the end of the two most recently completed calendar quarters, and appropriately adjusted for any equity or debt capital raises, repurchases or redemptions during the current calendar quarter. The base management fee for any partial month or quarter would be appropriately prorated. In addition, because our 5.25% Convertible Senior Notes matured on September 15, 2018 (the "5.25% Convertible Senior Notes due 2018"), we were previously carrying a larger cash balance than we would in the ordinary course of business. As a result, under the Waiver Agreement, GSV Asset Management agreed to waive its base management fee on any cash balances effective as of February 1, 2018 until the 5.25% Convertible Senior Notes due 2018 matured on September 15, 2018, at which time we repaid the remaining outstanding aggregate principal amount of the 5.25% Convertible Senior Notes due 2018, including accrued but unpaid interest. As a result, as of and after September 15, 2018, we paid GSV Asset Management a 1.75% base management fee on our cash balances.
Further, pursuant to the Waiver Agreement, in addition to the “hurdle” feature in the incentive fee, GSV Asset Management agreed to additional conditions on its ability to receive an incentive fee. Specifically, the Waiver Agreement provided that an incentive fee earned by GSV Asset Management under the Investment Advisory Agreement would be payable to GSV Asset Management only if, at the time that such incentive fee becomes payable under the Investment Advisory Agreement, both our stock price and our last reported net asset value per share were equal to or greater than $12.55 (the “High-Water Mark”). The High-Water Mark was based upon the volume weighted average price (VWAP) of all our equity offerings since the initial public offering, less the dollar amount of all dividends paid by us since inception. Upon such time that the High-Water Mark was achieved, and GSV Asset Management was paid an incentive fee, a new High-Water Mark would be established. Each new High-Water Mark would be equal to the most recent High-Water Mark, plus 10%. Any High-Water Mark then in effect would be adjusted to reflect any dividends paid by us or any stock split effected by us.
For the avoidance of doubt, after these changes took effect, under no circumstances would the aggregate fees earned by GSV Asset Management in any quarterly period be higher than those aggregate fees that would have been earned prior to the effectiveness of the Waiver Agreement.
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Payment of our Expenses
Prior to our Internalization, our primary operating expenses were the payment of a base management fee and any incentive fees under the Investment Advisory Agreement and the allocable portion of overhead and other expenses incurred by GSV Capital Service Company in performing its obligations under the Administration Agreement. We bore all other costs and expenses of our operations, administration, and transactions, including (without limitation) fees and expenses relating to:
•organization and offering;
•calculating our net asset value (including the cost and expenses of any independent valuation firm);
• | expenses incurred by GSV Asset Management payable to third parties, including agents, consultants, or other advisers in monitoring our financial and legal affairs and in providing administrative services, monitoring our investments and performing due diligence on any prospective portfolio companies; |
• | interest payable on debt and any other related costs, if any, incurred to finance our investments; |
• | the cost of effecting sales and repurchases of shares our common stock and other securities; |
• | investment advisory and management fees payable pursuant to the Investment Advisory Agreement |
• | administration fees, if any, payable pursuant to the Administration Agreement |
• | fees payable to third parties, including agents, consultants, or other advisers, relating to, or associated with, evaluating and making investments |
• | transfer agent, trustee, and custodial fees; |
• | federal and state registration fees; |
• | all costs of registration and listing our shares on any securities exchange; |
• | federal, state, and local taxes; |
• | independent directors’ fees and expenses, including travel expenses, and other costs of our Board of Directors’ meetings; |
• | costs of preparing and filing reports or other documents required by the SEC; |
• | costs of any reports, proxy statements, or other notices to stockholders, including printing costs; |
• | our allocable portion of the of the fidelity bond, directors and officers, errors and omissions liability insurance, and any other insurance premiums; |
• | fees and expenses associated with our website, public relations and marketing efforts (including attendance at industry and investor conferences and similar events); |
• | direct costs and expenses of administration, including printing, mailing, long distance telephone, copying, secretarial and other staff, independent auditors, and outside legal costs; and |
• | all other expenses incurred by either GSV Capital Service Company or us in connection with administering our business, including payments under the Administration Agreement that will be based upon our allocable portion of overhead and other expenses incurred by GSV Capital Service Company in performing its obligations under the Administration Agreement, including a portion of the rent and the compensation of our President, Chief Financial Officer, Chief Compliance Officer and other administrative support personnel. |
All of these expenses were ultimately borne by our common stockholders.
All personnel of GSV Asset Management, when and to the extent engaged in providing investment advisory services, and the compensation and expenses of such personnel allocable to such services, were provided and paid for by GSV Asset Management.
Duration and Termination
The Investment Advisory Agreement was initially approved by our Board of Directors on March 28, 2011 and became effective on April 11, 2011.
Unless earlier terminated as described below, the Investment Advisory Agreement would remain in effect from year to year if approved annually by our Board of Directors or by the affirmative vote of the holders of a majority of our outstanding voting securities, including, in either case, approval by a majority of our directors who are not interested persons of any such party, as such term is defined in Section 2(a)(19) of the 1940 Act. The Investment Advisory Agreement would automatically terminate in
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the event of its assignment. The Investment Advisory Agreement could be terminated by either party without penalty upon not more than 60 days’ written notice to the other. The Investment Advisory Agreement could also be terminated, without penalty, upon the vote of a majority of our outstanding voting securities.
In connection with our Internalization, the Investment Advisory Agreement was terminated on the Effective Date in accordance with its terms.
Indemnification
The Investment Advisory Agreement provided that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations, GSV Asset Management and its officers, managers, partners, agents, employees, controlling persons, members and any other person or entity affiliated with it would be entitled to indemnification from us for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of GSV Asset Management’s services under the Investment Advisory Agreement or otherwise as our investment adviser.
Board Approval of the Investment Advisory Agreement
On April 9, 2018, at an in-person meeting, our Board of Directors, including a majority of the directors who were not “interested persons,” as defined by the 1940 Act, of the Company or GSV Asset Management, approved the continuation of the Investment Advisory Agreement to April 9, 2019. In its consideration of the re-approval of the Investment Advisory Agreement, the Board of Directors focused on information it had received relating to, among other things:
• | the nature, quality and extent of the advisory and other services to be provided to us by GSV Asset Management; |
• | the investment performance of GSV Asset Management; |
• | comparative data with respect to advisory fees or similar expenses paid by other BDCs with similar investment objectives; |
• | our projected operating expenses and expense ratio; |
• | any existing and potential sources of indirect income to GSV Asset Management or GSV Capital Service Company from their relationships with us and the profitability of those relationships; |
• | information about the services to be performed and the personnel performing such services under the Investment Advisory Agreement; |
• | the organizational capability and financial condition of GSV Asset Management and its affiliates; and |
• | the possibility of obtaining similar services from other third-party service providers or through an internally-managed structure. |
Based on the information reviewed and related discussions, our Board of Directors concluded that fees payable to GSV Asset Management pursuant to the Investment Advisory Agreement were reasonable in relation to the services to be provided. The Board of Directors did not assign relative weights to the above factors or the other factors considered by it. In addition, our Board of Directors did not reach any specific conclusion on each factor considered, but rather, conducted an overall analysis of these factors. Individual members of the Board of Directors may have given different weights to different factors.
Administration Agreement
The following disclosure regards the Administration Agreement, which was terminated in accordance with its terms on the Effective Date in connection with our Internalization. See “—Internalization of Operating Structure.”
Under the Administration Agreement, GSV Capital Service Company performed, or oversaw the performance of, our required administrative services, which included being responsible for the financial records that we are required to maintain and preparing reports to our stockholders and reports filed with the SEC. In addition, GSV Capital Service Company assisted us in determining and publishing our net asset value, overseeing the preparation and filing of our tax returns and the printing and dissemination of reports to our stockholders, and generally overseeing the payment of our expenses and the performance of administrative and professional services rendered to us by others. Further, pursuant to the Administration Agreement, GSV Capital Service Company furnished us with office facilities, together with equipment and clerical, bookkeeping and record-keeping services at such facilities.
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Costs Incurred Under the Administration Agreement
Costs incurred under the Administration Agreement were based upon our allocable portion of overhead and other expenses incurred by GSV Capital Service Company in performing its obligations under the Administration Agreement, including a portion of the rent and the compensation of our President, Chief Financial Officer, Chief Compliance Officer and other staff providing administrative services.
In accordance with the terms of the Administration Agreement, overhead and other administrative expenses were generally allocated between us and GSV Asset Management by reference to the relative time spent by personnel in performing administrative and similar functions on our behalf as compared to performing investment advisory or administrative functions on behalf of GSV Asset Management. To the extent personnel retained by GSV Capital Service Company performed administrative tasks for GSV Asset Management, the fees incurred with respect to the actual time dedicated to such tasks would be reimbursed by GSV Asset Management. While there was no limit on the total amount of expenses we could be required to reimburse to GSV Capital Service Company, our administrator would only charge us for the actual expenses it incurred on our behalf, or our allocable portion thereof, without any profit to GSV Capital Service Company.
GSV Asset Management wholly owns and controls GSV Capital Service Company, which is a disregarded entity for tax purposes. The Administration Agreement could be terminated at any time without penalty upon 60 days’ written notice, by a vote of a majority of our outstanding voting securities, by a vote of our Board of Directors or by GSV Capital Service Company.
In connection with our Internalization, the Administration Agreement was terminated on the Effective Date in accordance with its terms.
Indemnification
The Administration Agreement provided that, absent willful misfeasance, bad faith or gross negligence in the performance of their respective duties or by reason of the reckless disregard of their respective duties and obligations, GSV Capital Service Company and its officers, manager, agents, employees, controlling persons, members and any other person or entity affiliated with it would be entitled to indemnification from us for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of GSV Capital Service Company’s services under the Administration Agreement or otherwise as our administrator.
Regulation as a Business Development Company
General
A BDC is regulated by the 1940 Act. A BDC must be organized in the United States for the purpose of investing in, or lending to, primarily private companies and making significant managerial assistance available to them. A BDC may use capital provided by public stockholders and from other sources to make long-term, private investments in businesses. A BDC provides stockholders the ability to retain the liquidity of a publicly traded stock while sharing in the possible benefits, if any, of investing in primarily privately owned companies.
We may not change the nature of our business so as to cease to be, or withdraw our election as, a BDC unless authorized by vote of a majority of the outstanding voting securities, as required by the 1940 Act. A majority of the outstanding voting securities of a company is defined under the 1940 Act as the lesser of: (a) 67% or more of such company’s voting securities present at a meeting if more than 50% of the outstanding voting securities of such company are present or represented by proxy, or (b) more than 50% of the outstanding voting securities of such company. We do not anticipate any substantial change in the nature of our business.
As with other companies regulated by the 1940 Act, a BDC must adhere to certain substantive regulatory requirements. A majority of our directors must be persons who are not “interested persons” as defined in the 1940 Act. Additionally, we are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect the BDC. Furthermore, as a BDC, we are prohibited from protecting any director or officer against any liability to us or our stockholders arising from willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person’s office.
As a BDC, we are generally required to meet an asset coverage ratio, defined under the 1940 Act as the ratio of our gross assets (less all liabilities and indebtedness not represented by senior securities) to our outstanding senior securities, of at least 200% after each issuance of senior securities. We may also be prohibited under the 1940 Act from knowingly participating in
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certain transactions with our affiliates without the prior approval of our directors who are not interested persons and, in some cases, prior approval by the SEC.
The Small Business Credit Availability Act (the “SBCAA”) modifies the asset coverage percentage from 200% to 150%. Under the SBCAA, we are allowed to increase our leverage capacity if stockholders representing at least a majority of the votes cast, when a quorum is present, approve a proposal to do so. If we receive stockholder approval, we would be allowed to increase our leverage capacity on the first day after such approval. Alternatively, the SBCAA allows the majority of our independent directors to approve an increase in our leverage capacity, and such approval would become effective on the one-year anniversary of such approval. In either case, we would be required to make certain disclosures on our website and in SEC filings regarding, among other things, the receipt of approval to increase our leverage, our leverage capacity and usage, and risks related to leverage.
The SBCAA also instructs the SEC to issue rules or amendments to rules allowing BDCs to use the same securities offering and proxy rules that available to operating companies, including, among other things, allowing BDCs to incorporate by reference in registration statements filed with the SEC and allow certain BDCs to file shelf registration statements that are automatically effective and take advantage of other benefits available to Well-Known Seasoned Issuers; however, as of the date of this Form 10-K, we do not know when the rules relating to this legislation will become effective.
We do not intend to acquire securities issued by any investment company that exceed the limits imposed by the 1940 Act. Under these limits, except for registered money market funds, we generally cannot acquire more than 3% of the voting stock of any investment company, invest more than 5% of the value of our total assets in the securities of one investment company or invest more than 10% of the value of our total assets in the securities of investment companies in the aggregate. The portion of our portfolio invested in securities issued by investment companies ordinarily will subject our stockholders to additional indirect expenses. Our investment portfolio is also subject to diversification requirements by virtue of our election to be treated as a RIC for U.S. tax purposes and our intention to continue to operate in a manner so as to qualify for the tax treatment applicable to RICs. See “Risk Factors—Risks Related to Our Business and Structure” in Part I, Item 1A of this Form 10-K for more information.
In addition, investment companies registered under the 1940 Act and private funds that are excluded from the definition of “investment company” pursuant to either Section 3(c)(1) or 3(c)(7) of the 1940 Act may not acquire directly or through a controlled entity more than 3% of our total outstanding voting stock (measured at the time of the acquisition), unless the funds comply with an exemption under the 1940 Act. As a result, certain of our investors may hold a smaller position in our shares than if they were not subject to these restrictions.
We are generally not able to issue and sell our common stock at a price below net asset value per share. See “Risk Factors—Risks Related to Our Business and Structure—Regulations governing our operation as a business development company affect our ability to, and the way in which we, raise additional capital, which may expose us to risks, including the typical risks associated with leverage” in Part I, Item 1A of this Form 10-K. We may, however, sell our common stock, or warrants, options or rights to acquire our common stock, at a price below the then-current net asset value of our common stock if our Board of Directors determines that such sale is in our best interests and the best interests of our stockholders, and our stockholders approve such sale. In addition, we may generally issue new shares of our common stock at a price below net asset value in rights offerings to existing stockholders, in payment of dividends and in certain other limited circumstances.
As a BDC, we are also prohibited under the 1940 Act from knowingly participating in certain transactions with our affiliates without the prior approval of our Board of Directors who are not interested persons and, in some cases, prior approval by the SEC. The affiliates with which we may be prohibited from transacting include our directors, officers and employees and any person controlling or under common control with us, subject to certain exceptions. For example, under the 1940 Act, absent receipt of exemptive relief from the SEC, we and certain of our affiliates are generally precluded from co-investing in negotiated private placements of securities. We, GSV Asset Management and certain of our affiliates submitted an exemptive application to the SEC to permit us to co-invest with other funds managed by GSV Asset Management or its affiliates in a manner consistent with our investment objective and the conditions to the application. As a result of our Internalization, we and GSV Asset Management withdrew such exemptive application on April 2, 2019 because the relief sought was no longer necessary.
We are subject to periodic examination by the SEC for compliance with the 1940 Act.
As a BDC, we are subject to certain risks and uncertainties. See “Risk Factors—Risks Related to Our Business and Structure” in Part I, Item 1A of this Form 10-K.
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Qualifying Assets
Under the 1940 Act, a BDC may not acquire any asset other than assets of the type listed in Section 55(a) of the 1940 Act, which are referred to as “qualifying assets”, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the BDC’s gross assets. The principal categories of qualifying assets relevant to our business are the following:
1. | Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer (subject to certain limited exceptions) is an eligible portfolio company, or from any person who is, or has been during the preceding 13 months, an affiliated person of an eligible portfolio company, or from any other person, subject to such rules as may be prescribed by the SEC. An eligible portfolio company is defined in the 1940 Act as any issuer which: |
a. | is organized under the laws of, and has its principal place of business in, the United States; |
b. | is not an investment company (other than a small business investment company wholly owned by the BDC) or a company that would be an investment company but for certain exclusions under the 1940 Act; and |
c. | satisfies any of the following: |
i. | does not have any class of securities that is traded on a national securities exchange; |
ii. | has a class of securities listed on a national securities exchange, but has an aggregate market value of outstanding voting and non-voting common equity of less than $250.0 million; |
iii. | is controlled by a BDC or a group of companies including a BDC and the BDC has an affiliated person who is a director of the eligible portfolio company; |
iv. | is a small and solvent company having gross assets of not more than $4.0 million and capital and surplus of not less than $2.0 million; or |
v. | meets such other criteria as may be established by the SEC. |
2. | Securities of any eligible portfolio company which we control. |
3. | Securities purchased in a private transaction from a U.S. issuer that is not an investment company or from an affiliated person of the issuer, or in transactions incident thereto, if the issuer is in bankruptcy and subject to reorganization or if the issuer, immediately prior to the purchase of its securities, was unable to meet its obligations as they came due without material assistance other than conventional lending or financing arrangements. |
4. | Securities of an eligible portfolio company purchased from any person in a private transaction if there is no ready market for such securities and we already own 60% of the outstanding equity of the eligible portfolio company. |
5. | Securities received in exchange for or distributed on or with respect to securities described in 1 through 4 above, or pursuant to the exercise of options, warrants or rights relating to such securities. |
6. | Cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment. |
In addition, a BDC must have been organized and have its principal place of business in the United States and must be operated for the purpose of making investments in the types of securities described in (1), (2) or (3) above.
If at any time less than 70% of our gross assets are comprised of qualifying assets, including as a result of an increase in the value of any non-qualifying assets or decrease in the value of any qualifying assets, we would generally not be permitted to acquire any additional non-qualifying assets, other than office furniture and equipment, interests in real estate and leasehold improvements and facilities maintained to conduct the business operations of the BDC, deferred organization and operating expenses, and other noninvestment assets necessary and appropriate to its operations as a BDC, until such time as 70% of our then-current gross assets
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were comprised of qualifying assets. We would not be required, however, to dispose of any non-qualifying assets in such circumstances.
Managerial Assistance to Portfolio Companies
A BDC generally must offer to make available to the issuer of the securities it holds significant managerial assistance, except in circumstances where either (i) the BDC controls such issuer of securities or (ii) the BDC purchases such securities in conjunction with one or more other persons acting together and one of the other persons in the group makes available such managerial assistance. Making available managerial assistance means, among other things, any arrangement whereby the BDC, through its directors, officers or employees, offers to provide, and, if accepted, does so provide, significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio company.
Temporary Investments
Pending investment in other types of “qualifying assets,” as described above, our investments may consist of cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment, which we refer to, collectively, as temporary investments, so that 70% of our assets are qualifying assets. Typically, we will invest in U.S. Treasury bills or in repurchase agreements, provided that such agreements are fully collateralized by cash or securities issued by the U.S. government or its agencies. A repurchase agreement involves the purchase by an investor, such as us, of a specified security and the simultaneous agreement by the seller to repurchase it at an agreed-upon future date and at a price which is greater than the purchase price by an amount that reflects an agreed-upon interest rate. There is no percentage restriction on the proportion of our assets that may be invested in such repurchase agreements. However, if more than 25% of our gross assets constitute repurchase agreements from a single counterparty, we would not meet the diversification tests in order to qualify as a RIC for U.S. federal income tax purposes. Thus, we do not intend to enter into repurchase agreements with a single counterparty in excess of this limit. We will monitor the creditworthiness of the counterparties with which we enter into repurchase agreement transactions.
Warrants and Options
Under the 1940 Act, a BDC is subject to restrictions on the amount of warrants, options, restricted stock or rights to purchase shares of capital stock that it may have outstanding at any time. Under the 1940 Act, we may generally only offer warrants provided that (i) the warrants expire by their terms within ten years, (ii) the exercise or conversion price is not less than the current market value at the date of issuance, (iii) our stockholders authorize the proposal to issue such warrants, and our Board of Directors approves such issuance on the basis that the issuance is in the best interests of us and our stockholders and (iv) if the warrants are accompanied by other securities, the warrants are not separately transferable unless no class of such warrants and the securities accompanying them has been publicly distributed. The 1940 Act also provides that the amount of our voting securities that would result from the exercise of all outstanding warrants, as well as options and rights, at the time of issuance may not exceed 25% of our outstanding voting securities. In particular, the amount of capital stock that would result from the conversion or exercise of all outstanding warrants, options or rights to purchase capital stock cannot exceed 25% of the BDC’s total outstanding shares of capital stock.
Senior Securities
We are permitted, under specified conditions, to issue multiple classes of indebtedness and one class of stock senior to our common stock if our asset coverage, as defined in the 1940 Act, is at least equal to 200% (or 150% if certain requirements are met) immediately after each such issuance. In addition, while any senior securities remain outstanding, we must make provisions to prohibit any distribution to our stockholders or the repurchase of such securities or shares unless we meet the applicable asset coverage ratios at the time of the distribution or repurchase. We may also borrow amounts up to 5% of the value of our gross assets for temporary or emergency purposes without regard to asset coverage. For a discussion of the risks associated with leverage, see “Risk Factors — Risks Related to Our Business and Structure — Borrowings, such as our 4.75% Convertible Senior Notes due 2023 (the "4.75% Convertible Senior Notes due 2023"), can magnify the potential for gain or loss on amounts invested and may increase the risk of investing in us.” in Part I, Item 1A of this Form 10-K.
Code of Ethics
We have adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act. This code establishes procedures for personal investments and restricts certain transactions by our personnel. Our code of ethics and our code of business conduct and ethics are available on the EDGAR Database on the SEC’s Internet site at http://www.sec.gov, and are available on our website. You may
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also obtain copies of our code of ethics and our code of business conduct and ethics, after paying a duplicating fee, by electronic request at the following Email address: publicinfo@sec.gov.
Compliance Policies and Procedures
We have adopted and implemented written policies and procedures reasonably designed to detect and prevent violation of the federal securities laws and review these compliance policies and procedures annually for their adequacy and the effectiveness of their implementation. Our Chief Compliance Officer is responsible for administering these policies and procedures.
Compliance with Corporate Governance Regulations
The Sarbanes-Oxley Act imposes a wide variety of regulatory requirements on publicly held companies and their insiders. Many of these requirements affect us. For example:
• | pursuant to Rule 13a-14 of the Exchange Act, our Chief Executive Officer and Chief Financial Officer must certify the accuracy of the financial statements contained in our periodic reports; |
• | pursuant to Item 307 of Regulation S-K, our periodic reports must disclose our conclusions about the effectiveness of our disclosure controls and procedures; |
• | pursuant to Rule 13a-15 of the Exchange Act, our management must prepare an annual report regarding its assessment of our internal control over financial reporting and must obtain an audit of the effectiveness of internal control over financial reporting performed by our independent registered public accounting firm; and |
• | pursuant to Item 308 of Regulation S-K and Rule 13a-15 of the Exchange Act, our periodic reports must disclose whether there were significant changes in our internal control over financial reporting or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
The Sarbanes-Oxley Act requires us to review our current policies and procedures to determine whether we comply with the Sarbanes-Oxley Act and the regulations promulgated thereunder. We will continue to monitor our compliance with all regulations that are adopted under the Sarbanes-Oxley Act and will take actions necessary to ensure that we are in compliance therewith.
In addition, the Nasdaq Capital Market has adopted various corporate governance requirements as part of its listing standards. We believe we are in compliance with such corporate governance listing standards. We will continue to monitor our compliance with all future listing standards and will take actions necessary to ensure that we are in compliance therewith.
Proxy Voting Policies and Procedures
Proxy Policies
We will vote proxies relating to our portfolio securities in what we perceive to be the best interests of our stockholders. We will review on a case-by-case basis each proposal submitted for a vote to determine its impact on the portfolio securities held by us. Although we will generally vote against proposals that may have a negative impact on our portfolio securities, we may vote for such a proposal if there are compelling long-term reasons to do so.
Our proxy voting decisions are made by our executive officers and investment professionals who are responsible for monitoring the relevant investments. To ensure that our vote is not the product of a conflict of interest, we require that: (1) anyone involved in the decision-making process disclose to our Chief Compliance Officer any potential conflict that he or she is aware of and any contact that he or she has had with any interested party regarding a proxy vote; and (2) employees involved in the decision-making process or vote administration are prohibited from revealing how we intend to vote on a proposal without the prior approval of the Chief Compliance Officer and our senior management in order to reduce any attempted influence from interested parties.
Proxy Voting Records
You may obtain information about how we voted proxies with respect to our portfolio securities by making a written request for proxy voting information to: Chief Compliance Officer, Sutter Rock Capital Corp., One Sansome Street, Suite 730, San Francisco, CA 94104 or compliance@sutterrock.com.
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Privacy Principles
We are committed to maintaining the privacy of our stockholders and to safeguarding their non-public personal information. The following information is provided to help you understand what personal information we collect, how we protect that information and why, in certain cases, we may share information with select other parties.
Generally, we do not receive any non-public personal information relating to our stockholders, although certain non-public personal information of our stockholders may become available to us. We do not disclose any non-public personal information about our stockholders or former stockholders to anyone, except as permitted by law or as is necessary in order to service stockholder accounts (for example, to a transfer agent or third-party administrator).
We restrict access to non-public personal information about our stockholders to our employees and affiliates with a legitimate business need for the information. We maintain physical, electronic and procedural safeguards designed to protect the non-public personal information of our stockholders.
Available Information
The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov.
Our internet address is www.sutterrock.com. We make available free of charge on our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The information on our website is not incorporated by reference into this annual report on Form 10-K unless specifically so incorporated by reference herein.
Material U.S. Federal Income Tax Considerations
Included in our consolidated financial statements, the following wholly-owned subsidiaries are taxable subsidiaries (collectively, the “Taxable Subsidiaries”), regardless of whether we qualify for tax treatment as a RIC: GSVC AE Holdings, Inc., GSVC AV Holdings, Inc., GSVC NG Holdings, Inc., GSVC SW Holdings, Inc., GSVC WS Holdings, Inc., and GSVC SVDS Holdings, Inc. The Taxable Subsidiaries are C corporations for U.S. federal and state income tax purposes. 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 our consolidated financial statements.
We evaluate tax positions taken, or expected to be taken, in the course of preparing our consolidated financial statements to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority. We recognize the tax benefits of uncertain tax positions only when the position has met the “more-likely-than-not” threshold. We classify 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. We have identified our major tax jurisdictions as U.S. federal and California.
Election to be Taxed as a RIC
We elected to be treated as a RIC for the taxable year ended December 31, 2014 in connection with the filing of its 2014 tax return. As a result, the Company was required to pay a corporate-level U.S. federal income tax on the amount of the net built-in gains 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) either (1) as of the date it converted to a RIC (i.e., the beginning of the first taxable year that the Company qualifies as a RIC, which would be January 1, 2014), or (2) to the extent that the Company recognized such net built-in gains during the five-year recognition period beginning on the date of conversion. As of January 1, 2014, the Company had net unrealized built-in gains, but did not incur a built-in-gains tax for the 2014 tax year due to the fact that there were sufficient net capital loss carryforwards to completely offset recognized built-in gains as well as available net operating losses. The five-year recognition period ended on December 31, 2018.
As a RIC, we generally will not be subject to corporate-level U.S. federal income taxes on any income that we distribute to our stockholders. To maintain our tax status as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements (as described below). In addition, in order to maintain our status as a RIC, we must timely distribute to our stockholders, for each taxable year, at least 90.0% of our “investment company taxable income,” which is generally our net ordinary income plus the excess, if any, of realized net short-term capital gain over realized net long-term capital loss, or the
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Annual Distribution Requirement. Depending on the level of taxable income earned in a tax year, we may choose to carry forward taxable income in excess of current year distributions into the next tax year and pay a 4.0% U.S. federal excise tax on such income. In such case, we must distribute any such carryover taxable income through a distribution declared prior to filing the final tax return for the year in which we generated such taxable income. Even if we maintain our status as a RIC, we generally will be subject to corporate-level U.S. federal income tax on our undistributed taxable income and could be subject to U.S. federal excise, state, local and foreign taxes.
Taxation as a Regulated Investment Company
If we:
• | qualify as a RIC; and |
• | satisfy the Annual Distribution Requirement, |
then we will not be subject to U.S. federal income tax on the portion of our income we distribute (or are deemed to distribute) to stockholders. We will be subject to U.S. federal income tax at the regular corporate rates on any income, including capital gains not distributed (or deemed distributed) to our stockholders.
We will be subject to a 4% nondeductible U.S. federal excise tax on certain undistributed income unless we distribute in a timely manner an amount at least equal to the sum of (1) 98% of our net ordinary income for each calendar year, (2) 98.2% of our capital gains in excess of capital losses for the one-year period ending October 31 in that calendar year and (3) any ordinary income and net capital gains we recognized in preceding years but were not distributed during such years and on which we paid no U.S. federal income tax (the “Excise Tax Avoidance Requirement”). We generally will endeavor in each year to make sufficient distributions to our stockholders to avoid any U.S. federal excise tax on our earnings.
In order to qualify as a RIC for U.S. federal income tax purposes, we must, among other things:
• | have in effect an election to be regulated as a BDC under the 1940 Act at all times during each taxable year; |
• | derive in each taxable year at least 90% of our gross income from dividends, interest, payments with respect to loans of certain securities, gains from the sale of stock or other securities or foreign currencies, net income from certain “qualified publicly traded partnerships,” or other income derived with respect to our business of investing in such stock or securities (the “90% Income Test”); |
• | distribute to our stockholders on a timely basis each year at least 90% of “investment company taxable income,” which is generally our net ordinary income plus the excess of realized net short-term capital gains over realized net long-term capital losses (the “Annual Distribution Requirement”). and |
• | diversify our holdings so that at the end of each quarter of the taxable year: |
• | at least 50% of the value of our assets consists of cash, cash equivalents, U.S. government securities, securities of other RICs, and other securities if such other securities of any one issuer do not represent more than 5% of the value of our assets or more than 10% of the outstanding voting securities of the issuer (the “50% Diversification Test”); and |
• | no more than 25% of the value of our assets is invested in the securities, other than U.S. government securities or securities of other RICs, of one issuer, of two or more issuers that are controlled, as determined under applicable Code rules, by us and that are engaged in the same or similar or related trades or businesses, or of certain “qualified publicly traded partnerships” (the “25% Diversification Test,” and together with the 50% Diversification Test, the “Diversification Tests”). |
If we satisfy the Diversification Tests as of the close of any quarter, we will not fail the Diversification Tests as of the close of a subsequent quarter as a consequence of a discrepancy between the value of our assets and the requirements of the Diversification Tests that is attributable solely to fluctuations in the value of our assets. Rather, we will fail the Diversification Tests as of the end of a subsequent quarter only if such a discrepancy existed immediately after our acquisition of any asset and such discrepancy is wholly or partly the result of that acquisition. In addition, if we fail the Diversification Tests as of the end of any quarter, we will not lose our status as a RIC if we eliminate the discrepancy within thirty days of the end of such quarter and, if we eliminate the discrepancy within that thirty-day period, we will be treated as having satisfied the Diversification Tests as of the end of such
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quarter for purposes of applying the rule described in the preceding sentence, assuming that it is not the first quarter of RIC qualification.
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 us in the applicable period, the amount of realized gain (loss), 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 U.S. federal income tax on built-in gain will be an expense that will reduce the amount available for distribution to our stockholders. The built-in gain tax is calculated by determining a RIC’s net unrealized built-in gains, if any, by which the fair market value of the assets of the RIC at the beginning of the first RIC-year exceeds the aggregate adjusted basis of such assets at that time.
We may be required to recognize taxable income in circumstances in which we do not receive cash. For example, if we hold debt obligations that are treated under applicable tax rules as having original issue discount (which may arise if we receive warrants in connection with the origination of a loan or possibly in other circumstances), we must include in income each year a portion of the original issue discount that accrues over the life of the obligation, regardless of whether cash representing such income is received by us in the same taxable year. We may also have to include in income other amounts that we have not yet received in cash, such as contractual payment-in-kind, or PIK, interest (which represents contractual interest added to the loan balance and due at the end of the loan term) or dividends and deferred loan origination fees that are paid after origination of the loan or are paid in non-cash compensation such as warrants or stock. Because any original issue discount or other amounts accrued will be included in our investment company taxable income for the year of accrual, we may be required to make a distribution to our stockholders in order to satisfy the Annual Distribution Requirement and the Excise Tax Avoidance Requirement, even though we will not have received any corresponding cash amount.
We will be subject to certain asset coverage ratio requirements under the 1940 Act and financial covenants under loan and credit agreements that could, under certain circumstances, restrict us from making distributions necessary to satisfy the Annual Distribution Requirement. See “—Regulation as a Business Development Company—Senior Securities.” Moreover, our ability to dispose of assets to meet our distribution requirements may be limited by (1) the illiquid nature of our portfolio and/or (2) other requirements relating to our status as a RIC, including the Diversification Tests. If we dispose of assets in order to meet the Annual Distribution Requirement or the Excise Tax Avoidance Requirement, we may make such dispositions at times that, from an investment standpoint, are not advantageous.
Certain of our investment practices may be subject to special and complex U.S. federal income tax provisions that may, among other things: (i) disallow, suspend or otherwise limit the allowance of certain losses or deductions; (ii) convert lower taxed long-term capital gain into higher taxed short-term capital gain or ordinary income; (iii) convert an ordinary loss or a deduction into a capital loss (the deductibility of which is more limited); (iv) cause us to recognize income or gain without a corresponding receipt of cash; (v) adversely affect the time as to when a purchase or sale of securities is deemed to occur; (vi) adversely alter the characterization of certain complex financial transactions; and (vii) produce income that will not be qualifying income for purposes of the 90% Income Test described above. We will monitor our transactions and may make certain tax elections in order to mitigate the potential adverse effect of these provisions.
Gain or loss realized by us from the sale or exchange of warrants acquired by us as well as any loss attributable to the lapse of such warrants generally will be treated as capital gain or loss. The treatment of such gain or loss as long-term or short-term will depend on how long we held a particular warrant. Upon the exercise of a warrant acquired by us, our tax basis in the stock purchased under the warrant will equal the sum of the amount paid for the warrant plus the strike price paid on the exercise of the warrant.
Failure to Maintain our Qualification as a RIC
If we fail to satisfy the 90% Income Test or the Diversification Tests for any taxable year, we may nevertheless continue to qualify as a RIC for such year if certain relief provisions are applicable (which may, among other things, require us to pay certain corporate-level U.S. federal income taxes or to dispose of certain assets).
If we were unable to qualify for treatment as a RIC and the foregoing relief provisions are not applicable, we would be subject to tax on all of our taxable income at regular corporate rates, regardless of whether we make any distributions to our stockholders. Distributions would not be required, and any distributions would be taxable to our stockholders as ordinary dividend income that, subject to certain limitations, may be eligible for the 20% maximum rate to the extent of our current and accumulated earnings and profits provided certain holding period and other requirements were met. Subject to certain limitations under the Code, corporate distributees would be eligible for the dividends-received deduction. Distributions in excess of our current and accumulated earnings and profits would be treated first as a return of capital to the extent of the stockholder’s tax basis, and any remaining distributions
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would be treated as a capital gain. To requalify as a RIC in a subsequent taxable year, we would be required to satisfy the RIC qualification requirements for that year and dispose of any earnings and profits from any year in which we failed to qualify as a RIC. Subject to a limited exception applicable to RICs that qualified as such under Subchapter M of the Code for at least one year prior to disqualification and that requalify as a RIC no later than the second year following the nonqualifying year, we could be subject to tax on any unrealized net built-in gains in the assets held by us during the period in which we failed to qualify as a RIC that are recognized within the subsequent five years, unless we made a special election to pay corporate-level U.S. federal income tax on such built-in gain at the time of our requalification as a RIC.
Tax matters are complicated and the tax consequences to an investor of an investment in our common stock will depend on the facts of his, her or its particular situation. We encourage investors to consult their own tax advisers regarding the specific consequences of such an investment, including tax reporting requirements, the applicability of U.S. federal, state, local and foreign tax laws, eligibility for the benefits of any applicable tax treaty and the effect of any possible changes in the tax laws.
See “Risk Factors—Risks Related to Our Business and Structure” in Part I, Item 1A of this Form 10-K and “Note 2—Significant Accounting Policies—U.S. Federal and State Income Taxes” and “Note 9—Income Taxes” to our consolidated financial statements for the year ended December 31, 2019 for further detail.
Item 1A. Risk Factors
Investing in our securities involves a number of significant risks. In addition to the other information contained in this annual report on Form 10-K, you should consider carefully the following information before making an investment in our securities. Although the risks described below represent the principal risks associated with an investment in us, they are not the only risks we face. Additional risks and uncertainties not presently known to us might also impair our operations and performance. If any of the following events occur, our business, financial condition and results of operations could be materially and adversely affected. In such case, our net asset value and the trading price of our common stock could decline, and you may lose all or part of your investment.
Risks Related to Our Investments
Our investments in the rapidly growing venture-capital-backed emerging companies that we target may be extremely risky and we could lose all or part of our investments.
Investment in the rapidly growing venture-capital-backed emerging companies that we target involves a number of significant risks, including the following:
• | these companies may have limited financial resources and may be unable to meet their obligations under their existing debt, which may lead to equity financings, possibly at discounted valuations, in which we could be substantially diluted if we do not or cannot participate, bankruptcy or liquidation and the reduction or loss of our equity investment; |
• | they typically have limited operating histories, narrower, less established product lines and smaller market shares than larger businesses, which tend to render them more vulnerable to competitors’ actions, market conditions and consumer sentiment in respect of their products or services, as well as general economic downturns; |
• | they generally have less predictable operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position; |
• | because they are privately owned, there is generally little publicly available information about these businesses; therefore, although we will perform due diligence investigations on these portfolio companies, their operations and their prospects, we may not learn all of the material information we need to know regarding these businesses and, in the case of investments we acquire on private secondary transactions, we may be unable to obtain financial or other information regarding the companies with respect to which we invest. Furthermore, there can be no assurance that the information that we do obtain with respect to any investment is reliable; and |
• | they are more likely to depend on the management talents and efforts of a small group of persons; therefore, the death, disability, resignation or termination of one or more of these persons could have a material adverse impact on the portfolio company and, in turn, on us. |
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A portfolio company’s failure to satisfy financial or operating covenants imposed by its lenders could lead to defaults and, potentially, termination of its loans and foreclosure on its assets, which could trigger cross-defaults under other agreements and jeopardize our equity investment in such portfolio company. We may incur expenses to the extent necessary to seek recovery of our equity investment or to negotiate new terms with a financially distressed portfolio company.
Because our investments are generally not in publicly traded securities, there will be uncertainty regarding the value of our investments, which could adversely affect the determination of our net asset value.
Our portfolio investments will generally not be in publicly traded securities. As a result, although we expect that some of our equity investments may trade on private secondary marketplaces, the fair value of our direct investments in portfolio companies will often not be readily determinable. Under the 1940 Act, for our investments for which there are no readily available market quotations, including securities that, while listed on a private securities exchange, have not actively traded, we will value such securities at fair value quarterly as determined in good faith by our Board of Directors based upon the recommendation of the Valuation Committee in accordance with our written valuation policy. In connection with that determination, our executive officers and investment professionals will prepare portfolio company valuations using, where available, the most recent portfolio company financial statements and forecasts. The Valuation Committee utilizes the services of an independent valuation firm, which prepares valuations for each of our portfolio investments that are not publicly traded or for which we do not have readily available market quotations, including securities that while listed on a private securities exchange, have not actively traded. However, the Board of Directors retains ultimate authority as to the appropriate valuation of each such investment. The types of factors that the Valuation Committee takes into account in providing its fair value recommendation to the Board of Directors with respect to such non-traded investments include, as relevant and, to the extent available, the portfolio company’s earnings, the markets in which the portfolio company does business, comparison to valuations of publicly traded companies, comparisons to recent sales of comparable companies, the discounted value of the cash flows of the portfolio company and other relevant factors. This information may not be available because it is difficult to obtain financial and other information with respect to private companies, and even when we are able to obtain such information, there can be no assurance that it is complete or accurate. Because such valuations are inherently uncertain and may be based on estimates, our determinations of fair value may differ materially from the values that would be assessed if a readily available market for these securities existed. Due to this uncertainty, our fair value determinations with respect to any non-traded investments we hold may cause our net asset value on a given date to materially understate or overstate the value that we may ultimately realize on one or more of our investments. As a result, investors purchasing our securities based on an overstated net asset value would pay a higher price than the value of our investments might warrant. Conversely, investors selling securities during a period in which the net asset value understates the value of our investments would receive a lower price for their securities than the value of our investments might warrant.
The securities of our private portfolio companies are illiquid, and the inability of these portfolio companies to complete an IPO or consummate another liquidity event within our targeted time frame will extend the holding period of our investments, may adversely affect the value of these investments, and will delay the distribution of gains, if any.
The IPO market is, by its very nature, unpredictable. A lack of IPO opportunities for venture capital-backed companies could lead to companies staying longer in our portfolio as private entities still requiring funding. This situation may adversely affect the amount of available venture capital funding to late-stage companies that cannot complete an IPO. Such stagnation could dampen returns or could lead to unrealized depreciation and realized losses as some companies run short of cash and have to accept lower valuations in private fundings or are not able to access additional capital at all. A lack of IPO opportunities for venture capital-backed companies may also cause some venture capital firms to change their strategies, leading some of them to reduce funding of their portfolio companies and making it more difficult for such companies to access capital. This might result in unrealized depreciation and realized losses in such companies by other investment funds, like us, who are co-investors in such companies. There can be no assurance that we will be able to achieve our targeted return on our portfolio company investments if, as and when they go public.
The equity securities we acquire in a private company are generally subject to contractual transfer limitations imposed on the company’s stockholders as well as other contractual obligations, such as rights of first refusal and co-sale rights. These obligations generally expire only upon an IPO by the company or the occurrence of another liquidity/exit event. As a result, prior to an IPO or other liquidity/exit event, our ability to liquidate our private portfolio company positions may be constrained. Transfer restrictions could limit our ability to liquidate our positions in these securities if we are unable to find buyers acceptable to our portfolio companies, or where applicable, their stockholders. Such buyers may not be willing to purchase our investments at adequate prices or in volumes sufficient to liquidate our position, and even where they are willing, other stockholders could exercise their co-sale rights to participate in the sale, thereby reducing the number of shares available to sell by us. Furthermore, prospective
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buyers may be deterred from entering into purchase transactions with us due to the delay and uncertainty that these transfer and other limitations create.
If the private companies in which we invest do not perform as planned, they may be unable to successfully complete an IPO or consummate another liquidity event within our targeted time frame, or they may decide to abandon their plans for an IPO. In such cases, we will likely exceed our targeted holding period and the value of these investments may decline substantially if an IPO or other exit is no longer viable. We may also be forced to take other steps to exit these investments.
The illiquidity of our private portfolio company investments, including those that are traded on the trading platforms of private secondary marketplaces, may make it difficult for us to sell such investments should the need arise. Also, if we were required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we have previously recorded our investments. We will have no limitation on the portion of our portfolio that may be invested in illiquid securities, and we anticipate that all or a substantial portion of our portfolio may be invested in such illiquid securities at all times. Due to the inherent uncertainty in determining the fair value of investments that do not have a readily available market value, the fair value of our investments determined in good faith by our Board of Directors may differ significantly from the value that would have been used had a ready market existed for such investments, and the differences could be material.
In addition, even if a portfolio company completes an IPO, we will typically not be able to sell our position until any applicable post-IPO lockup restriction expires. As a result of lockup restrictions, the market price of securities that we hold may decline substantially before we are able to sell them following an IPO. There is also no assurance that a meaningful trading market will develop for our publicly traded portfolio companies following an IPO to allow us to liquidate our position when we desire.
We may not realize gains from our equity investments and, because certain of our portfolio companies may incur substantial debt to finance their operations, we may experience a complete loss on our equity investments in the event of a bankruptcy or liquidation of any of our portfolio companies.
We invest principally in the equity and equity-related securities of what we believe to be rapidly growing venture-capital-backed emerging companies. However, the equity interests we acquire may not appreciate in value and, in fact, may decline in value.
In addition, the private company securities we acquire may be subject to drag-along rights, which could permit other stockholders, under certain circumstances, to force us to liquidate our position in a subject company at a specified price, which could be, in our opinion, inadequate or undesirable or even below our cost basis. In this event, we could realize a loss or fail to realize gain in an amount that we deem appropriate on our investment. Further, capital market volatility and the overall market environment may preclude our portfolio companies from realizing liquidity events and impede our exit from these investments. Accordingly, we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience. We will generally have little, if any, control over the timing of any gains we may realize from our equity investments unless and until the portfolio companies in which we invest become publicly traded. In addition, the companies in which we invest may have substantial debt loads. In such cases, we would typically be last in line behind any creditors in a bankruptcy or liquidation and would likely experience a complete loss on our investment.
Many of our portfolio companies are currently experiencing operating losses, which may be substantial, and there can be no assurance when or if such companies will operate at a profit.
We have limited information about the financial performance and profitability of some of our portfolio companies. While certain of our portfolio companies have earned net income in recent periods, we believe that many of our portfolio companies are currently experiencing operating losses. There can be no assurance when or if such companies will operate at a profit.
The lack of liquidity in, and potentially extended holding period of, our many investments may adversely affect our business and will delay any distributions of gains, if any.
Our investments will generally not be in publicly traded securities. Although we expect that some of our equity investments will trade on private secondary marketplaces, certain of the securities we hold will be subject to legal and other restrictions on resale or will otherwise be less liquid than publicly traded securities. In addition, while some portfolio companies may trade on private secondary marketplaces, we can provide no assurance that such a trading market will continue or remain active, or that we will be able to sell our position in any portfolio company at the time we desire to do so and at the price we anticipate. The illiquidity of our investments, including those that are traded on private secondary marketplaces, will make it difficult for us to sell such investments if the need arises. Also, if we are required to liquidate all or a portion of our portfolio quickly, we may realize
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significantly less than the value at which we have previously recorded our investments. We have no limitation on the portion of our portfolio that may be invested in illiquid securities, and a substantial portion or all of our portfolio may be invested in such illiquid securities from time to time.
In addition, because we generally invest in equity and equity-related securities, with respect to the majority of our portfolio companies, we do not expect regular realization events, if any, to occur in the near term. We expect that our holdings of equity securities may require several years to appreciate in value, and we can offer no assurance that such appreciation will occur. Even if such appreciation does occur, it is likely that initial purchasers of our shares could wait for an extended period of time before any appreciation or sale of our investments, and any attendant distributions of gains, may be realized.
Our portfolio is concentrated in a limited number of portfolio companies or market sectors, which subjects us to a risk of significant loss if the business or market position of these companies deteriorates or market sectors experiences a market downturn.
A consequence of our limited number of investments is that the aggregate returns we realize may be significantly adversely affected if a small number of investments perform poorly or if we need to write down the value of any one investment. For example, as of December 31, 2019, 81.3% of our net asset value was comprised of investments in ten portfolio companies. Beyond the asset diversification requirements necessary to qualify as a RIC, we have general guidelines for diversification, however our investments could be concentrated in relatively few issuers. In addition, our investments may be concentrated in a limited number of market sectors, including in technology-related sectors. As a result, a downturn in any market sector in which a significant number of our portfolio companies operate or the deterioration of the market position of any portfolio company in which we have a material position could materially adversely affect us.
Technology-related sectors in which we invest are subject to many risks, including volatility, intense competition, decreasing life cycles, product obsolescence, changing consumer preferences, periodic downturns, regulatory concerns and litigation risks.
Given the experience of our executive officers and investment professionals within the technology space, a number of the companies in which we have invested and intend to invest operate in technology-related sectors. Investments in such companies are subject to substantial risks. The revenue, income (or losses) and valuations of technology-related companies can and often do fluctuate suddenly and dramatically. In addition, because of rapid technological change, the average selling prices of products and some services provided by companies in technology-related sectors have historically decreased over their productive lives.
In addition, our portfolio companies face intense competition since their businesses are rapidly evolving, intensely competitive and subject to changing technology, shifting user needs and frequent introductions of new products and services. Potential competitors to our portfolio companies in the technology industry range from large and established companies to emerging start-ups. Further, such companies are subject to laws that were adopted prior to the advent of the Internet and related technologies and, as a result, may not contemplate or address the unique issues of the Internet and related technologies. The laws that do reference the Internet are being interpreted by the courts, but their applicability and scope remain uncertain. Claims have been threatened and filed under both U.S. and foreign laws for defamation, invasion of privacy and other tort claims, unlawful activity, copyright and trademark infringement, or other theories based on the nature and content of the materials searched and the ads posted by a company’s users, a company’s products and services, or content generated by a company’s users. Further, the growth of technology-related companies into a variety of new fields implicate a variety of new regulatory issues and may subject such companies to increased regulatory scrutiny, particularly in the U.S. and Europe. Any of these factors could materially and adversely affect the business and operations of a portfolio company in the technology industry and, in turn, adversely affect the value of these portfolio companies and the value of any securities that we may hold.
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Our financial results could be negatively affected if a significant portfolio company fails to perform as expected.
Our total investment in companies may be significant individually or in the aggregate. As a result, if a significant investment in one or more companies fails to perform as expected, our financial results could be more negatively affected and the magnitude of the loss could be more significant than if we had made smaller investments in more companies. The following table shows the cost and fair value of our ten largest portfolio company positions as of December 31, 2019:
Portfolio Company | | Cost | Fair Value | | % of Net Asset Value | |||||
Coursera, Inc. | $ | 14,519,519 | $ | 33,569,902 | | 16.8% | ||||
Palantir Technologies, Inc. | 16,189,935 | 31,582,084 | | 15.8% | ||||||
Course Hero, Inc. | 5,000,001 | 25,674,019 | | 12.8% | ||||||
Ozy Media, Inc. | 10,945,024 | 15,684,182 | | 7.8% | ||||||
Parchment, Inc. | 4,000,982 | 10,896,585 | | 5.5% | ||||||
Nextdoor.com, Inc. | 10,006,578 | 10,867,365 | | 5.4% | ||||||
Neutron Holdings, Inc. (d/b/a/ Lime) | 10,006,800 | 10,000,000 | | 5.0% | ||||||
StormWind, LLC | 6,387,741 | 9,300,873 | | 4.7% | ||||||
GreenAcreage Real Estate Corp. | 7,501,530 | 7,500,000 | | 3.8% | ||||||
Treehouse Real Estate Corp. | 7,500,000 | 7,384,738 | | 3.7% | ||||||
Total | $ | 92,058,110 | | $ | 162,459,748 | | 81.3% | |||
We may be limited in our ability to make follow-on investments, and our failure to make follow-on investments in our portfolio companies could impair the value of our portfolio.
Following an initial investment in a portfolio company, we may make additional investments in that portfolio company as “follow-on” investments, in order to: (1) increase or maintain in whole or in part our equity ownership percentage; (2) exercise warrants, options or convertible securities that were acquired in the original or subsequent financing; or (3) attempt to preserve or enhance the value of our investment.
We may elect not to make follow-on investments, or may otherwise lack sufficient funds to make those investments or lack access to desired follow-on investment opportunities. We have the discretion to make any follow-on investments, subject to the availability of capital resources and of the investment opportunity. The failure to make follow-on investments may, in some circumstances, jeopardize the continued viability of a portfolio company and our initial investment, or may result in a missed opportunity for us to increase our participation in a successful operation. Even if we have sufficient capital to make a desired follow-on investment, we may elect not to make a follow-on investment because we may not want to increase our concentration of risk, because we prefer other opportunities, or because we are inhibited by compliance with BDC requirements or the desire to qualify to maintain our status as a RIC, or we lack access to the desired follow-on investment opportunity.
In addition, we may be unable to complete follow-on investments in our portfolio companies that have conducted an IPO as a result of regulatory or financial restrictions.
Because we will generally not hold controlling equity interests in our portfolio companies, we will likely not be in a position to exercise control over our portfolio companies or to prevent decisions by substantial stockholders or management of our portfolio companies that could decrease the value of our investments.
Generally, we will not take controlling equity positions in our portfolio companies. As a result, we will be subject to the risk that a portfolio company may make business decisions with which we disagree, and the stockholders and management of a portfolio company may take risks or otherwise act in ways that are adverse to our interests. In addition, other stockholders, such as venture capital and private equity sponsors, that have substantial investments in our portfolio companies may have interests that differ from that of the portfolio company or its minority stockholders, which may lead them to take actions that could materially and adversely affect the value of our investment in the portfolio company. Due to the lack of liquidity for the equity and equity-related investments that we will typically hold in our portfolio companies, we may not be able to dispose of our investments in the event we disagree with the actions of a portfolio company or its substantial stockholders, and may therefore suffer a decrease in the value of our investments.
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Investments in foreign companies may involve significant risks in addition to the risks inherent in U.S. investments.
While we invest primarily in U.S. companies, we may invest on an opportunistic basis in certain non-U.S. companies, including those located in emerging markets, that otherwise meet our investment criteria. In regards to the regulatory requirements for BDCs, non-U.S. investments do not qualify as investments in “eligible portfolio companies,” and thus may not be considered “qualifying assets.” In addition, investing in foreign companies, and particularly those in emerging markets, may expose us to additional risks not typically associated with investing in U.S. issues. These risks include changes in exchange control regulations, political and social instability, expropriation, imposition of foreign taxes, less liquid markets and less available information than is generally the case in the United States, higher transaction costs, less government supervision of exchanges, brokers and issuers, less developed bankruptcy laws, difficulty in enforcing contractual obligations, lack of uniform accounting and auditing standards and greater price volatility. Further, we may have difficulty enforcing our rights as equity holders in foreign jurisdictions. In addition, to the extent we invest in non-U.S. companies, we may face greater exposure to foreign economic developments.
Although we expect that most of our investments will be U.S. dollar-denominated, any investments denominated in a foreign currency will be subject to the risk that the value of a particular currency will change in relation to one or more other currencies. Among the factors that may affect currency values are trade balances, the level of short-term interest rates, differences in relative values of similar assets in different currencies, long-term opportunities for investment and capital appreciation, and political developments.
We may expose ourselves to risks if we engage in hedging transactions.
If we engage in hedging transactions, we may expose ourselves to risks associated with such transactions. We may utilize instruments such as forward contracts, currency options and interest rate swaps, caps, collars and floors to seek to hedge against fluctuations in the relative values of our portfolio positions from changes in currency exchange rates and market interest rates. Hedging against a decline in the values of our portfolio positions does not eliminate the possibility of fluctuations in the values of such positions or prevent losses if the values of such positions decline. However, such hedging can establish other positions designed to gain from those same developments, thereby offsetting the decline in the value of such portfolio positions. Such hedging transactions may also limit the opportunity for gain if the values of the underlying portfolio positions should increase. It may not be possible to hedge against an exchange rate or interest rate fluctuation that is so generally anticipated that we are not able to enter into a hedging transaction at an acceptable price. Moreover, for a variety of reasons, we may not seek to establish a perfect correlation between such hedging instruments and the portfolio holdings being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk of loss. In addition, it may not be possible to hedge fully or perfectly against currency fluctuations affecting the value of securities denominated in non-U.S. currencies because the value of those securities is likely to fluctuate as a result of factors not related to currency fluctuations.
Our ability to enter into transactions involving derivatives and financial commitment transactions may be limited.
In November 2019, the SEC published a proposed rulemaking regarding the ability of a BDC (or a registered investment company) to use derivatives and other transactions that create future payment or delivery obligations (except reverse repurchase agreements and similar financing transactions). If adopted as proposed, BDCs that use derivatives would be subject to a value-at-risk (“VaR”) leverage limit, certain other derivatives risk management program and testing requirements and requirements related to board reporting. These new requirements would apply unless the BDC qualified as a “limited derivatives user,” as defined in the SEC’s proposal. A BDC that enters into reverse repurchase agreements or similar financing transactions would need to aggregate the amount of indebtedness associated with the reverse repurchase agreements or similar financing transactions with the aggregate amount of any other senior securities representing indebtedness when calculating the BDC’s asset coverage ratio. Under the proposed rule, a BDC may enter into an unfunded commitment agreement that is not a derivatives transaction, such as an agreement to provide financing to a portfolio company, if the BDC has a reasonable belief, at the time it enters into such an agreement, that it will have sufficient cash and cash equivalents to meet its obligations with respect to all of its unfunded commitment agreements, in each case as it becomes due. If the BDC cannot meet this test, it is required to treat unfunded commitments as a derivatives transaction subject to the requirements of the rule. Collectively, these proposed requirements, if adopted, may limit our ability to use derivatives and/or enter into certain other financial contracts.
Risks Related to Our Business and Structure
Any failure on our part to maintain our status as a BDC would reduce our operating flexibility.
The 1940 Act imposes numerous constraints on the operations of BDCs. For example, BDCs are required to invest at least 70% of their gross assets in specified types of securities, primarily in private companies or thinly-traded U.S. public companies, cash, cash equivalents, U.S. government securities and other high quality debt investments that mature in one year or less.
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Furthermore, any failure to comply with the requirements imposed on BDCs by the 1940 Act could cause the SEC to bring an enforcement action against us and/or expose us to claims of private litigants. In addition, upon approval of a majority of our stockholders, we may elect to withdraw our status as a BDC. If we decide to withdraw our election, or if we otherwise fail to maintain our qualification, to be regulated as a BDC, we may be subject to substantially greater regulation under the 1940 Act as a closed-end investment company. Compliance with such regulations would significantly decrease our operating flexibility and could significantly increase our costs of doing business.
As an internally managed BDC, we are subject to certain restrictions that may adversely affect our business.
As an internally managed BDC, the size and categories of our assets under management is limited, and we are unable to offer as wide a variety of financial products to prospective portfolio companies and sponsors (potentially limiting the size and diversification of our asset base). We therefore may not achieve efficiencies of scale and greater management resources available to externally managed BDCs.
Additionally, as an internally managed BDC, our ability to offer more competitive and flexible compensation structures, such as offering both a profit-sharing plan and an equity incentive plan, is subject to the limitations imposed by the 1940 Act, which limits our ability to attract and retain talented investment management professionals. As such, these limitations could inhibit our ability to grow, pursue our business plan and attract and retain professional talent, any or all of which may have a negative impact on our business, financial condition and results of operations.
As an internally managed BDC, we are dependent upon our management team and investment professionals for their time availability and for our future success, and if we are not able to hire and retain qualified personnel, or if we lose key members of our senior management team, our ability to implement our business strategy could be significantly harmed.
As an internally managed BDC, our ability to achieve our investment objectives and to make distributions to our stockholders depends upon the performance of our management team and investment professionals. We depend upon the members of our management and our investment professionals for the identification, final selection, structuring, closing and monitoring of our investments. These employees have critical industry experience and relationships on which we rely to implement our business plan. If we lose the services of key members of our senior management team, we may not be able to operate the business as we expect, and our ability to compete could be harmed, which could cause our operating results to suffer. We believe our future success will depend, in part, on our ability to identify, attract and retain sufficient numbers of highly skilled employees. If we do not succeed in identifying, attracting and retaining such personnel, we may not be able to operate our business as we expect.
As an internally managed BDC, our compensation structure is determined and set by our Board of Directors and its Compensation Committee. This structure currently includes salary, bonus and incentive compensation. We are not generally permitted by the 1940 Act to employ an incentive compensation structure that directly ties performance of our investment portfolio and results of operations to incentive compensation.
Members of our senior management team may receive offers of more flexible and attractive compensation arrangements from other companies, particularly from investment advisers to externally managed BDCs that are not subject to the same limitations on incentive-based compensation that we are subject to as an internally managed BDC. A departure by one or more members of our senior management team could have a negative impact on our business, financial condition and results of operations.
Our financial condition and results of operations will depend on our ability to achieve our investment objective.
Our ability to achieve our investment objective will depend on our management team’s and investment professional’s ability to identify, analyze and invest in companies that meet our investment criteria. Accomplishing this result on a cost-effective basis is largely a function of our management team’s and investment professional’s structuring of the investment process and its ability to provide competent, attentive and efficient services to us. We seek a specified number of investments in rapidly growing venture-capital-backed emerging companies, which may be extremely risky. There can be no assurance that our management team and investment professionals will be successful in identifying and investing in companies that meet our investment criteria, or that we will achieve our investment objective. Even if we are able to grow and build upon our investment operations, any failure to manage our growth effectively could have a material adverse effect on our business, financial condition, results of operations and prospects
The results of our operations will depend on many factors, including the availability of opportunities for investment, readily accessible short and long-term funding alternatives in the financial markets and economic conditions. Furthermore, any inability to successfully operate our business or implement our investment policies and strategies as described herein, could adversely impact our ability to pay dividends.
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We will likely experience fluctuations in our quarterly results and we may be unable to replicate past investment opportunities or make the types of investments we have made to date in future periods.
We will likely experience fluctuations in our quarterly operating results due to a number of factors, including the rate at which we make new investments, the level of our expenses, changes in the valuation of our portfolio investments, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic conditions. For example, since inception through December 31, 2019, we have experienced substantial cumulative negative cash flows from operations. These fluctuations may in certain cases be exaggerated as a result of our focus on realizing capital gains rather than current income from our investments. In addition, there can be no assurance that we will be able to locate or acquire investments that are of a similar nature to those currently in our portfolio. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods.
Our business model depends upon the development and maintenance of strong referral relationships with private equity, venture capital funds and investment banking firms.
We expect that members of our management team and our investment professionals will maintain key informal relationships, which we use to help identify and gain access to investment opportunities. If our management team and investment professionals fail to maintain relationships with key firms, or if they fail to establish strong referral relationships with other firms or other sources of investment opportunities, we will not be able to grow our portfolio of equity investments and achieve our investment objective. In addition, persons with whom our management team and investment professionals have informal relationships are not obligated to inform them or us of investment opportunities, and therefore such relationships may not lead to the origination of equity or other investments. Any loss or diminishment of such relationships could effectively reduce the ability to identify attractive portfolio companies that meet our investment criteria, either for direct equity investments or for investments through private secondary market transactions or other secondary transactions.
There are significant potential risks related to investing in securities traded on private secondary marketplaces.
We have utilized and expect to continue to utilize private secondary marketplaces, such as SharesPost, Inc., to acquire investments for our portfolio. When we purchase secondary shares, we may have little or no direct access to financial or other information from these portfolio companies. As a result, we are dependent upon the relationships of our management team and investment professionals and our Board of Directors to obtain the information necessary to perform research and due diligence, and to monitor our investments after they are made. There can be no assurance that our management team and investment professionals will be able to acquire adequate information on which to make its investment decision with respect to any private secondary marketplace purchases, or that the information it is able to obtain is accurate or complete. Any failure to obtain full and complete information regarding the portfolio companies with respect to which we invest through private secondary marketplaces could cause us to lose part or all of our investment in such companies, which would have a material and adverse effect on our net asset value and results of operations.
In addition, while we believe the ability to trade on private secondary marketplaces provides valuable opportunities for liquidity, there can be no assurance that the portfolio companies with respect to which we invest through private secondary marketplaces will have or maintain active trading markets, and the prices of those securities may be subject to irregular trading activity, wide bid/ask spreads and extended trade settlement periods, which may result in an inability for us to realize full value on our investment. In addition, wide swings in market prices, which are typical of irregularly traded securities, could cause significant and unexpected declines in the value of our portfolio investments. Further, prices in private secondary marketplaces, where limited information is available, may not accurately reflect the true value of a portfolio company, and may overstate a portfolio company’s actual value, which may cause us to realize future capital losses on our investment in that portfolio company. If any of the foregoing were to occur, it would likely have a material and adverse effect on our net asset value and results of operations.
Investments in private companies, including through private secondary marketplaces, also entail additional legal and regulatory risks which expose participants to the risk of liability due to the imbalance of information among participants and participant qualification and other transactional requirements applicable to private securities transactions, the non-compliance with which could result in rescission rights and monetary and other sanctions. The application of these laws within the context of private secondary marketplaces and related market practices are still evolving, and, despite our efforts to comply with applicable laws, we could be exposed to liability. The regulation of private secondary marketplaces is also evolving. Additional state or federal regulation of these markets could result in limits on the operation of or activity on those markets. Conversely, deregulation of these markets could make it easier for investors to invest directly in private companies and affect the attractiveness of our Company as an access vehicle for investment in private shares. Private companies may also increasingly seek to limit secondary trading in their stock, such as through contractual transfer restrictions, and provisions in company charter documents, investor rights of first
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refusal and co-sale and/or employment and trading policies further restricting trading. To the extent that these or other developments result in reduced trading activity and/or availability of private company shares, our ability to find investment opportunities and to liquidate our investments could be adversely affected.
Due to transfer restrictions and the illiquid nature of our investments, we may not be able to purchase or sell our investments when we wish to do so.
Most of our investments are or will be in equity or equity-related securities of privately held companies. The securities we acquire in private companies are typically subject to contractual transfer limitations, which may include prohibitions on transfer without the company’s consent, may require that shares owned by us be held in escrow and may include provisions in company charter documents, and may include investor rights of first refusal and co-sale and/or employment or trading policies further restricting trading. In order to complete a purchase of shares we may need to, among other things, give the issuer, its assignees or its stockholders a particular period of time, often 30 days or more, in which to exercise a veto right, or a right of first refusal over, the sale of such securities. We may be unable to complete a purchase transaction if the subject company or its stockholders chooses to exercise a veto right or right of first refusal. When we complete an investment, we generally become bound to the contractual transfer limitations imposed on the subject company’s stockholders as well as other contractual obligations, such as co-sale or tag- along rights. These obligations generally expire only upon an IPO by the subject company. As a result, prior to an IPO, our ability to liquidate may be constrained. Transfer restrictions could limit our ability to liquidate our positions in these securities if we are unable to find buyers acceptable to our portfolio companies, or where applicable, their stockholders. Such buyers may not be willing to purchase our investments at adequate prices or in volumes sufficient to liquidate our position, and even where they are willing, other stockholders could exercise their co-sales or tag-along rights to participate in the sale, thereby reducing the number of shares sellable by us. Furthermore, prospective buyers may be deterred from entering into purchase transactions with us due to the delay and uncertainty that these transfer and other limitations create.
Although we believe that secondary marketplaces may offer an opportunity to liquidate our private company investments, there can be no assurance that a trading market will develop for the securities that we wish to liquidate or that the subject companies will permit their shares to be sold through such marketplaces. Even if some of our portfolio companies complete IPOs, we are typically subject to lock-up provisions that prohibit us from selling our investments into the public market for specified periods of time after IPOs. As a result, the market price of securities that we hold may decline substantially before we are able to sell these securities following an IPO.
Due to the illiquid nature of most of our investments, we may not be able to sell these securities at times when we deem it advantageous to do so, or at all. Because our net asset value is only determined on a quarterly basis, and due to the difficulty in assessing this value, our net asset value may not fully reflect the illiquidity of our portfolio, which may change on a daily basis, depending on many factors, including the status of the private secondary markets and our particular portfolio at any given time.
There are significant potential risks associated with investing in venture capital companies with complex capital structures.
We invest primarily in what we believe to be rapidly growing, venture-capital-backed emerging companies, either through private secondary transactions, other secondary transactions or direct investments in companies. Such private companies frequently have much more complex capital structures than traditional publicly traded companies, and may have multiple classes of equity securities with differing rights, including with respect to voting and distributions. In addition, it is often difficult to obtain financial and other information with respect to private companies, and even where we are able to obtain such information, there can be no assurance that it is complete or accurate. In certain cases, such private companies may also have senior or pari passu preferred stock or senior debt outstanding, which may heighten the risk of investing in the underlying equity of such private companies, particularly in circumstances when we have limited information with respect to such capital structures. Although we believe that our management team and investment professionals and our Board of Directors have extensive experience evaluating and investing in private companies with such complex capital structures, there can be no assurance that we will be able to adequately evaluate the relative risks and benefits of investing in a particular class of a portfolio company’s equity securities. Any failure on our part to properly evaluate the relative rights and value of a class of securities in which we invest could cause us to lose part or all of our investment, which in turn could have a material and adverse effect on our net asset value and results of operations.
Our business is subject to increasingly complex corporate governance, public disclosure and accounting requirements that are costly and could adversely affect our business and financial results.
We are subject to changing rules and regulations of federal and state government as well as the stock exchange on which our common stock is listed. These entities, including the Public Company Accounting Oversight Board, the SEC and the Nasdaq Capital Market, have issued a significant number of new and increasingly complex requirements and regulations over the course of the last several years and continue to develop additional regulations and requirements in response to laws enacted by Congress.
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In addition, there are significant corporate governance and executive compensation-related provisions in the Dodd-Frank Act, and the SEC has adopted, and may continue to adopt, additional rules and regulations that may impact us. Our efforts to comply with these requirements have resulted in, and are likely to continue to result in, an increase in expenses and a diversion of management’s time from other business activities.
In addition, any failure to keep pace with such rules, or for our management to appropriately address compliance with such rules fully and in a timely manner, would expose us to an increasing risk of inadvertent non-compliance. While our management team takes reasonable efforts to ensure that we are in full compliance with all laws applicable to our operations, the increasing rate and extent of regulatory change increases the risk of a failure to comply, which may limit our ability to operate our business in the ordinary course or may subject us to potential fines, regulatory findings or other matters that may materially impact our business.
Over the last several years, there has also been an increase in regulatory attention to the extension of credit outside of the traditional banking sector, raising the possibility that some portion of the non-bank financial sector will be subject to new regulation. While it cannot be known at this time whether any regulation will be implemented or what form it will take, increased regulation of non-bank credit extension could negatively impact our operating results or financial condition, impose additional costs on us, intensify the regulatory supervision of us or otherwise adversely affect our business.
Capital markets may experience periods of disruption and instability. These market conditions may materially and adversely affect debt and equity capital markets in the United States and abroad, which may in the future have a negative impact on our business and operations.
As a BDC, we must maintain our ability to raise additional capital for investment purposes. Without sufficient access to the capital markets or credit markets, we may be forced to curtail our business operations, or we may not be able to pursue new business opportunities.
From time to time, capital markets may experience periods of disruption and instability. During such periods of market disruption and instability, we and other companies in the financial services sector may have limited access, if available, to alternative markets for debt and equity capital. Equity capital may be difficult to raise because, subject to some limited exceptions which will apply to us as a BDC, we will generally not be able to issue additional shares of our common stock at a price less than net asset value without first obtaining approval for such issuance from our stockholders and our independent directors. In addition, our ability to incur indebtedness (including by issuing preferred stock) is limited by applicable regulations such that our asset coverage, as defined in the 1940 Act, must equal at least 200% (or 150% if certain requirements are met) immediately after each time we incur indebtedness. The debt capital that will be available, if at all, may be at a higher cost and on less favorable terms and conditions in the future. Any inability to raise capital could have a negative effect on our business, financial condition and results of operations.
Given the volatility and dislocation in the capital markets over the past several years, many BDCs have faced, and may in the future face, a challenging environment in which to raise or access capital. In addition, this volatility and disruption, has had, and in the future may have, a negative effect on the valuations of our investments and on the potential for liquidity events involving these investments. While most of our investments are not publicly traded, applicable accounting standards require us to assume, as part of our valuation process, that our investments are sold in orderly market-to-market transactions between market participants. As a result, volatility in the capital markets can adversely affect our investment valuations. Further, the illiquidity of our investments may make it difficult for us to sell such investments if required and to value such investments. As a result, we may realize significantly less than the value at which we will have recorded our investments. An inability to raise capital, and any required sale of our investments for liquidity purposes, could have a material adverse impact on our business, financial condition or results of operations. In addition, a prolonged period of market illiquidity may cause us to reduce the volume of investments we may make and adversely affect the value of our portfolio investments, which could have a material and adverse effect on our business, financial condition, results of operations and cash flows.
Global economic, political and market conditions may adversely affect our business, results of operations and financial condition, including our revenue growth and profitability.
The current worldwide financial market situation, as well as various social and political tensions in the United States and around the world, may contribute to increased market volatility, may have long-term effects on the U.S. and worldwide financial markets, and may cause economic uncertainties or deterioration in the United States and worldwide. The U.S. and global capital markets experienced extreme volatility and disruption during the economic downturn that began in mid-2007, and the U.S. economy was in a recession for several consecutive calendar quarters during the same period. In 2010, a financial crisis emerged in Europe, triggered by high budget deficits and rising direct and contingent sovereign debt, which created concerns about the ability of certain nations to continue to service their sovereign debt obligations. Risks resulting from such debt crisis, including any austerity
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measures taken in exchange for bailout of certain nations, and any future debt crisis in Europe or any similar crisis elsewhere could have a detrimental impact on the global economic recovery, sovereign and non-sovereign debt in certain countries and the financial condition of financial institutions generally. In June 2016, the United Kingdom held a referendum in which voters approved an exit from the European Union (“Brexit”) and, subsequently, on March 29, 2017, the U.K. government began the formal process of leaving the European Union. Brexit created political and economic uncertainty and instability in the global markets (including currency and credit markets), and especially in the United Kingdom and the European Union. Under current Prime Minister Boris Johnson, the House of Commons passed the Brexit deal on December 20, 2019 and the U.K. formally left the European Union on January 31, 2020. The U.K. is currently in a transition period until December 31, 2020, where agreements surrounding trade and other aspects of the U.K.’s future relationship with the European Union will need to be finalized. Failure to come to terms on a free trade deal could result in checks and tariffs on U.K. goods traveling to the European Union and thus prolong the economic uncertainty. There is continued concern about national-level support for the Euro and the accompanying coordination of fiscal and wage policy among European Economic and Monetary Union member countries. In addition, the fiscal and monetary policies of foreign nations, such as Russia and China, may have a severe impact on the worldwide and U.S. financial markets.
The Chinese capital markets have also experienced periods of instability over the past several years. The current political climate has also intensified concerns about a potential trade war between the U.S. and China in connection with each country’s recent or proposed tariffs on the other country’s products. These market and economic disruptions and the potential trade war with China have affected, and may in the future affect, the U.S. capital markets, which could adversely affect our business, financial condition or results of operations.
The current global financial market situation, as well as various social and political circumstances in the United States and around the world (including wars and other forms of conflict, terrorist acts, security operations and catastrophic events such as fires, floods, earthquakes, tornadoes, hurricanes and global health epidemics), may contribute to increased market volatility and economic uncertainties or deterioration in the United States and worldwide. For example, the recent outbreak of coronavirus, or COVID-19, in many countries continues to adversely impact global commercial activity, particularly in China, and has contributed to significant volatility in financial markets. The outbreak of COVID-19 may have a material adverse impact on the ability of our portfolio companies to fulfill their end customers’ orders due to supply chain delays, limited access to key commodities or technologies or other events that impact their manufacturers or their suppliers. Such events have affected, and may in the future affect, the global and U.S. capital markets, and our business, financial condition or results of operations.
Additionally, the U.S. government’s credit and deficit concerns, the European sovereign debt crisis, and the potential trade war with China could cause interest rates to be volatile, which may negatively impact our ability to access the debt markets on favorable terms.
The Republican Party currently controls the executive branch and the senate portion of the legislative branch of government, which increases the likelihood that legislation may be adopted that could significantly affect the regulation of U.S. financial markets. Areas subject to potential change, amendment or repeal include the Dodd-Frank Wall Street Reform and Consumer Protection Act and the authority of the Federal Reserve and the Financial Stability Oversight Council. For example, in March 2018, the U.S. Senate passed a bill that eased financial regulations and reduced oversight for certain entities. The United States may also potentially withdraw from or renegotiate various trade agreements and take other actions that would change current trade policies of the United States. We cannot predict which, if any, of these actions will be taken or, if taken, their effect on the financial stability of the United States. Such actions could have a significant adverse effect on our business, financial condition and results of operations. We cannot predict the effects of these or similar events in the future on the U.S. economy and securities markets or on our investments. We monitor developments and seek to manage our investments in a manner consistent with achieving our investment objective, but there can be no assurance that we will be successful in doing so.
On May 24, 2018, President Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act, which increased from $50 billion to $250 billion the asset threshold for designation of “systemically important financial institutions” or “SIFIs” subject to enhanced prudential standards set by the Federal Reserve Board, staggering application of this change based on the size and risk of the covered bank holding company. On May 30, 2018, the Federal Reserve Board voted to consider changes to the Volcker Rule that would loosen compliance requirements for all banks. The effect of this change and any further rules or regulations are and could be complex and far-reaching, and the change and any future laws or regulations or changes thereto could negatively impact our operations, cash flows or financial condition, impose additional costs on us, intensify the regulatory supervision of us or otherwise adversely affect our business, financial condition and results of operations.
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Events outside of our control, including public health crises, may negatively affect our results of operations and financial performance.
Periods of market volatility may occur in response to pandemics or other events outside of our control. These types of events could adversely affect our results of operations and financial performance. For example, in December 2019, a novel strain of coronavirus surfaced in Wuhan, China, which has resulted in the temporary closure of many corporate offices, retail stores, and manufacturing facilities and factories across China and the rest of the world. As the potential impact on global markets from the coronavirus is difficult to predict, the extent to which the coronavirus may negatively affect our results of operation and financial performance or the duration of any potential business disruption is uncertain. Any potential impact to our results of operations and financial performance will depend to a large extent on future developments and new information that may emerge regarding the duration and severity of the coronavirus and the actions taken by authorities and other entities to contain the coronavirus or treat its impact, all of which are beyond our control. These potential impacts, while uncertain, could adversely affect our results of operations and financial performance.
We are exposed to risks associated with changes in interest rates.
Because we may borrow money to make investments, our net investment income may depend, in part, upon the difference between the rate at which we borrow funds and the rate at which we invest those funds. As a result, we can offer no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. A reduction in the interest rates on new investments relative to interest rates on current investments could have an adverse impact on our net investment income. However, an increase in interest rates could decrease the value of any investments we hold which earn fixed interest rates and also could increase our interest expense, thereby decreasing our net income. Also, an increase in interest rates available to investors could make an investment in our common stock less attractive if we are not able to increase our distribution rate, which could reduce the value of our common stock. Further, rising interest rates could also adversely affect our performance if such increases cause our borrowing costs to rise at a rate in excess of the rate that our investments yield.
In periods of rising interest rates, to the extent we borrow money subject to a floating interest rate, our cost of funds would increase, which could reduce our net investment income. Further, rising interest rates could also adversely affect our performance if we hold investments with floating interest rates, subject to specified minimum interest rates (such as a LIBOR floor), while at the same time engaging in borrowings subject to floating interest rates not subject to such minimums. In such a scenario, rising interest rates may increase our interest expense, even though our interest income from investments is not increasing in a corresponding manner as a result of such minimum interest rates.
If general interest rates rise, there is a risk that the portfolio companies in which we may hold floating rate securities will be unable to pay escalating interest amounts, which could result in a default under their loan documents with us (if any). Rising interest rates could also cause portfolio companies to shift cash from other productive uses to the payment of interest, which may have a material adverse effect on their business and operations and could, over time, lead to increased defaults. In addition, rising interest rates may increase pressure on us to provide fixed rate loans to our portfolio companies, which could adversely affect our net investment income, as increases in our cost of borrowed funds would not be accompanied by increased interest income from such fixed-rate investments.
On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. It is unclear if at that time whether LIBOR will cease to exist or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with a new index calculated by short term repurchase agreements, backed by Treasury securities called the Secured Overnight Financing Rate (“SOFR”). The first publication of SOFR was released in April 2018. Whether or not SOFR attains market traction as a LIBOR replacement remains a question and the future of LIBOR at this time is uncertain. At this time, it is not possible to predict the effect of any such changes, any establishment of alternative reference rates or any other reforms to LIBOR that may be enacted. The elimination of LIBOR or any other changes or reforms to the determination or supervision of LIBOR could have an adverse impact on the market for or value of any LIBOR-linked securities, loans, and other financial obligations or extensions of credit held by or due to us or on our overall financial condition or results of operations. In addition, if LIBOR ceases to exist, we may need to renegotiate credit agreements extending beyond 2021 with our portfolio companies that utilize LIBOR as a factor in determining the interest rate, in order to replace LIBOR with the new standard that is established, which may have an adverse effect on our overall financial condition or results of operations. Following the replacement of LIBOR, some or all of these credit agreements may bear interest a lower interest rate, which could have an adverse impact on our results of operations. Moreover, if LIBOR ceases to exist, we may need to renegotiate certain terms of our credit facilities, if any. If we are unable to do so, amounts drawn under our credit facilities (if any) may bear interest at a higher rate, which would increase the cost of our borrowings and, in turn, affect our results of operations.
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Economic recessions or downturns could impair our portfolio companies and harm our operating results.
Many of the portfolio companies in which we make investments may be susceptible to economic slowdowns or recessions and may be unable to repay any loans made to them during these periods and, thus, jeopardize our equity investment in such portfolio companies. Therefore, the value of our portfolio may decrease during these periods as we are required to record our investments at their current fair value. Adverse economic conditions also may decrease the value of our equity investments and the value of any collateral securing our loans, if any. Economic slowdowns or recessions could lead to financial losses in our portfolio and a decrease in revenues, net income and assets. Unfavorable economic conditions could also increase our and our portfolio companies’ funding costs, limit our and our portfolio companies’ access to the capital markets or result in a decision by lenders not to extend credit to us or our portfolio companies. These events could prevent us from increasing investments and harm our operating results.
A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, acceleration of the time when the loans are due and foreclosure on its secured assets, which could trigger cross- defaults under other agreements and jeopardize our equity investment in such portfolio company. We may incur additional expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a financially distressed or defaulting portfolio company. In addition, if one of our portfolio companies were to go bankrupt, depending on the facts and circumstances, we would typically be last in line behind any creditors and would likely experience a complete loss on our investment.
Any disruptive conditions in the financial industry and the impact of new legislation in response to those conditions could restrict our business operations and could adversely impact our results of operations and financial condition. In addition, the BDC market may be more sensitive to changes in interest rates or other factors and to the extent the BDC market trades down, our shares might likewise be affected. If the fair value of our assets declines substantially, we may fail to maintain the asset coverage ratios imposed upon us by the 1940 Act. Any such failure would affect our ability to issue securities, including borrowings, and pay dividends, which could materially impair our business operations. Our liquidity could be impaired further by an inability to access the capital markets or to consummate new borrowing facilities to provide capital for normal operations, including new originations. In recent years, reflecting concern about the stability of the financial markets, many lenders and institutional investors have reduced or ceased providing funding to borrowers.
Economic sanction laws in the United States and other jurisdictions may prohibit us from transacting with certain countries, individuals and companies. Economic sanction laws in the United States and other jurisdictions may prohibit us from transacting with certain countries, individuals and companies. In the United States, the U.S. Department of the Treasury’s Office of Foreign Assets Control administers and enforces laws, executive orders and regulations establishing U.S. economic and trade sanctions, which prohibit, among other things, transactions with, and the provision of services to, certain non-U.S. countries, territories, entities and individuals. These types of sanctions may significantly restrict or completely prohibit investment activities in certain jurisdictions, and if we, our portfolio companies or other issuers in which we invest were to violate any such laws or regulations, we may face significant legal and monetary penalties. The Foreign Corrupt Practices Act, or FCPA, and other anti-corruption laws and regulations, as well as antiboycott regulations, may also apply to and restrict our activities, our portfolio companies and other issuers of our investments. If an issuer or we were to violate any such laws or regulations, such issuer or we may face significant legal and monetary penalties.
The U.S. government has indicated that it is particularly focused on FCPA enforcement, which may increase the risk that an issuer or us becomes the subject of such actual or threatened enforcement. In addition, certain commentators have suggested that private investment firms and the funds that they manage may face increased scrutiny and/or liability with respect to the activities of their underlying portfolio companies. As such, a violation of the FCPA or other applicable regulations by us or an issuer of our portfolio investments could have a material adverse effect on us. We are committed to complying with the FCPA and other anti-corruption laws and regulations, as well as anti-boycott regulations, to which it is subject. As a result, we may be adversely affected because of our unwillingness to enter into transactions that violate any such laws or regulations.
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Our business and operations could be negatively affected if we become subject to any securities litigation or stockholder activism, which could cause us to incur significant expense, hinder execution of investment strategy and impact our stock price.
In the past, following periods of volatility in the market price of a company’s securities, securities class-action litigation has often been brought against that company. Stockholder activism, which could take many forms or arise in a variety of situations, has been increasing in the BDC space recently. While we are currently not subject to any securities litigation or stockholder activism, due to the potential volatility of our stock price and for a variety of other reasons, we may in the future become the target of securities litigation or stockholder activism. Securities litigation and stockholder activism, including potential proxy contests, could result in substantial costs and divert management’s and our Board of Directors’ attention and resources from our business. Additionally, such securities litigation and stockholder activism could give rise to perceived uncertainties as to our future, adversely affect our relationships with service providers and make it more difficult to attract and retain qualified personnel. Also, we may be required to incur significant legal fees and other expenses related to any securities litigation and activist stockholder matters. Further, our stock price could be subject to significant fluctuation or otherwise be adversely affected by the events, risks and uncertainties of any securities litigation and stockholder activism.
We operate in a highly competitive market for direct equity investment opportunities.
A large number of entities compete with us to make the types of direct equity investments that we target as part of our business strategy. We compete for such investments with a large number of private equity and venture capital funds, other equity and non- equity based investment funds, investment banks and other sources of financing, including traditional financial services companies such as commercial banks and specialty finance companies. Many of our competitors are substantially larger than us and have considerably greater financial, technical and marketing resources than we do. For example, some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC. There can be no assurance that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations. Also, as a result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time, and we can offer no assurance that we will be able to identify and make direct equity investments that are consistent with our investment objective.
Borrowings, such as the 4.75% Convertible Senior Notes due 2023, can magnify the potential for gain or loss on amounts invested and may increase the risk of investing in us.
Borrowings, also known as leverage, magnify the potential for gain or loss on amounts invested and, therefore, increase the risks associated with investing in our securities. In addition to the 4.75% Convertible Senior Notes due 2023, we may borrow from and issue senior debt securities to banks, insurance companies and other lenders. Lenders of such senior securities would have fixed dollar claims on our assets that are superior to the claims of our common stockholders. If the value of our assets increases, then leveraging would cause the net asset value attributable to our common stock to increase more sharply than it would have had we not leveraged. Conversely, if the value of our assets decreases, leveraging would cause net asset value to decline more sharply than it otherwise would have had we not leveraged. Similarly, any increase in our income in excess of interest payable on the borrowed funds would cause our net income to increase more than it would without the leverage, while any decrease in our income would cause net income to decline more sharply than it would have had we not borrowed. Leverage is generally considered a speculative investment technique. Our ability to service the 4.75% Convertible Senior Notes due 2023, borrowings under any other future debt that we incur will depend largely on our financial performance and will be subject to prevailing economic conditions and competitive pressures. As a result of our use of leverage, we have experienced a substantial increase in operating expenses and may continue to do so in the future.
Our use of borrowed funds to make investments exposes us to risks typically associated with leverage.
We borrow money and may issue additional debt securities or preferred stock to leverage our capital structure. As a result:
• | shares of our common stock would be exposed to incremental risk of loss; therefore, a decrease in the value of our investments would have a greater negative impact on the value of our common shares than if we did not use leverage; |
• | any depreciation in the value of our assets may magnify losses associated with an investment and could totally eliminate the value of an asset to us; |
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• | if we do not appropriately match the assets and liabilities of our business and interest or dividend rates on such assets and liabilities, adverse changes in interest rates could reduce or eliminate the incremental income we make with the proceeds of any leverage; |
• | our ability to pay dividends on our common stock may be restricted if our asset coverage ratio, as provided in the 1940 Act, is not at least 200% (or 150% if certain requirements are met), and any amounts used to service indebtedness or preferred stock would not be available for such dividends; |
• | Any future credit facility we may enter would be, subject to periodic renewal by our lenders, whose continued participation cannot be guaranteed; |
• | such securities would be governed by an indenture or other instrument containing covenants restricting our operating flexibility or affecting our investment or operating policies, and may require us to pledge assets or provide other security for such indebtedness; |
• | we, and indirectly our common stockholders, bear the entire cost of issuing and paying interest or dividends on such securities; |
• | if we issue preferred stock, the special voting rights and preferences of preferred stockholders may result in such stockholders’ having interests that are not aligned with the interests of our common stockholders, and the rights of our preferred stockholders to dividends and liquidation preferences will be senior to the rights of our common stockholders; |
• | any convertible or exchangeable securities that we issue may have rights, preferences and privileges more favorable than those of our common shares; and |
• | any custodial relationships associated with our use of leverage would conform to the requirements of the 1940 Act, and no creditor would have veto power over our investment policies, strategies, objectives or decisions except in an event of default or if our asset coverage was less than 200% (or 150% if certain requirements are met.) |
Under the provisions of the 1940 Act, we are permitted, as a BDC, to issue senior securities only in amounts such that our asset coverage ratio equals at least 200% after each issuance of senior securities. If the value of our assets declines, we may be unable to satisfy this test and we may be required to sell a portion of our investments and, depending on the nature of our leverage, repay a portion of our senior securities at a time when such sales may be disadvantageous.
If we default under any future credit facility or any other future indebtedness, we may not be able to make payments on the 4.75% Convertible Senior Notes due 2023.
Any default under any future credit facility or any other future indebtedness to which we may be a party that is not waived by the required lenders or holders, and the remedies sought by the holders of such indebtedness, could make us unable to pay principal, premium, if any, and interest on the 4.75% Convertible Senior Notes due 2023 and substantially decrease the market value of the 4.75% Convertible Senior Notes due 2023. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness may have the ability to elect to declare all the funds borrowed thereunder due and payable, together with accrued and unpaid interest, the lenders under any credit future facility or other future debt we may incur in the future may elect to terminate their commitments, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. If our operating performance declines, we may in the future need to seek to obtain waivers from the required lenders under any future credit facility or other future debt that we may incur in the future to avoid being in default. If we breach our covenants under any future credit facility or other future debt and seek a waiver, we may not be able to obtain a waiver from the required lenders or holders. If this occurs, we may be in default under the relevant credit facility or other debt, the lenders or holders could exercise their rights as described above, and we could be forced into bankruptcy or liquidation. If we are unable to repay debt, lenders having secured obligations, including the lenders under any future credit facility or other future indebtedness, could proceed against the collateral securing the debt. Because any future credit facilities will likely have, customary cross-default provisions, if the indebtedness under the 4.75% Convertible Senior Notes due 2023, or under any future credit facility is accelerated, we may be unable to repay or finance the amounts due.
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If we default under any future borrowing facility we enter into or are unable to amend, repay or refinance any such facility on commercially reasonable terms, or at all, we may suffer material adverse effects on our business, financial condition, results of operations and cash flows.
Substantially all of our assets may be pledged as collateral under any future borrowing facility. In the event that we default under any future borrowing facility, our business could be adversely affected as we may be forced to sell all or a portion of our investments quickly and prematurely at what may be disadvantageous prices to us in order to meet our outstanding payment obligations and/or support covenants and working capital requirements under any future borrowing facility, any of which would have a material adverse effect on our business, financial condition, results of operations and cash flows.
Following any such default, the agent for the lenders under any future borrowing facility could assume control of the disposition of any or all of our assets, including the selection of such assets to be disposed and the timing of such disposition, which would have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, if the lender exercises its right to sell the assets pledged under any future borrowing facility, such sales may be completed at distressed sale prices, thereby diminishing or potentially eliminating the amount of cash available to us after repayment of our outstanding borrowings. Moreover, such deleveraging of our Company could significantly impair our ability to effectively operate our business in the manner in which we have historically operated. As a result, we could be forced to curtail or cease new investment activities and lower or eliminate any dividends that we may pay to our stockholders.
We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income.
Although we focus on achieving capital gains from our investments, in certain cases we may receive current income, such as interest or dividends, on our investments. Because in certain cases we may recognize such current income before or without receiving cash representing such income, we may have difficulty satisfying the annual distribution requirement applicable to RICs. Accordingly, in order to maintain our qualification as a RIC, we may have to sell some of our investments at times we would not consider advantageous, raise additional debt or equity capital or reduce new investments to meet these distribution requirements. If we are not able to obtain cash from other sources, we may fail to qualify for RIC tax treatment and thus would be subject to corporate-level U.S. federal income tax.
Regulations governing our operation as a BDC affect our ability to, and the way in which we, raise additional capital, which may expose us to risks, including the typical risks associated with leverage.
We may in the future issue additional debt securities or preferred stock and/or borrow money from banks or other financial institutions, which we refer to collectively (along with the 4.75% Convertible Senior Notes due 2023) as “senior securities,” up to the maximum amount permitted by the 1940 Act. Under the provisions of the 1940 Act, we are permitted, as a BDC, to issue senior securities in amounts such that our asset coverage ratio, as defined in the 1940 Act, equals at least 200% (or 150% if certain requirements are met) of gross assets less all liabilities and indebtedness not represented by senior securities, after each issuance of senior securities. If the value of our assets declines, we may be unable to satisfy this test. If that happens, we may be required to sell a portion of our investments and, depending on the nature of our leverage, repay a portion of our indebtedness at a time when such sales may be disadvantageous. Furthermore, any amounts that we use to service our indebtedness would not be available for distributions to our common stockholders.
All of the costs of offering and servicing the 4.75% Convertible Senior Notes due 2023 and any additional debt or preferred stock we may issue in the future, including interest or preferential dividend payments thereon, will be borne by our common stockholders. The interests of the holders of the 4.75% Convertible Senior Notes due 2023, any additional debt or preferred stock we may issue will not necessarily be aligned with the interests of our common stockholders. In particular, the rights of holders of the 4.75% Convertible Senior Notes due 2023 and our debt or preferred stock to receive interest, dividends or principal repayment will be senior to those of our common stockholders. Also, in the event we issue preferred stock, the holders of such preferred stock will have the ability to elect two members of our Board of Directors. In addition, we may grant a lender a security interest in a significant portion or all of our assets, even if the total amount we may borrow from such lender is less than the amount of such lender’s security interest in our assets. In no event, however, will any lender to us have any veto power over, or any vote with respect to, any change in our, or approval of any new, investment objective or investment policies or strategies.
We are not generally able to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common stock, or warrants, options or rights to acquire our common stock, at a price below the then-current net asset value of our common stock if our Board of Directors determines that such sale is in the best interests of Sutter Rock Capital and its stockholders, and our stockholders approve such sale. In any such case, the price at which our securities are to be issued and sold may not be less than a price which, in the determination of our Board of Directors, closely approximates the market value of
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such securities (less any distributing commission or discount). We are also generally prohibited under the 1940 Act from issuing securities convertible into voting securities without obtaining the approval of our existing stockholders.
In addition to regulatory requirements that restrict our ability to raise capital, the loan agreement governing any future credit facility may contain various covenants which, if not complied with, could materially and adversely affecting our liquidity, financial condition, results of operations and ability to pay dividends.
Under the loan agreement governing any future credit facility, we may take certain customary representations and warranties and may be required to comply with various affirmative and negative covenants, reporting requirements, and other customary requirements for similar credit facilities, including, without limitation, restrictions on incurring additional indebtedness, compliance with the asset coverage requirements under the 1940 Act, a minimum net asset value requirement, a limitation on the reduction of our net asset value, and maintenance of RIC and BDC status. Such loan agreement may include usual and customary events of default for credit facilities of similar nature, including, without limitation, nonpayment, misrepresentation of representations and warranties in a material respect, breach of covenant, cross-default to certain other indebtedness, bankruptcy, and the occurrence of a material adverse effect.
Our ability to continue to comply with these covenants in the future depends on many factors, some of which are beyond our control. There are no assurances that we will be able to comply with these covenants. Failure to comply with these covenants would result in a default which, if we were unable to obtain a waiver under any such loan agreement, would have a material adverse impact on our liquidity, financial condition, results of operations and ability to pay dividends.
We will be subject to corporate-level U.S. federal income tax if we are profitable and are unable to qualify as a RIC, which could have a material adverse effect on us and our stockholders.
We elected to be treated as a RIC under the Code beginning with our taxable year ended December 31, 2014, have qualified to be treated as a RIC for subsequent taxable years and expect to continue to operate in a manner so as to qualify for the tax treatment applicable to RICs. See “Business—Material U.S. Federal Income Tax Considerations” and “Note 2—Significant Accounting Policies—U.S. Federal and State Income Taxes” and “Note 9—Income Taxes” to our consolidated financial statements for the year ended December 31, 2019 for more information.
Management generally believes that it will be in our best interest to be treated as a RIC in any year in which we are profitable. If we fail to qualify for tax treatment as a RIC for any year in which we are profitable and such profits exceed certain loss carryforwards that we are entitled to utilize, we will be subject to corporate-level U.S. federal income tax, which could substantially reduce our net assets, the amount of income available for distribution or reinvestment and the amount of our distributions. Such a failure could have a material adverse effect on us and our stockholders.
In any year in which we intend to be treated as a RIC, we may be forced to dispose of investments at times when our management team would not otherwise do so or raise additional capital at times when we would not otherwise do so, in each case in order to qualify for the special tax treatment accorded to RICs.
To qualify for the special treatment accorded to RICs, we must meet certain income source, asset diversification and annual distribution requirements. In order to satisfy the income source requirement, we must derive in each taxable year at least 90% of our gross income from dividends, interest, payments with respect to certain securities loans, gains from the sale of stock or other securities or foreign currencies, other income derived with respect to our business of investing in such stock or securities or income from “qualified publicly traded partnerships.” To qualify as a RIC, we must also meet certain asset diversification requirements at the end of each quarter of our taxable year. Failure to meet these tests in any year in which we intend to be treated as a RIC may result in our having to dispose of certain investments quickly in order to prevent the loss of RIC status. Because most of our investments are in private companies, any such dispositions could be made at disadvantageous prices and could result in substantial losses. In addition, in order to satisfy the Annual Distribution Requirement for a RIC, we must distribute at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, to our stockholders on an annual basis. We will be subject to certain asset coverage ratio requirements under the 1940 Act and financial covenants under the terms of our indebtedness that could, under certain circumstances, restrict us from making distributions necessary to satisfy the annual distribution requirement. If we are unable to dispose of investments quickly enough to meet the asset diversification requirements at the end of a quarter or obtain cash from other sources in order to meet the annual distribution requirement, we may fail to qualify for special tax treatment accorded to RICs and, thus, be subject to corporate-level U.S. federal income tax.
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The comprehensive tax reform bill could adversely affect our business and financial condition.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law and significantly changed the Code. The Tax Act, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), limitation of the deduction or net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits. Our U.S. federal net operating loss carryovers created in 2018 and thereafter will be carried forward indefinitely pursuant to the Tax Act. We continue to examine the impact this tax legislation may have on our business. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the Tax Act is uncertain and our business and financial condition could be adversely affected. The impact of this Tax Act on holders of the 4.75% Convertible Senior Notes due 2023 or our common stock is also uncertain and could be adverse. We urge such holders to consult with their legal and tax advisors with respect to such legislation and the potential tax consequences of investing in our convertible notes and common stock.
Because we expect to distribute substantially all of our net investment income and net realized capital gains to our stockholders, we will need additional capital to finance our growth and such capital may not be available on favorable terms or at all.
We have elected to be taxed for U.S. federal income tax purposes as a RIC under Subchapter M of the Code. If we meet certain requirements, including source of income, asset diversification and distribution requirements, and if we continue to qualify as a BDC, we will continue to qualify for tax treatment as a RIC under the Code and will not have to pay corporate-level income taxes on income we distribute to our stockholders as dividends, allowing us to substantially reduce or eliminate our U.S. federal corporate-level income tax liability. As a BDC, we are generally required to meet a coverage ratio of total assets to total senior securities, which includes all of our borrowings and any preferred stock we may issue in the future, of at least 200% (or 150% if certain requirements are met) at the time we issue any debt or preferred stock. This requirement limits the amount that we may borrow. Because we will continue to need capital to grow our investment portfolio, this limitation may prevent us from incurring debt or preferred stock and require us to raise additional equity at a time when it may be disadvantageous to do so. We cannot assure you that debt and equity financing will be available to us on favorable terms, or at all, and debt financings may be restricted by the terms of any of our outstanding borrowings. In addition, as a BDC, we are generally not permitted to issue common stock priced below net asset value without stockholder approval. If additional funds are not available to us, we could be forced to curtail or cease new lending and investment activities, and our net asset value could decline.
We may continue to choose to pay dividends in our common stock, in which case you may be required to pay tax in excess of the cash you receive.
We have in the past, and may continue to, distribute taxable dividends that are payable in part in shares of our common stock. For example, on November 4, 2015, our Board of Directors declared a dividend of $2.76 per share to stockholders, paid partially in cash and partially in shares of our common stock on December 31, 2015. In accordance with certain applicable U.S. Treasury regulations and published guidance issued by the Internal Revenue Service (“IRS”), a RIC may treat a distribution of its own common stock as fulfilling the RIC distribution requirements if each stockholder may elect to receive his or her entire distribution in either cash or common stock of the RIC, subject to a limitation that the aggregate amount of cash to be distributed to all stockholders must be at least 20% of the aggregate declared distribution. If too many stockholders elect to receive cash, the cash available for distribution must be allocated among the stockholders electing to receive cash (with the balance of the distribution paid in stock). In no event will any stockholder electing to receive cash, receive less than the lesser of (a) the portion of the distribution such stockholder has elected to receive in cash or (b) an amount equal to his or her entire distribution times the percentage limitation on cash available for distribution. If these and certain other requirements are met, for U.S. federal income tax purposes, the amount of the dividend paid in common stock will be equal to the amount of cash that could have been received instead of common stock. Taxable stockholders receiving such dividends will be required to include the full amount of the dividend as ordinary income (or as long-term capital gain to the extent such distribution is properly reported as a capital gain dividend) to the extent of our current and accumulated earnings and profits for U.S. federal income tax purposes. As a result, a U.S. stockholder may be required to pay tax with respect to such dividends in excess of any cash received. If a U.S. stockholder sells the stock it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our common stock at the time of the sale. Furthermore, with respect to Non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in common stock. In addition, if a significant number of our stockholders determine to sell shares of our common stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our common stock.
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Changes in laws or regulations governing our business or the businesses of our portfolio companies, changes in the interpretation thereof or newly enacted laws or regulations, and any failure by us or our portfolio companies to comply with these laws or regulations may adversely affect our business and the businesses of our portfolio companies.
We and our portfolio companies are subject to laws and regulations at the U.S. federal, state and local levels and, in some cases, foreign levels. These laws and regulations, as well as their interpretation, may change from time to time, and new laws, regulations and interpretations may also come into effect, potentially with retroactive effect. Any such new or changed laws or regulations could have a material adverse effect on our business or the business of our portfolio companies. The legal, tax and regulatory environment for BDCs, investment advisers and the instruments that they utilize (including derivative instruments) is continuously evolving. In addition, there is significant uncertainty regarding enacted legislation (including the Dodd-Frank Act and the regulations adopted thereunder and future regulations that may or may not be adopted pursuant to such legislation) and, consequently, the full impact that such legislation will ultimately have on us and the markets in which we trade and invest is not fully known. Such uncertainty and any resulting confusion may itself be detrimental to the efficient functioning of the markets and the success of certain investment strategies.
In addition, as private equity firms become more influential participants in the U.S. and global financial markets and economy generally, there recently has been pressure for greater governmental scrutiny and/or regulation of the private equity industry. It is uncertain as to what form and in what jurisdictions such enhanced scrutiny and/or regulation, if any, on the private equity industry may ultimately take. Therefore, there can be no assurance as to whether any such scrutiny or initiatives will have an adverse impact on the private equity industry, including our ability to effect operating improvements or restructurings of our portfolio companies or otherwise achieve our objectives.
Over the last several years, there also has been an increase in regulatory attention to the extension of credit outside of the traditional banking sector, raising the possibility that some portion of the non-bank financial sector will be subject to new regulation. While it cannot be known at this time whether any regulation will be implemented or what form it will take, increased regulation of non-bank credit extension could negatively impact our or our portfolio companies’ operating results or financial condition, impose additional costs on us or our portfolio companies, intensify the regulatory supervision of us or otherwise adversely affect our business.
Additionally, any changes to the laws and regulations governing our operations may cause us to alter our investment strategy in order to avail ourselves of new or different opportunities. Such changes could result in material differences to the strategies and plans set forth herein and may result in our investment focus shifting from the areas of expertise of our management team and investment professionals to other types of investments in which the investment team may have less expertise or little or no experience. Thus, any such changes, if they occur, could have a material adverse effect on our results of operations and the value of your investment.
The Small Business Credit Availability Act allows us to incur additional leverage, which could increase the risk of investing in the Company.
The 1940 Act had generally prohibited us from incurring indebtedness unless immediately after such borrowing we had an asset coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our total assets). However, the Small Business Credit Availability Act (the “SBCA") modified the 1940 Act to allow BDCs to decrease their asset coverage requirement from 200% to 150% (i.e. the amount of debt may not exceed 66.7% of the value of our total assets), if certain requirements are met. Under the SBCA, we are allowed to reduce our asset coverage requirement to 150%, and thereby increase our leverage capacity, if shareholders representing at least a majority of the votes cast, when a quorum is present, approve a proposal to do so. If we receive shareholder approval, we would be allowed to reduce our asset coverage requirement to 150% on the first day after such approval. Alternatively, the SBCA allows the majority of our independent directors to approve the reduction in our asset coverage requirement to 150%, and such approval would become effective after one year. In either case, we would be required to make certain disclosures on our website and in SEC filings regarding, among other things, the receipt of approval to reduce our asset coverage requirement to 150%, our leverage capacity and usage, and risks related to leverage.
As a result of the SBCA, if we obtain the necessary approval, we may be able to increase our leverage up to an amount that reduces our asset coverage ratio from 200% to 150%. Leverage magnifies the potential for loss on investments in our indebtedness and on invested equity capital. As we use leverage to partially finance our investments, you will experience increased risks of investing in our securities. If the value of our assets increases, then leveraging would cause the net asset value attributable to our common stock to increase more sharply than it would have had we not leveraged. Conversely, if the value of our assets decreases, leveraging would cause net asset value to decline more sharply than it otherwise would have had we not leveraged our business. Similarly, any increase in our income in excess of interest payable on the borrowed funds would cause our net investment income to increase more than it would without the leverage, while any decrease in our income would cause net investment income to
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decline more sharply than it would have had we not borrowed. Such a decline could negatively affect our ability to pay common stock dividends, scheduled debt payments or other payments related to our securities. Leverage is generally considered a speculative investment technique.
Uncertainty about presidential administration initiatives could negatively impact our business, financial condition and results of operations.
The current administration has called for significant changes to U.S. trade, healthcare, immigration, foreign and government regulatory policy. In this regard, there is significant uncertainty with respect to legislation, regulation and government policy at the federal level, as well as the state and local levels. Recent events have created a climate of heightened uncertainty and introduced new and difficult-to-quantify macroeconomic and political risks with potentially far-reaching implications. There has been a corresponding meaningful increase in the uncertainty surrounding interest rates, inflation, foreign exchange rates, trade volumes and fiscal and monetary policy. To the extent the U.S. Congress or the current administration implements changes to U.S. policy, those changes may impact, among other things, the U.S. and global economy, international trade and relations, unemployment, immigration, corporate taxes, healthcare, the U.S. regulatory environment, inflation and other areas.
A particular area identified as subject to potential change, amendment or repeal includes the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the “Dodd-Frank Act,” including the Volcker Rule and various swaps and derivatives regulations, credit risk retention requirements and the authorities of the Federal Reserve, the Financial Stability Oversight Council and the SEC. Given the uncertainty associated with the manner in which and whether the provisions of the Dodd-Frank Act will be implemented, repealed, amended, or replaced, the full impact such requirements will have on our business, results of operations or financial condition is unclear. The changes resulting from the Dodd-Frank Act or any changes to the regulations already implemented thereunder may require us to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements. Failure to comply with any such laws, regulations or principles, or changes thereto, may negatively impact our business, results of operations or financial condition. While we cannot predict what effect any changes in the laws or regulations or their interpretations would have on us as a result of recent financial reform legislation, these changes could be materially adverse to us and our stockholders.
We cannot predict how tax reform legislation will affect us, our investments, or our stockholders, and any such legislation could adversely affect our business.
Legislative or other actions relating to taxes could have a negative effect on us. The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department. In December 2017, the U.S. House of Representatives and U.S. Senate passed tax reform legislation, which the President signed into law. Such legislation significantly changed the Code, including significant changes to the taxation of business entities, the deductibility of interest expense, and the tax treatment of capital investment. We cannot predict with certainty how any changes in the tax laws might affect us, our stockholders, or our portfolio investments. New legislation and any U.S. Treasury regulations, administrative interpretations or court decisions interpreting such legislation could significantly and negatively affect our ability to qualify for tax treatment as a RIC or the U.S. federal income tax consequences to us and our stockholders of such qualification or could have other adverse consequences. Stockholders are urged to consult with their tax advisor regarding tax legislative, regulatory, or administrative developments and proposals and their potential effect on an investment in our securities.
Changes to United States tariff and import/export regulations may have a negative effect on our portfolio companies and, in turn, harm us.
There has been ongoing discussion and commentary regarding potential significant changes to United States trade policies, treaties and tariffs. The current administration, along with Congress, has created significant uncertainty about the future relationship between the United States and other countries with respect to the trade policies, treaties and tariffs. These developments, or the perception that any of them could occur, may have a material adverse effect on global economic conditions and the stability of global financial markets, and may significantly reduce global trade and, in particular, trade between the impacted nations and the United States. Any of these factors could depress economic activity and restrict our portfolio companies’ access to suppliers or customers and have a material adverse effect on their business, financial condition and results of operations, which in turn would negatively impact us.
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Certain investors are limited in their ability to make significant investments in us.
Private funds that are excluded from the definition of “investment company” either pursuant to Section 3(c)(1) or 3(c)(7) of the 1940 Act are restricted from acquiring directly or through a controlled entity more than 3% of our total outstanding voting stock (measured at the time of the acquisition). Investment companies registered under the 1940 Act and BDCs, such as us, are also subject to this restriction as well as other limitations under the 1940 Act that would restrict the amount that they are able to invest in our securities. As a result, certain investors will be limited in their ability to make significant investments in us at a time that they might desire to do so.
We incur significant costs as a result of being a publicly traded company.
As a publicly traded company, we incur legal, accounting and other expenses, including costs associated with the periodic reporting requirements applicable to a company whose securities are registered under the Exchange Act as well as additional corporate governance requirements, including requirements under the Sarbanes-Oxley Act, and other rules implemented by the SEC.
Ineffective internal controls could impact our business and operating results.
Our internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain the adequacy of our internal controls, including any failure to implement required new or improved controls, or if we experience difficulties in their implementation, our business and operating results could be harmed and we could fail to meet our financial reporting obligations.
We may in the future determine to fund a portion of our investments with preferred stock, which would magnify the potential for gain or loss and the risks of investing in us in the same way as our borrowings.
Preferred stock, which is another form of leverage, has the same risks to our common stockholders as borrowings because the dividends on any preferred stock we issue must be cumulative. Payment of such dividends and repayment of the liquidation preference of such preferred stock must take preference over any dividends or other payments to our common stockholders, and preferred stockholders are not subject to any of our expenses or losses and are not entitled to participate in any income or appreciation in excess of their stated preference.
Our Board of Directors is authorized to reclassify any unissued shares of stock into one or more classes of preferred stock, which could convey special rights and privileges to its owners.
Our charter permits our Board of Directors to reclassify any authorized but unissued shares of stock into one or more classes of preferred stock. Our Board of Directors will generally have broad discretion over the size and timing of any such reclassification, subject to a finding that the reclassification and issuance of such preferred stock is in the best interests of Sutter Rock Capital and our existing common stockholders. Any issuance of preferred stock would be subject to certain limitations imposed under the 1940 Act, including the requirement that such preferred stock have equal voting rights with our outstanding common stock. We are authorized to issue up to 100,000,000 shares of common stock. In the event our Board of Directors opts to reclassify a portion of our unissued shares of common stock into a class of preferred stock, those preferred shares would have a preference over our common stock with respect to dividends and liquidation. The cost of any such reclassification would be borne by our existing common stockholders. In addition, the 1940 Act provides that holders of preferred stock are entitled to vote separately from holders of common stock to elect two directors. As a result, our preferred stockholders will have the ability to reject a director that would otherwise be elected by our common stockholders. In addition, while Maryland law generally requires directors to act in the best interests of all of a corporation’s stockholders, there can be no assurance that a director elected by our preferred stockholders will not choose to act in a manner that tends to favors our preferred stockholders, particularly where there is a conflict between the interests of our preferred stockholders and our common stockholders. The class voting rights of any preferred shares we may issue could make it more difficult for us to take some actions that may, in the future, be proposed by the Board of Directors and/or the holders of our common stock, such as a merger, exchange of securities, liquidation, or alteration of the rights of a class of our securities, if these actions were perceived by the holders of preferred shares as not in their best interests. The issuance of preferred shares convertible into shares of common stock might also reduce the net income and net asset value per share of our common stock upon conversion. These effects, among others, could have an adverse effect on your investment in our common stock.
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Our Board of Directors may change our investment objective, operating policies and strategies without prior notice or stockholder approval, the effects of which may be adverse.
Our Board of Directors has the authority to modify or waive our investment objective, current operating policies, investment criteria and strategies without prior notice and without stockholder approval. We cannot predict the effect any changes to our current operating policies, investment criteria and strategies would have on our business, net asset value, operating results and value of our stock. However, the effects might be adverse, which could negatively impact our ability to pay you dividends and cause you to lose all or part of your investment.
Provisions of the Maryland General Corporation Law and of our charter and bylaws could deter takeover attempts and have an adverse impact on the price of our common stock.
The Maryland General Corporation Law and our charter and bylaws contain provisions that may discourage, delay or make more difficult a change in control of us or the removal of our directors. We are subject to the Maryland Business Combination Act (“MBCA”), subject to any applicable requirements of the 1940 Act. Our Board of Directors has adopted a resolution exempting from the MBCA any business combination between us and any other person, subject to prior approval of such business combination by our Board of Directors, including approval by a majority of our directors who are not “interest persons” as defined in the 1940 Act. If the resolution exempting business combinations is repealed or our Board of Directors does not approve a business combination, the MBCA may discourage third parties from trying to acquire control of us and increase the difficulty of consummating such an offer. Our bylaws exempt from the Maryland Control Share Acquisition Act (“Control Share Act”) acquisitions of our stock by any person. If we amend our bylaws to repeal the exemption from the Control Share Act, the Control Share Act also may make it more difficult for a third party to obtain control of us and increase the difficulty of consummating such a transaction. However, we will amend our bylaws to be subject to the Control Share Act only if our Board of Directors determines that it would be in our best interests and if the SEC staff does not object to our determination that our being subject to the Control Share Act does not conflict with the 1940 Act.
We have also adopted measures that may make it difficult for a third party to obtain control of us, including provisions of our charter classifying our Board of Directors in three classes serving staggered three-year terms, and authorizing our Board of Directors, without stockholder action, to classify or reclassify shares of our stock in one or more classes or series, including preferred stock, to cause the issuance of additional shares of our stock, to amend our charter without stockholder approval to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that we have authority to issue. These provisions, as well as other provisions of our charter and bylaws, may delay, defer or prevent a transaction or a change in control that might otherwise be in the best interests of our stockholders.
We are highly dependent on information systems and systems failures could significantly disrupt our business, which may, in turn, negatively affect the market price of our common stock and our ability make distributions.
Our business is highly dependent on our and third parties’ communications and information systems. Any failure or interruption of those systems, including as a result of the termination of an agreement with any third-party service providers, could cause delays or other problems in our activities. Our financial, accounting, data processing, backup or other operating systems and facilities may fail to operate properly or become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond our control and may adversely affect our business. There could be:
• | sudden electrical or telecommunications outages; |
• | natural disasters such as earthquakes, tornadoes and hurricanes; |
• | disease pandemics (including the recent coronavirus outbreak); |
• | events arising from local or larger scale political or social matters, including terrorist acts; and |
• | cyber-attacks. |
These events, in turn, could have a material adverse effect on our operating results and negatively affect the market price of our common stock and our ability to pay dividends to our stockholders.
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Terrorist attacks, acts of war or natural disasters may affect any market for our securities, impact the businesses in which we invest and harm our business, operating results and financial condition.
Terrorist acts, acts of war or natural disasters may disrupt our operations, as well as the operations of the businesses in which we invest. Such acts have created, and continue to create, economic and political uncertainties and have contributed to global economic instability. Future terrorist activities, military or security operations, or natural disasters could further weaken the domestic/global economies and create additional uncertainties, which may negatively impact the businesses in which we invest directly or indirectly and, in turn, could have a material adverse impact on our business, operating results and financial condition. Losses from terrorist attacks and natural disasters are generally uninsurable.
We face cyber-security risks.
Our business operations rely upon secure information technology systems for data processing, storage and reporting. Despite careful security and controls design, implementation and updating, our information technology systems could become subject to cyber-attacks. Network, system, application and data breaches could result in operational disruptions or information misappropriation, which could have a material adverse effect on our business, results of operations and financial condition.
The failure in cyber-security systems, as well as the occurrence of events unanticipated in our disaster recovery systems and management continuity planning could impair our ability to conduct business effectively.
The occurrence of a disaster such as a cyber-attack, a natural catastrophe, an industrial accident, a terrorist attack or war, events unanticipated in our disaster recovery systems, or a support failure from external providers, could have an adverse effect on our ability to conduct business and on our results of operations and financial condition, particularly if those events affect our computer-based data processing, transmission, storage, and retrieval systems or destroy data. If a significant number of the members of our management team are unavailable in the event of a disaster, our ability to effectively conduct our business could be severely compromised.
We depend heavily upon computer systems to perform necessary business functions. Despite our implementation of a variety of security measures, our computer systems could be subject to cyber-attacks and unauthorized access, such as physical and electronic break-ins or unauthorized tampering. Like other companies, we may experience threats to our data and systems, including malware and computer virus attacks, unauthorized access, system failures and disruptions. If one or more of these events occurs, it could potentially jeopardize the confidential, proprietary and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our operations, which could result in damage to our reputation, financial losses, litigation, increased costs, regulatory penalties and/or customer dissatisfaction or loss, reputational damage, and increased costs associated with mitigation of damages and remediation. If unauthorized parties gain access to such information and technology systems, they may be able to steal, publish, delete or modify private and sensitive information, including nonpublic personal information related to stockholders (and their beneficial owners) and material nonpublic information. The systems we have implemented to manage risks relating to these types of events could prove to be inadequate and, if compromised, could become inoperable for extended periods of time, cease to function properly or fail to adequately secure private information. Breaches such as those involving covertly introduced malware, impersonation of authorized users and industrial or other espionage may not be identified even with sophisticated prevention and detection systems, potentially resulting in further harm and preventing them from being addressed appropriately. The failure of these systems or of disaster recovery plans for any reason could cause significant interruptions in our operations and result in a failure to maintain the security, confidentiality or privacy of sensitive data, including personal information relating to stockholders, material nonpublic information and other sensitive information in our possession.
A disaster or a disruption in the infrastructure that supports our business, including a disruption involving electronic communications or other services used by us or third parties with whom we conduct business, or directly affecting our headquarters, could have a material adverse impact on our ability to continue to operate our business without interruption. Our disaster recovery programs may not be sufficient to mitigate the harm that may result from such a disaster or disruption. In addition, insurance and other safeguards might only partially reimburse us for our losses, if at all.
Third parties with which we do business may also be sources of cybersecurity or other technological risk. We outsource certain functions and these relationships allow for the storage and processing of our information, as well as client, counterparty, employee, and borrower information. While we engage in actions to reduce our exposure resulting from outsourcing, ongoing threats may result in unauthorized access, loss, exposure, destruction, or other cybersecurity incident that affects our data, resulting in increased costs and other consequences as described above.
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In addition, cybersecurity has become a top priority for regulators around the world, and some jurisdictions have enacted laws requiring companies to notify individuals of data security breaches involving certain types of personal data. If we fail to comply with the relevant laws and regulations, we could suffer financial losses, a disruption of our businesses, liability to investors, regulatory intervention or reputational damage.
Risks Related to the 4.75% Convertible Senior Notes due 2023
Our stockholders may experience dilution upon the conversion of the 4.75% Convertible Senior Notes due 2023.
The 4.75% Convertible Senior Notes due 2023 are convertible into shares of our common stock. Upon conversion, we must deliver shares of our common stock. The current conversion rate of the 4.75% Convertible Senior Notes due 2023 is 97.9448 shares of common stock per $1,000 principal amount of the 4.75% Convertible Senior Notes due 2023, which is equivalent to a conversion price of approximately $10.21 per share of common stock. Based on the current conversion rate, as of March 13, 2020, the maximum number of shares of common stock that would be issued upon conversion of the $40,000,000 of 4.75% Convertible Senior Notes due 2023 currently outstanding is approximately 3,917,792. If we deliver shares of common stock upon a conversion at the time our net asset value per share exceeds the conversion price in effect at such time, our stockholders will incur dilution. In addition, our stockholders will experience dilution in their ownership percentage of our common stock upon our issuance of common stock in connection with the conversion of the 4.75% Convertible Senior Notes due 2023 and any dividends paid on our common stock will also be paid on shares issued in connection with such conversion after such issuance.
We may not have, or have the ability to raise, the funds necessary to repurchase the 4.75% Convertible Senior Notes due 2023 upon a fundamental change, and our debt may contain limitations on our ability to deliver shares of our common stock upon conversion or pay cash upon repurchase of the 4.75% Convertible Senior Notes due 2023.
Holders of the 4.75% Convertible Senior Notes due 2023 will have the right to require us to repurchase their notes upon the occurrence of certain significant corporate events involving us, including if our common stock ceases to trade on any national securities exchange or we consolidate or merge into another entity in certain circumstances, at a repurchase price equal to 100% of their principal amount, plus accrued and unpaid interest, if any. We refer to such a corporate event as a “fundamental change.” However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of the 4.75% Convertible Senior Notes due 2023 surrendered therefor. In addition, our ability to repurchase the 4.75% Convertible Senior Notes due 2023 or deliver shares of our common stock upon conversions of the 4.75% Convertible Senior Notes due 2023 may be limited by law, by regulatory authority or by agreements governing our indebtedness. For example, any future credit facility may generally prohibit us from prepaying indebtedness other than borrowings under any such credit facility. As a result, before making any such repurchase of the 4.75% Convertible Senior Notes due 2023, we would have to obtain consent from the lender under any such credit facility to the extent such requirement is in effect at such time. Our failure to repurchase the 4.75% Convertible Senior Notes due 2023 at a time when the repurchase is required by the indenture relating to the 4.75% Convertible Senior Notes due 2023 or to deliver any shares of our common stock deliverable on future conversions of such 4.75% Convertible Senior Notes due 2023 as required by such indenture would constitute a default under such indenture. A default under the indenture relating to the 4.75% Convertible Senior Notes due 2023 or the occurrence of a fundamental change itself could also lead to a default under agreements governing any future credit facility or our future indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the 4.75% Convertible Senior Notes due 2023.
Provisions of the 4.75% Convertible Senior Notes due 2023 could discourage an acquisition of us by a third party.
Certain provisions of the 4.75% Convertible Senior Notes due 2023 could make it more difficult or more expensive for a third party to acquire us. Upon the occurrence of certain transactions constituting a fundamental change, the holders of the 4.75% Convertible Senior Notes due 2023 will have the right, at their option, to require us to repurchase all or a portion of their 4.75% Convertible Senior Notes due 2023, plus accrued and unpaid interest. We may also be required to increase the conversion rate of the 4.75% Convertible Senior Notes due 2023 in certain other circumstances, including in the event of certain transactions constituting fundamental changes or a make-whole adjustment event. These provisions could discourage an acquisition of us by a third party.
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Servicing our debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our debt.
Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness, including the 4.75% Convertible Senior Notes due 2023, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets (including interests in our portfolio companies if permitted pursuant to the terms of our investment) under terms that may be disadvantageous for us, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.
Any adverse rating of the 4.75% Convertible Senior Notes due 2023 may negatively affect the trading price and liquidity of the 4.75% Convertible Senior Notes due 2023 and the price of our common stock.
We do not intend to seek a rating on the 4.75% Convertible Senior Notes due 2023. However, if a rating service were to rate the 4.75% Convertible Senior Notes due 2023, and if such rating service were to assign the 4.75% Convertible Senior Notes due 2023 a rating lower than the rating expected by investors or were to lower its rating on the 4.75% Convertible Senior Notes due 2023 below the rating initially assigned to the 4.75% Convertible Senior Notes due 2023 or otherwise announce its intention to put the 4.75% Convertible Senior Notes due 2023 on credit watch, the trading price or liquidity of the 4.75% Convertible Senior Notes due 2023 and the price of our common stock could decline.
Holders of the 4.75% Convertible Senior Notes due 2023 may be subject to tax if we make or fail to make certain adjustments to the conversion rate of the 4.75% Convertible Senior Notes due 2023, even though such holders do not receive a corresponding cash distribution.
The conversion rate of the 4.75% Convertible Senior Notes due 2023 is subject to adjustment in certain circumstances, including the payment of cash dividends. If the conversion rate is adjusted as a result of a distribution that is taxable to our common stockholders, holders of the 4.75% Convertible Senior Notes due 2023 may be deemed to have received a dividend subject to U.S. federal income tax without the receipt of any cash. In addition, a failure to adjust (or to adjust adequately) the conversion rate after an event that increases a noteholder’s proportionate interest in us could be treated as a deemed taxable dividend to such holder. If a make-whole adjustment event occurs on or prior to the business day immediately preceding the stated maturity date of the 4.75% Convertible Senior Notes due 2023, under some circumstances, we will increase the conversion rate for the 4.75% Convertible Senior Notes due 2023 converted in connection with the make-whole adjustment event. Such increase may also be treated as a distribution subject to U.S. federal income tax as a dividend. In addition, if a holder is a Non-U.S. Holder, such holder may be subject to U.S. federal withholding tax in connection with such a deemed distribution. If withholding tax is paid on a noteholder’s behalf as a result of an adjustment to the conversion rate of the 4.75% Convertible Senior Notes due 2023, the withholding agent may offset such payments against payments of cash and common stock on the 4.75% Convertible Senior Notes due 2023. Refer to the prospectus supplement related to the offering of the 4.75% Convertible Senior Notes due 2023, dated March 22, 2018, for more information.
Certain adverse consequences could result if the 4.75% Convertible Senior Notes due 2023 are treated as equity interests in us for purposes of regulations under the Employee Retirement Income Security Act of 1974.
Pursuant to regulations under the Employee Retirement Income Security Act of 1974 (“ERISA”), it is possible that, due to their convertibility feature, the 4.75% Convertible Senior Notes due 2023 could be treated as equity interests in us. In that event, if employee benefit plans subject to Title I of ERISA, plans that are not subject to ERISA but that are subject to Section 4975 of the Code, such as individual retirement accounts, and entities that are deemed to hold the assets of such plans or accounts (such plans, accounts, and entities, “Benefit Plan Investors”) were to acquire 25% or more of the aggregate value of the 4.75% Convertible Senior Notes due 2023, among other consequences, we and our management would be subject to ERISA fiduciary duties, and certain transactions we might enter into, or may have entered into, in the ordinary course of our business might constitute non-exempt “prohibited transactions” under Section 406 of ERISA or Section 4975 of the Code and might have to be rescinded at significant cost to us. Moreover, if our underlying assets were deemed to be assets constituting plan assets, (i) our assets could be subject to ERISA’s reporting and disclosure requirements, (ii) a fiduciary causing a Benefit Plan Investor to make an investment in our equity interests could be deemed to have delegated its responsibility to manage the assets of the Benefit Plan Investor, and (iii) various providers of fiduciary or other services to us, and any other parties with authority or control with respect to our assets, could be deemed to be plan fiduciaries or otherwise parties in interest or disqualified persons by virtue of their provision of such services.
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We do not believe that the 4.75% Convertible Senior Notes due 2023 should be treated as equity interests in us for purposes of ERISA in light of the relevant regulations. No assurance can be given, however, that the 4.75% Convertible Senior Notes due 2023 will not be so treated.
The accounting for convertible debt securities is complex and subject to uncertainty.
The accounting for convertible debt securities is complex and subject to frequent scrutiny by the accounting regulatory bodies and is subject to change. The issuance of the 4.75% Convertible Senior Notes due 2023 may affect our earnings per share on a fully diluted basis in certain periods. Further, we cannot predict if or when changes in the accounting for convertible debt securities could be made and whether any such change could have an adverse impact on our reported or future financial results. Any such impacts could adversely affect the market price or value of our common stock.
Risks Related to an Investment in Our Securities
Investing in our securities may involve an above average degree of risk.
The investments we make in accordance with our investment objective may result in a higher amount of risk than alternative investment options and a higher risk of volatility or loss of principal. Our investments in portfolio companies may be highly speculative, and therefore, an investment in our shares may not be suitable for someone with lower risk tolerance.
Our common stock price may be volatile and may decrease substantially.
The trading price of our common stock may fluctuate substantially. The price of our common stock that will prevail in the market after any future offering may be higher or lower than the price you pay, depending on many factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include, but are not limited to, the following:
• | price and volume fluctuations in the overall stock market from time to time; |
• | investor demand for our shares; |
• | significant volatility in the market price and trading volume of securities of RICs, BDCs or other financial services companies; |
• | changes in regulatory policies or tax guidelines with respect to RICs or BDCs; |
• | failure to qualify as a RIC for a particular taxable year, or the loss of RIC status; |
• | actual or anticipated changes in our earnings or fluctuations in our operating results or changes in the expectations of securities analysts; |
• | general economic conditions and trends; |
• | fluctuations in the valuation of our portfolio investments; |
• | operating performance of companies comparable to us; |
• | market sentiment against technology-related companies; or |
• | departures of any of the senior members of our management team. |
In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. Due to the potential volatility of our stock price, we may therefore be the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management’s attention and resources from our business.
Shares of our common stock have recently traded, and may in the future trade, at discounts from net asset value or at premiums that may prove to be unsustainable.
Shares of BDCs like us may, during some periods, trade at prices higher than their net asset value per share and, during other periods, as frequently occurs with closed-end investment companies, trade at prices lower than their net asset value per share. The perceived value of our investment portfolio may be affected by a number of factors including perceived prospects for individual companies we invest in, market conditions for common stock generally, for IPOs and other exit events for venture-capital-backed companies, and the mix of companies in our investment portfolio over time. Negative or unforeseen developments affecting the
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perceived value of companies in our investment portfolio could result in a decline in the trading price of our common stock relative to our net asset value per share.
The possibility that our shares will trade at a discount from net asset value or at premiums that are unsustainable are risks separate and distinct from the risk that our net asset value per share will decrease. The risk of purchasing shares of a BDC that might trade at a discount or unsustainable premium is more pronounced for investors who wish to sell their shares in a relatively short period of time because, for those investors, realization of a gain or loss on their investments is likely to be more dependent upon changes in premium or discount levels than upon increases or decreases in net asset value per share. As of March 11, 2020, the closing price of our common stock on the Nasdaq Capital Market was $6.06 per share, which represented an approximately 46.7% discount to our net asset value of $11.38 per share as of December 31, 2019.
We may not be able to pay distributions to our stockholders and our distributions may not grow over time, particularly since we invest primarily in securities that do not produce current income, and a portion of distributions paid to our stockholders may be a return of capital, which is a distribution of the stockholders’ invested capital.
The timing and amount of our distributions, if any, will be determined by our Board of Directors and will be declared out of assets legally available for distribution. We cannot assure you that we will achieve investment results or maintain a tax treatment that will allow or require any specified level of cash distributions or year-to-year increases in cash distributions. Our ability to pay distributions might be adversely affected by, among other things, the impact of one or more of the risk factors described herein. In addition, the inability to satisfy the asset coverage test applicable to us as a BDC could limit our ability to pay distributions. All distributions will be paid at the discretion of our Board of Directors and will depend on our earnings, our financial condition, maintenance of our tax treatment as a RIC, compliance with applicable BDC regulations, compliance with our debt covenants and such other factors as our Board of Directors may deem relevant from time to time. We cannot assure you that we will pay distributions to our stockholders in the future.
As we intend to focus on making primarily capital gains-based investments in equity securities, which generally will not be income producing, we do not anticipate that we will pay dividends on a quarterly basis or become a predictable issuer of dividends, and we expect that our dividends, if any, will be less consistent than other BDCs that primarily make debt investments. When we make distributions, we will be required to determine the extent to which such distributions are paid out of current or accumulated taxable earnings, recognized capital gains or capital. To the extent there is a return of capital, investors will be required to reduce their basis in our stock for federal tax purposes, which may result in higher tax liability when the shares are sold, even if they have not increased in value or have lost value. In addition, any return of capital will be net of any sales load and offering expenses associated with sales of shares of our common stock. Our distributions have included a return of capital in the past, and our future distributions may include a return of capital.
We have broad discretion over the use of proceeds from our offerings, to the extent they are successful, and will use proceeds in part to satisfy operating expenses.
We have significant flexibility in applying the proceeds of our offerings and may use the net proceeds from such offerings in ways with which you may not agree, or for purposes other than those contemplated at the time of the offering. We cannot assure you that we will be able to successfully utilize the proceeds within the time frame contemplated. We will also pay operating expenses, and may pay other expenses such as due diligence expenses of potential new investments, from the net proceeds of any offering. Our ability to achieve our investment objective may be limited to the extent that the net proceeds of an offering, pending full investment, are used to pay operating expenses. In addition, we can provide you no assurance that any such offerings will be successful, or that by increasing the size of our available equity capital our aggregate expenses, and correspondingly, our expense ratio, will be lowered.
We have internalized our operating structure, including our management and investment functions; as a result, we may incur significant costs and face significant risks associated with being self-managed, including adverse effects on our business and financial condition.
On March 12, 2019, our Board of Directors approved internalizing our operating structure, including our management and investment functions. There can be no assurances that internalizing our operating structure will be beneficial to us and our stockholders, as we may incur the costs and risks discussed below and may not be able to effectively replicate the services previously provided to us by our former investment adviser, GSV Asset Management, and our former administrator, GSV Capital Service Company.
While we will no longer bear the costs of the various fees and expenses we previously paid to GSV Asset Management under the Investment Advisory Agreement, our direct expenses will generally include general and administrative costs, including legal,
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accounting, and other expenses related to corporate governance, SEC reporting and compliance, as well as costs and expenses related to making and managing our investments. We will also now incur the compensation and benefits costs of our officers and other employees and consultants, and we may issue equity awards to our officers, employees and consultants, which awards may decrease net income and funds from our operations and may dilute our stockholders. We may also be subject to potential liabilities commonly faced by employers, such as workers disability and compensation claims, potential labor disputes and other employee-related liabilities and grievances.
In addition, if the expenses we assume as a result of our internalization are higher than the expenses we would have paid to GSV Asset Management and/or reimbursed to GSV Capital Service Company, our earnings per share may be lower as a result of our internalization than they otherwise would have been, potentially decreasing the amount of funds available to distribute to our stockholders and the value of our shares.
Further, in connection with internalizing our operating structure, we may experience difficulty integrating these functions as a stand-alone entity, and we could have difficulty retaining our personnel, including those performing management, investment and general and administrative functions. These personnel have a great deal of know-how and experience. We may also fail to properly identify the appropriate mix of personnel and capital needs to operate successfully as a stand-alone entity. An inability to effectively manage our internalization could result in our incurring excess costs and operating inefficiencies, and may divert our management’s attention from managing our investments.
Internalization transactions have also, in some cases, been the subject of litigation. Even if these claims are without merit, we could be forced to spend significant amounts of time and money defending claims, which would reduce the amount of funds available for us to make investments and to pay distributions, and may divert our management’s attention from managing our investments.
All of these factors could have a material adverse effect on our results of operations, financial condition, and ability to pay distributions.
Item 1B. | Unresolved Staff Comments |
Not applicable.
Item 2. | Properties |
Through March 31, 2019, our corporate headquarters were located at 2925 Woodside Road, Woodside, California, 94062, in the offices of GSV Asset Management. Subsequent to our Internalization, we leased office space at 345 California Street, Suite 600, San Francisco, CA 94104. On June 3, 2019, we entered into a 5-year operating lease for primary office space at One Sansome Street, Suite 730, San Francisco, CA 94104. Our office facilities are suitable and adequate for our business as it is presently conducted.
Item 3. | Legal Proceedings |
From time to time, we are involved in various legal proceedings, lawsuits and claims incidental to the conduct of our business. Our business is also subject to extensive regulation, which may result in regulatory proceedings against us. Except as described below, we are not currently a party to any material legal proceedings.
On March 12, 2020, a complaint was filed in the United States District Court in the Northern District of California, by Sutter Hill Ventures, captioned, Sutter Hill Ventures, a California limited partnership (Plaintiff) v. Sutter Rock Capital Corp, a Maryland corporation (Defendant). The complaint alleges that the Defendant infringed on the Plaintiff’s federally-registered service mark SUTTER HILL VENTURES; engaged in unfair competition and false designation of origin under Section 43(a) of the Latham Act; and related claims of unfair competition and trademark infringement under California common law. The Plaintiff is seeking an injunction on Defendant from using the SUTTER ROCK and SUTTER ROCK CAPITAL marks and trade names, or any other mark or name that it views as similar to SUTTER HILL and SUTTER HILL VENTURES; an unspecified amount of damages and disgorgement of Defendant’s profits; a determination that the alleged infringement was willful, intentional and deliberate, warranting an award to Plaintiff of three times Defendant’s profits and three times Plaintiff’s damages; an award of Plaintiff’s attorney’s fees and cost; and an award of prejudgment and post judgment interest. While we are unable to determine the ultimate outcome of this matter, we believe that the alleged claims in the complaint are frivolous and completely without merit and intend to defend this lawsuit vigorously.
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Item 4. | Mine Safety Disclosures |
Not applicable.
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Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the Nasdaq Capital Market under the symbol “SSSS.” The following table sets forth the high and low closing market prices for our common stock for each fiscal quarter for the years ended December 31, 2019 and 2018. The closing market prices reported below have been adjusted to give retroactive effect to material changes resulting from stock dividends. The reported closing market price of our common stock on March 11, 2020 was $6.06.
| Price Range | ||||||
| High | Low | |||||
Fiscal 2019 | |||||||
Fourth Quarter | $ | 6.94 | $ | 5.71 | |||
Third Quarter | 6.70 | 6.06 | |||||
Second Quarter | 7.57 | 5.95 | |||||
First Quarter | 8.39 | 5.15 | |||||
Fiscal 2018 | |||||||
Fourth Quarter | $ | 7.22 | $ | 5.12 | |||
Third Quarter | 7.35 | 6.81 | |||||
Second Quarter | 7.50 | 6.68 | |||||
First Quarter | 9.18 | 5.58 | |||||
Holders
As of March 13, 2020, there were 3 holders of record of our common stock (including Cede & Co.).
Distributions
We have elected to be treated as a RIC under Subchapter M of the Code and expect to continue to operate in a manner so as to qualify for the tax treatment applicable to RICs. To maintain RIC tax treatment, we must, among other things, distribute at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. Further, 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 U.S. federal income tax return for that fiscal year. In order to avoid certain excise taxes imposed on RICs, we currently intend to distribute during each calendar year an amount at least equal to the sum of (1) 98% of our ordinary income for the calendar year, (2) 98.2% of our capital gains in excess of capital losses for the one-year period ending on October 31 of the calendar year and (3) any ordinary income and net capital gains for preceding years that were not distributed during such years. In addition, although we currently intend to distribute realized net capital gains (i.e., net long-term capital gains in excess of net short-term capital losses), if any, at least annually, we may in the future decide to retain such capital gains for investment. If this happens, our stockholders will be treated as if they received an actual distribution of the capital gains we retain and reinvested the net after-tax proceeds in us. Stockholders may be eligible to claim a tax credit (or, in certain circumstances, a tax refund) equal to the allocable share of the tax we paid on the capital gains deemed distributed to them. We can offer no assurance that we will achieve results that will permit the payment of any cash distributions and, to the extent that we issue senior securities, we will be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the terms of any of our borrowings.
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The timing and amount of our distributions, if any, will be determined by our Board of Directors and will be declared out of assets legally available for distribution. The following table lists the distributions, including dividends and returns of capital, if any, per share that we have declared since our formation through December 31, 2019. The table is divided by fiscal year according to record date:
Date Declared | Record Date | Payment Date | Amount per Share | |||||
Fiscal 2015: | | | | |||||
November 4, 2015(1) | November 16, 2015 | December 31, 2015 | $ | 2.76 | ||||
Fiscal 2016: | | | | |||||
August 3, 2016(2) | August 16, 2016 | August 24, 2016 | 0.04 | |||||
Fiscal 2019: | ||||||||
November 5, 2019(3) | December 2, 2019 | December 12, 2019 | 0.20 | |||||
December 20, 2019(4) | December 31, 2019 | January 15, 2020 | 0.12 | |||||
Total | | | $ | 3.12 | ||||
___________________
(1) | The distribution was paid in cash or shares of our common stock at the election of stockholders, although the total amount of cash distributed to all stockholders was limited to approximately 50% of the total distribution to be paid to all stockholders. As a result of stockholder elections, the distribution consisted of approximately 2,860,903 shares of common stock issued in lieu of cash, or approximately 14.8% of our outstanding shares prior to the distribution, as well as cash of $26,358,885. The number of shares of common stock comprising the stock portion was calculated based on a price of $9.425 per share, which equaled the average of the volume weighted-average trading price per share of our common stock on December 28, 29 and 30, 2015. None of the $2.76 per share distribution represented a return of capital. |
(2) | Of the total distribution of $887,240 on August 24, 2016, $820,753 represented a distribution from realized gains, and $66,487 represented a return of capital. |
(3) | All of the total distribution of $3,512,849 on December 12, 2019 represented a distribution from realized gains. None of the distribution represented a return of capital. |
(4) All of the total distribution of $2,107,709 on January 15, 2020 represented a distribution from realized gains. None of the distribution represented a return of capital.
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 distributions on a quarterly basis or become a predictable distributor of distributions, and we expect that our distributions, if any, will be much less consistent than the distributions of other BDCs that primarily make debt investments. If there are earnings or realized capital gains to be distributed, we intend to declare and pay a distribution at least annually. The amount of realized capital gains available for distribution to stockholders will be impacted by our tax status.
Our current intention is to make any future distributions out of assets legally available therefrom in the form of additional shares of our common stock under our dividend reinvestment plan, except in the case of stockholders who elect to receive 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 applicable 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 be treated as received by the U.S. stockholder for U.S. federal income tax purposes, although no cash distribution has been made. As a result, if a stockholder does not elect to opt out of the dividend reinvestment plan, it will be required to pay applicable federal, state and local taxes on any reinvested dividends even though such stockholder will not receive a corresponding cash distribution. Stockholders that hold shares in the name of a broker or financial intermediary should contact the broker or financial intermediary regarding any election to receive distributions in cash.
So long as we qualify and maintain our tax treatment as a RIC, we generally will not pay corporate-level U.S. federal and state income taxes on any ordinary income or capital gains that we distribute at least annually to our stockholders as dividends. Rather, any tax liability related to income earned by the RIC will represent obligations of our investors and will not be reflected in our consolidated financial statements. See “Note 2—Significant Accounting Policies—U.S. Federal and State Income Taxes” and “Note 9—Income Taxes” to our consolidated financial statements for the year ended December 31, 2019 for more information. The Taxable Subsidiaries included in our consolidated financial statements are taxable subsidiaries, regardless of whether we are taxed as 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 our consolidated financial statements.
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Performance Graph
The following graph compares the cumulative total return on our common stock with that of the Standard & Poor’s 500 Stock Index and the Nasdaq Stock Index, as we do not believe there is an appropriate index of companies with an investment strategy similar to our own with which to compare the return on our common stock, for the five years ended December 31, 2019. The graph assumes that, on December 31, 2014, a person invested $100.00 in our common stock, at the closing price of our common stock on December 31, 2014, and in the Standard & Poor’s 500 Stock Index and the Nasdaq Stock Index. The graph measures total stockholder return, which takes into account both changes in stock price and dividends. It assumes that dividends are reinvested in like securities on the respective dividend dates without commissions.
| 12/31/14 | 12/31/15 | 12/31/16 | 12/31/17 | 12/31/18 | 12/31/19 | ||||||||||||||||||||
SSSS | $ | 100.00 | $ | 108.57 | — | $ | 82.62 | — | $ | 89.52 | — | $ | 85.74 | $ | 107.59 | |||||||||||
S&P 500 Index | $ | 100.00 | $ | 99.27 | — | $ | 108.74 | — | $ | 129.86 | — | $ | 121.76 | $ | 156.92 | |||||||||||
Nasdaq Stock Index | $ | 100.00 | $ | 105.73 | — | $ | 113.66 | — | $ | 145.76 | — | $ | 140.10 | $ | 189.45 | |||||||||||
The graph and other information furnished under this Part II, Item 5 of this annual report on Form 10-K shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act. The stock price performance included in the above graph is not necessarily indicative of future stock price performance.
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Sales of Unregistered Equity Securities
We did not sell any equity securities during the period covered in this report that were not registered under the Securities Act of 1933, as amended.
Issuer Purchases of Equity Securities(1)
Information relating to the Company’s purchases of its common stock during the year ended December 31, 2019 is as follows:
Period | Total Number of Shares Purchased(2) | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Share Repurchase Program | ||||||||||
January 1 through January 31, 2019 | — | $ | — | — | $ | 4,789,673 | ||||||||
February 1 through February 28, 2019 | — | — | — | 4,789,673 | ||||||||||
March 1 through March 31, 2019 | — | — | — | 4,789,673 | ||||||||||
April 1 through April 30, 2019 | — | — | — | 4,789,673 | ||||||||||
May 1 through May 31, 2019 | 90,696 | 6.38 | 90,696 | 4,211,341 | ||||||||||
June 1 through June 30, 2019 | 60,105 | 6.41 | 25,105 | 4,052,555 | ||||||||||
July 1 through July 31, 2019 | — | — | — | 4,052,555 | ||||||||||
August 1 through August 31, 2019 | 223,291 | 6.37 | 223,291 | 7,629,372 | ||||||||||
September 1 through September 30, 2019 | 382,036 | 6.45 | 382,036 | 5,165,963 | ||||||||||
October 1 through October 31, 2019 | 28,000 | 6.02 | 28,000 | 4,997,307 | ||||||||||
November 1 through November 30, 2019(3) | 1,449,275 | 6.90 | 1,449,275 | 4,997,307 | ||||||||||
December 1 through December 31, 2019(4) | — | — | — | 4,997,307 | ||||||||||
Total | 2,233,403 | 2,198,403 | ||||||||||||
During the year ended December 31, 2019, we repurchased 749,128 shares of our common stock pursuant to the Share Repurchase Program.
On October 21, 2019, we commenced a modified “Dutch Auction” tender offer that expired on November 20, 2019. Pursuant to this tender offer, we offered to purchase to up to $10.0 million of our common stock at a price per share of not less than $6.00 and not greater than $8.00 in $0.10 increments, using available cash. As a result of this tender offer, we repurchased 1,449,275 shares at a price of $6.90 per share on a pro rata basis, excluding fees and expenses related to the tender offer.
_______________________
(1) | On August 8, 2017, we announced the $5.0 million discretionary open-market Share Repurchase Program under which our Board of Directors authorized the repurchase of shares of our common stock in the open market until the earlier of (i) August 6, 2018 or (ii) the repurchase of $5.0 million in aggregate amount of our common stock. On November 7, 2017, our Board of Directors authorized an extension of, and an increase in the amount of shares of our common stock that may be repurchased under, the discretionary Share Repurchase Program until the earlier of (i) November 6, 2018 or (ii) the repurchase of $10.0 million in aggregate amount of our common stock. On May 3, 2018, the Company’s Board of Directors authorized an additional $5.0 million increase in the amount of shares of our common stock that may be repurchased under the discretionary Share Repurchase Program until the earlier of (i) November 6, 2018 or (ii) the repurchase of $15.0 million in aggregate amount of our common stock. On November 1, 2018, the Company’s Board of Directors authorized a $5.0 million increase in the amount of shares of the Company’s common stock that may be repurchased under the discretionary Share Repurchase Program until the earlier of (i) October 31, 2019 or (ii) the repurchase of $20.0 million in aggregate amount of the Company’s common stock. On August 5, 2019, our Board of Directors authorized a $5.0 million increase in the amount of shares of our common stock that may be repurchased under the discretionary Share Repurchase Program until the earlier of (i) August 4, 2020 or (ii) the repurchase of $25.0 million in aggregate amount of our common stock. The timing and number of shares to be repurchased will depend on a number of factors, including market conditions and alternative investment opportunities. The Share Repurchase Program may be suspended, terminated or modified at any time for any reason and does not obligate us to acquire any specific number of shares of our common stock. During the quarter and year ended December 31, 2019, the Company repurchased 28,000 and 749,128, respectively, of shares of the Company’s common stock pursuant to the Share Repurchase Program. As of December 31, 2019, the dollar value of shares that remained available to be purchased by the Company under the Share Repurchase Program was approximately $5.0 million. |
(2) | Includes purchases of our common stock made on the open market by or on behalf of any “affiliated purchaser,” as defined in Exchange Act Rule 10b-18(a)(3), of the Company. |
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(3) | Reflects shares purchased by the Company pursuant to our tender offer that commenced on October 21, 2019 and expired on November 20, 2019. |
(4) | On March 9, 2020, our Board of Directors authorized a $5.0 million increase in the amount of shares of our common stock that may be repurchased under the discretionary Share Repurchase Program until the earlier of (i) March 8, 2021 or (ii) the repurchase of $30.0 million in aggregate amount of our common stock. This additional $5.0 million allocation is not included in the approximate dollar value of shares that may yet be purchased under the Share Repurchase Program as of December 31, 2019. Subsequent to year-end, through March 13, 2020, we repurchased an additional 237,612 shares under the Share Repurchase Program for an aggregate purchase price of $1,518,803. As of March 13, 2020, the dollar value of shares that may yet be purchased by us under the Share Repurchase Program is approximately $8.5 million. |
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Item 6. | Selected Financial Data |
The following selected financial and other data for the fiscal years ended December 31, 2019, 2018, 2017, 2016, and 2015, respectively, have been derived from our audited financial statements. The data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this Form 10-K and consolidated financial statements and notes thereto contained in this report.
| Year Ended December 31, | ||||||||||||||||||
2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
Income Statement Data | |||||||||||||||||||
Total Investment Income | $ | 1,495,724 | $ | 1,617,836 | $ | 852,768 | $ | 736,283 | $ | 290,896 | |||||||||
Gross Operating Expenses | 10,946,792 | 15,144,834 | 22,439,855 | 1,999,646 | 26,978,235 | ||||||||||||||
Management fee waiver | — | (892,421 | ) | (708,272 | ) | — | — | ||||||||||||
Incentive fee waiver | — | (5,000,000 | ) | — | — | — | |||||||||||||
Net Operating Expenses | 10,946,792 | 9,252,413 | 21,731,583 | 1,999,646 | 26,978,235 | ||||||||||||||
Reversal of benefit from taxes on net investment loss(4) | — | — | — | — | (21,969,370 | ) | |||||||||||||
Net Investment Loss | (9,451,068 | ) | (7,634,577 | ) | (20,878,815 | ) | (1,263,363 | ) | (48,656,709 | ) | |||||||||
Net realized gain/(loss) on investments | 19,179,340 | (7,433,619 | ) | 913,982 | (2,634,471 | ) | 54,144,229 | ||||||||||||
Benefit from taxes on net realized loss on investments(4) | — | — | — | — | 342,802 | ||||||||||||||
Realized loss on extinguishment of debt | — | (397,846 | ) | — | — | — | |||||||||||||
Net change in unrealized appreciation/ (depreciation) of investments | 13,339,859 | 9,641,050 | 34,775,696 | (73,213,845 | ) | (13,422,245 | ) | ||||||||||||
Benefit from taxes on unrealized depreciation of investments(4) | 885,566 | 6,716,735 | 2,757,070 | 2,116,784 | 16,058,080 | ||||||||||||||
Net increase/(decrease) in net assets resulting from operations | 23,953,697 | 891,743 | 17,567,933 | (74,994,895 | ) | 8,466,157 | |||||||||||||
Per Common Share Data | | ||||||||||||||||||
Weighted-Average Common Shares: | | ||||||||||||||||||
Basic | 19,328,414 | 20,617,890 | 21,924,490 | 22,181,003 | 19,327,938 | ||||||||||||||
Diluted | 23,069,622 | 20,617,890 | 21,924,490 | 22,181,003 | 19,327,938 | ||||||||||||||
Net increase/(decrease) in net assets resulting from operations per average share: | | ||||||||||||||||||
Basic | $ | 1.24 | $ | 0.04 | $ | 0.80 | $ | (3.38 | ) | $ | 0.44 | ||||||||
Diluted | 1.14 | 0.04 | 0.80 | (3.38 | ) | 0.44 | |||||||||||||
Net asset value per share(1) | 11.38 | 9.89 | 9.64 | 8.66 | 12.08 | ||||||||||||||
Market price at year-end | 6.55 | 5.22 | 5.45 | 5.03 | 9.37 | ||||||||||||||
Distributions declared | 0.32 | — | — | 0.04 | 2.76 | ||||||||||||||
Shares Outstanding at Year-End | 17,564,244 | 19,762,647 | 21,246,345 | 22,181,003 | 22,181,003 | ||||||||||||||
Balance Sheet Data(3) | | ||||||||||||||||||
Total Assets(2) | $ | 288,564,089 | $ | 330,219,554 | $ | 381,682,536 | $ | 300,964,426 | $ | 397,843,071 | |||||||||
5.25% Convertible Senior Notes due 2018 | — | — | 68,382,549 | 67,512,798 | 66,649,047 | ||||||||||||||
4.75% Convertible Senior Notes due 2023 | 38,803,635 | 38,434,511 | — | — | — | ||||||||||||||
Total Liabilities | 88,646,800 | 134,841,395 | 176,919,670 | 108,835,616 | 129,832,126 | ||||||||||||||
Net Assets | 199,917,289 | 195,378,159 | 204,762,866 | 192,128,810 | 268,010,945 | ||||||||||||||
____________________
(1) | Net asset value per share is based on basic shares outstanding at the end of the period. |
(2) | During the year ended December 31, 2015, total assets decreased due to a declared dividend, which was paid on December 31, 2015. During the year ended December 31, 2016, total assets and net assets decreased due to a change in unrealized depreciation of investments and net realized losses on investments. During the year ended December 31, 2017, total assets and net assets increased due to a change in unrealized appreciation of investments and net realized gains on investments. During the year ended December 31, 2018, total assets and net assets decreased due to a decrease in net unrealized appreciation of investments and net realized losses on investments. During the year ended December 31, 2019, total assets decreased due to a lower investment in U.S. Treasury bill and net assets increased due to an increase in net |
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unrealized appreciation of investments and net realized gains on investments. For further discussion of factors that affected our total assets and net assets refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations” in Part II, Item 7 of this Form 10-K.
(3) | Deferred debt issuance costs of $1,947,572 as of December 31, 2015 related to the Company’s issuance of the 5.25% Convertible Senior Notes due 2018 were previously classified as “Deferred financing costs” as of December 31, 2015. In accordance with ASU 2015-03, this balance has been retrospectively reclassified as a direct deduction from the 5.25% Convertible Senior Notes due 2018. Refer to “Note 10—Debt Capital Activities” of the consolidated financial statements as of December 31, 2019 included in this annual report on Form 10-K for further detail. |
(4) | Due to our change in tax status to a RIC from a C Corporation, the associated accrued benefits from and provisions for taxes from previous years were reversed for the year ended December 31, 2015. During the year ended December 31, 2017, we recognized a net benefit from taxes on unrealized depreciation of $2,757,070 despite recording a net change in unrealized appreciation of approximately $34.8 million. The net tax benefit from taxes on unrealized depreciation for the year ended December 31, 2017 was the result of an approximately $4.1 million decrease in built-in gains tax liability due to the recently passed tax legislation that reduced the U.S. corporate federal income tax rate from 35% to 21%, partially offset by a $1.3 million increase in the net deferred tax liability generated by the Taxable Subsidiaries. During the year ended December 31, 2018, in anticipation of the end of the RIC built-in gain measurement period, we reversed the accrual of related potential tax liabilities of approximately $6.1 million. Refer to “Note 9 — Income Taxes” to our consolidated financial statements as of December 31, 2019 included in this annual report on Form 10-K for further detail. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking statements
This annual report on Form 10-K 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 us, 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 annual report on Form 10-K involve risks and uncertainties, including, without limitation, statements as to:
• | our future operating results; |
• | our business prospects and the prospects of our portfolio companies; |
• | the impact of investments that we expect to make; |
• | our contractual arrangements and relationships with third parties; |
• | the dependence of our future success on the general economy and its impact on the industries in which we invest; |
• | the ability of our portfolio companies to achieve their objectives; |
• | our expected financings and investments; |
• | the adequacy of our cash resources and working capital; and |
• | the timing of cash flows, if any, from the operations of our portfolio companies. |
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:
• | an economic downturn could impair our portfolio companies’ ability to continue to operate, which could lead to the loss of some or all of our investments in such portfolio companies; |
• | an economic downturn could disproportionately impact the market sectors in which a significant portion of our portfolio is concentrated, causing us to suffer losses in our portfolio; |
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• | a contraction of available credit and/or an inability to access the equity markets could impair our investment activities; |
• | interest rate volatility could adversely affect our results, particularly because we use leverage as part of our investment strategy; and |
• | the risks, uncertainties and other factors we identify in the sections entitled “Risk Factors” in our quarterly reports on Form 10-Q, our annual report on Form 10-K, and in our other filings with the SEC. |
Although we believe that 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. Important assumptions include our ability to originate new investments, certain margins and levels of profitability and the availability of additional capital. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this annual report on Form 10-K 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 quarterly reports on Form 10-Q and our annual report on Form 10-K, in the “Risk Factors” sections. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this annual report on Form 10-K. The following analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto contained elsewhere in this annual report on Form 10-K.
Overview
We are an internally-managed, non-diversified closed-end management investment company that has elected to be regulated as a business development company ("BDC") under the Investment Company Act of 1940, as amended (the “1940 Act”), and has elected to be treated, and intends to qualify annually, as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).
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 acquire our investments through direct investments in prospective portfolio companies, secondary marketplaces for private companies and negotiations with selling stockholders. We may also invest on an opportunistic basis in select publicly traded equity securities or certain non-U.S. companies that otherwise meet our investment criteria.
In regard to the regulatory requirements for BDCs under the 1940 Act, some of these investments may not qualify as investments in “eligible portfolio companies,” and thus may not be considered “qualifying assets.” “Eligible portfolio companies” generally include U.S. companies that are not investment companies and that do not have securities listed on a national exchange. If at any time less than 70% of our gross assets are comprised of qualifying assets, including as a result of an increase in the value of any non-qualifying assets or decrease in the value of any qualifying assets, we would generally not be permitted to acquire any additional non-qualifying assets until such time as 70% of our then-current gross assets were comprised of qualifying assets. We would not be required, however, to dispose of any non-qualifying assets in such circumstances.
Our investment philosophy is based on a disciplined approach of identifying promising investments in high-growth, venture-backed companies across several key industry themes which may include, among others, social mobile, cloud computing and big data, internet commerce, financial technology, mobility, and enterprise software. Our investment decisions are based on a disciplined analysis of available information regarding each potential portfolio company’s business operations, focusing on the portfolio company’s growth potential, the quality of recurring revenues, and path to profitability, as well as an understanding of key market fundamentals. Venture capital funds or other institutional investors have invested in the vast majority of companies that we evaluate.
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. Typically, our preferred stock investments are non-income producing, have different voting rights than our common stock investments and are generally convertible into common stock at our discretion.
We seek to create a low-turnover portfolio that includes investments in companies representing a broad range of investment themes.
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Starting in 2017, we began to focus our investment strategy to increase the size of our investments in individual portfolio companies. While this will likely have the effect of reducing the number of companies in which we hold investments, we believe that the shift towards larger positions will better allow us to focus our investments in companies and industries that are more likely to result in beneficial returns to our stockholders.
Internalization of Operating Structure
On and effective March 12, 2019 (the "Effective Date"), our Board of Directors approved internalizing our operating structure ("Internalization") and we began operating as an internally managed non-diversified closed-end management investment company that has elected to be regulated as a BDC under the 1940 Act. Prior to the Effective Date, we were externally managed by our former investment adviser, GSV Asset Management, LLC (“GSV Asset Management”), pursuant to an investment advisory agreement (the “Investment Advisory Agreement”), and our former administrator, GSV Capital Service Company, LLC (“GSV Capital Service Company”), provided the administrative services necessary for our operations pursuant to an administration agreement (the “Administration Agreement”).
In connection with our Internalization, the Investment Advisory Agreement and the Administration Agreement were terminated as of the Effective Date, and as a result no fees or expenses will be due or payable under the Investment Advisory Agreement and the Administration Agreement going forward. In addition, Michael T. Moe resigned from our Board of Directors as of the Effective Date in connection with our Internalization, and as of such date, we entered into a Consulting Agreement with Mr. Moe (the former Chairman of our Board of Directors and the Chief Executive Officer and Chief Investment Officer of GSV Asset Management), pursuant to which Mr. Moe provides certain services to us in connection with our transition to an internally managed operating structure. We also entered into an Amended and Restated Trademark License Agreement (the "Amended and Restated Trademark License Agreement") with GSV Asset Management to permit us to use the trade name “GSV”, and other state or unregistered “GSV” marks, including the trading symbol “GSVC.” Effective as of July 30, 2019, we changed our name to Sutter Rock Capital Corp. and effective as of August 1, 2019, we changed our trading symbol to “SSSS”. See “- Rebranding to Sutter Rock Capital Corp.”
Except as otherwise disclosed herein, this Form 10-K discusses our business and operations as an internally-managed BDC during the period covered by this Form 10-K.
Rebranding to Sutter Rock Capital Corp.
Articles of Amendment
On and effective July 30, 2019, the Company changed its name to “Sutter Rock Capital Corp.” from “GSV Capital Corp.” (the “Name Change”) by filing Articles of Amendment (the “Articles of Amendment”) to its Articles of Amendment and Restatement, as amended (the “Charter”), with the Department of Assessments and Taxation of the State of Maryland to effectuate the Name Change. In accordance with the Maryland General Corporation Law and the Charter, the Company’s Board of Directors approved the Name Change and the Articles of Amendment. Stockholder approval was not required.
Trading Symbol
In connection with the Name Change, the trading symbol for the Company’s shares of common stock on the Nasdaq Capital Market changed to “SSSS” from “GSVC” effective August 1, 2019.
Amended and Restated Bylaws
In connection with the Name Change, the Company’s Board of Directors also approved an amendment and restatement of the Company’s Bylaws (the “Amended and Restated Bylaws”) to reflect the Name Change. The Amended and Restated Bylaws became effective on July 30, 2019 and did not require stockholder approval.
For more information regarding the foregoing events, please refer to the Company’s current report on Form 8-K filed with the SEC on August 1, 2019.
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Board of Directors
Election of New Director
On and effective July 17, 2019, the Company’s Board of Directors elected Lisa Westley as a director of the Company. Ms. Westley is not an “interested person” (as defined in Section 2(a)(19) of the 1940 Act) of the Company and will serve as one of the Company’s independent directors. She will serve as a director for a term expiring in 2020 and until her successor is duly elected and qualified.
Ms. Westley will be entitled to the applicable annual fee and other compensation pursuant to the Company’s director compensation arrangements, under terms consistent with those previously disclosed by the Company. There are no arrangements or understandings between Ms. Westley and any other persons pursuant to which Ms. Westley was elected as a director of the Company.
Increased Number of Directors
In connection with Ms. Westley’s election as a director, the Board of Directors increased the number of directors that constitutes the full Board of Directors to five directors from four directors, effective July 17, 2019, in accordance with the Company’s bylaws. The Company had previously reduced the number of directors that constitutes the full Board of Directors to four directors from five directors, effective July 1, 2019, in connection with David S. Pottruck’s departure from the Board of Directors. For more information regarding Mr. Pottruck’s departure and such reduction in the number of directors, please refer to the Company’s current report on Form 8-K filed with the SEC on June 10, 2019.
Changes to Committee Composition
On and effective July 31, 2019, the Company’s Board of Directors appointed Ms. Westley as Chair of the Board of Director’s Compensation Committee and as a member of the Audit Committee, the Nominating and Corporate Governance Committee, and the Valuation Committee. In connection with Ms. Westley’s appointment as Chair of the Compensation Committee, Ronald M. Lott, the former Chair of the Compensation Committee, was appointed as Chair of the Nominating and Corporate Governance Committee, effective July 31, 2019. As a result of the foregoing, the Board of Director’s committees are composed of the following individuals, each of whom is considered independent under the rules of the Nasdaq Capital Market and is not an “interested person” of the Company as that term is defined in Section 2(a)(19) of the 1940 Act.
The Audit Committee is comprised of Marc Mazur, Leonard A. Potter, Ronald M. Lott, and Lisa Westley. Mr. Mazur serves as Chair of the Audit Committee.
The Nominating and Corporate Governance Committee is comprised of Marc Mazur, Leonard A. Potter, Ronald M. Lott, and Lisa Westley. Mr. Lott was appointed Chair of the Nominating and Corporate Governance Committee on July 31, 2019.
The Valuation Committee is comprised of Marc Mazur, Leonard A. Potter, Ronald M. Lott, and Lisa Westley. Mr. Potter serves as Chair of the Valuation Committee.
The Compensation Committee is comprised of Marc Mazur, Leonard A. Potter, Ronald M. Lott, and Lisa Westley. Ms. Westley was appointed as Chair of the Compensation Committee on July 31, 2019.
Changes to Compensation
On and effective July 31, 2019, the Company’s Board of Directors approved the following changes to director compensation: (i) the annual fee paid to independent directors increased to $100,000 from $80,000, (ii) the annual fee paid to the Chair of the Audit Committee increased to $15,000 from $10,000, and (iii) the annual fee paid to the chairs of the other committees of the Board of Directors increased to $10,000 from $5,000.
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Portfolio and Investment Activity - 2019
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 of new and follow-on investments and the sales of existing investments. The fair value, as of December 31, 2019, of all of our portfolio investments, excluding U.S. Treasury bills, was $191,585,578.
During year ended December 31, 2019, we funded investments in an aggregate amount of $25,530,000 (not including capitalized transaction costs) as shown in the following table:
Portfolio Company | Investment | Transaction Date | Gross Payments | |||||
Neutron Holdings, Inc. (d/b/a/ Lime) | Preferred shares, Series D | 1/25/2019 | $ | 10,000,000 | ||||
Aspiration Partners, Inc. | Convertible Promissory Note 5% 1/31/2021 | 8/12/2019 | 280,000 | |||||
GreenAcreage Real Estate Corp. | Common shares | 8/12/2019 | 7,500,000 | |||||
Treehouse Real Estate Investment Trust, Inc. | Common shares | 9/11/2019 | 7,500,000 | |||||
Stormwind, LLC | Preferred shares, Series D | 11/26/2019 | 250,000 | |||||
Total | $ | 25,530,000 | ||||||
During the year ended December 31, 2019, we capitalized fees of $39,685.
During the year ended December 31, 2019, we sold or amended investments in an amount of $65,603,252, net of transaction costs, and realized a net gain on investments of approximately $19,179,340 (including U.S. Treasury investments) as shown in following table:
Portfolio Investment | Transaction Date | Shares Sold | Average Net Share Price (1) | Net Proceeds | Realized Gain/(Loss)(2) | ||||||||||||
Declara, Inc.(3) | 3/11/2019 | — | $ | — | $ | — | $ | (12,334,151 | ) | ||||||||
Spotify Technology S.A.(4) | Various | 235,360 | 138.29 | 32,547,633 | 22,545,550 | ||||||||||||
Dropbox, Inc.(5) | Various | 874,990 | 22.54 | 19,723,591 | 6,066,664 | ||||||||||||
Knewton, Inc.(6) | 5/31/2019 | — | — | 51,511 | (5,083,701 | ) | |||||||||||
CUX, Inc. (d/b/a CorpU) (7) | 10/24/2019 | — | — | — | (109,331 | ) | |||||||||||
Lyft, Inc. (8) | Various | 304,829 | 43.57 | 13,280,517 | 8,983,623 | ||||||||||||
EdSurge, Inc. (9) | 12/12/2019 | 873,153 | — | — | (1,002,161 | ) | |||||||||||
Total | $ | 65,603,252 | $ | 19,066,493 | |||||||||||||
__________________
(1) | The average net share price is the net share price realized after deducting all commissions and fees on the sale(s), if applicable. |
(2) | Realized gain/(loss) does not include amounts held in escrow or any realized gain/(loss) incurred on the maturity of our U.S. Treasury investments. |
(3) | On March 11, 2019, Declara, Inc. entered into a definitive agreement to be acquired by Declara Holdings, Inc., a subsidiary of Futuryng, Inc. Despite the existence of an earn-out provision, as a result of the transaction, we do not expect to receive any proceeds. The exit of Declara, Inc. included a 12% Convertible Promissory Note with a principal value of $2,334,152. |
(4) | As of May 2, 2019, all remaining shares of Spotify Technology S.A. held by us had been sold. |
(5) | As of September 19, 2019, all remaining shares of Dropbox, Inc. held by us had been sold. |
(6) | On May 31, 2019, a sale of substantially all of the assets of Knewton, Inc. to Wiley Education was completed. As a result of the transaction, we have received $51,511 in net proceeds and expect to receive approximately $26,000 in additional proceeds held in escrow. We expect to receive the proceeds held in escrow in 2020. |
(7) | On October 24, 2019, CUX, Inc. (d/b/a CorpU) completed a recapitalization, which amended our investment in the Senior Subordinated Convertible Promissory Note. As a result of the recapitalization, the principal amount of our Senior Subordinated Convertible Promissory Note was reduced by $109,331, the interest rate was reduced to 4%, and the maturity was extended to February 14, 2023. |
(8) | As of November 4, 2019, all remaining shares of Lyft, Inc. held by us had been sold. |
(9) | As of December 12, 2019, all remaining shares of EdSurge, Inc., were sold in a transaction with the International Society for Technology in Education (ISTE). As a result of the transaction, we do not expect to receive any proceeds. |
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Portfolio and Investment Activity - 2018
During the year ended December 31, 2018, we funded investments in an aggregate amount of $10,636,685 (not including capitalized transaction costs) as shown in the following table:
Portfolio Company | Investment | Transaction Date | Gross Payments | |||||
Ozy Media, Inc.(1) | Promissory Note 10% Due 2/12/2018 | 1/12/2018 | $ | 100,000 | ||||
SharesPost, Inc.(2) | Common shares | 6/15/2018 | 100,221 | |||||
Knewton, Inc. | Unsecured Convertible Promissory Note 8% due 12/31/2019 | 7/23/2018 | 134,405 | |||||
Nextdoor.com, Inc. | Common shares | 9/27/2018 | 6,326,790 | |||||
Nextdoor.com, Inc. | Common shares | 12/19/2018 | 1,390,373 | |||||
Nextdoor.com, Inc. | Common shares | 12/27/2018 | 2,284,896 | |||||
NestGSV, Inc. (d/b/a GSV Labs, Inc.)(3) | Unsecured Convertible Promissory Note 12% due 12/31/2019 | 12/31/2018 | 300,000 | |||||
Total | $ | 10,636,685 | ||||||
__________________
(1) | During the year ended December 31, 2018, Ozy Media, Inc.’s obligations under its financing arrangements with us became past due. Effective April 9, 2018, the term of Ozy Media Inc.'s notes were extended through the issuance of a new convertible promissory note, which extended the maturity date of the existing notes to October 31, 2018 and then to December 31, 2018 once certain conditions were satisfied. Effective August 17, 2018, Ozy Media Inc. executed an additional debt amendment, which expanded its borrowing limit. In consideration for amending and restating the existing notes, we were issued warrants exercisable for 295,565 shares of Ozy Media Inc.'s common stock. Subsequent to December 31, 2018, Ozy Media Inc.'s obligations under its financing arrangements with us became past due. On September 11, 2019, we agreed to convert the Convertible Promissory Note due 12/31/2018 to Ozy Media, Inc. and all related accrued interest, into 683,482 shares of Ozy Media, Inc.'s Series C-2 preferred shares. |
(2) | On June 15, 2018 we exercised our 770,934 warrants to purchase shares of SharesPost, Inc.'s common stock, with a $0.13 strike price. |
(3) | Effective July 31, 2018, we agreed to extend the Convertible Promissory Note to NestGSV, Inc. (d/b/a GSV Labs, Inc.) until December 31, 2018, with a new interest rate of 12%. Previously accrued interest will be capitalized into the principal of the extended note. On December 31, 2018, we extended the maturity of the Convertible Promissory Note to December 31, 2019, compounded the previously accrued and then-outstanding interest, and invested an additional $300,000. The Convertible Promissory Note continues to accrue interest at 12%. In consideration for the extension and additional investment, the 500,000 Series A-3 Preferred Warrants due April 4, 2019 and the 187,500 Series A-4 Preferred Warrants due October 6, 2019, were extended to April 4, 2021 and October 6, 2021, respectively. We also received an additional 250,000 Series B Preferred Warrants due December 31, 2023. |
During the year ended December 31, 2018, we capitalized fees of $32,350.
During the year ended December 31, 2018, we sold investments or received repayments from portfolio companies in an amount of $32,395,839, net of transaction costs, and realized a net loss on investments of approximately $7,433,619 (including U.S. Treasury investments) as shown in following table:
Portfolio Investment | Net Proceeds | Realized Gain/(Loss)(1) | ||||||
Chegg, Inc.(2) | $ | 9,446,315 | $ | 3,437,847 | ||||
NestGSV, Inc. (d/b/a GSV Labs, Inc.)(3) | 592,129 | (680 | ) | |||||
Avenues Global Holdings, LLC | 5,923,795 | (4,228,059 | ) | |||||
General Assembly Space, Inc.(4) | 7,820,191 | 3,292,552 | ||||||
Lytro, Inc.(5) | 791,596 | (9,711,762 | ) | |||||
SugarCRM, Inc.(6) | 2,645,183 | (4,332,777 | ) | |||||
DreamBox Learning, Inc.(7) | 5,176,630 | 2,916,251 | ||||||
Total | $ | 32,395,839 | $ | (8,626,628 | ) | |||
__________________
(1) | Realized gain/(loss) does not include amounts held in escrow or any realized gain/(loss) incurred on the maturity of our U.S. Treasury investments. |
(2) | As of February 22, 2018, all remaining shares of Chegg, Inc. held by us had been sold. |
(3) | Represents repayment of the 12% Unsecured Promissory Note Due 1/15/2018. |
(4) | On April 16, 2018, Adecco Group, a Swiss staffing company, announced that it was acquiring technology education provider General Assembly Space, Inc. for $412.5 million, including debt financing. We have received approximately $7.8 million in net proceeds as a result of the transaction, with approximately $1.5 million of additional proceeds held in escrow. We have received approximately $1.4 million in escrow proceeds in 2019 and expect to receive approximately $61,000 in additional escrow proceeds in 2020. |
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(5) | On March 27, 2018, Lytro, Inc. announced that it was preparing to wind down the company over an unspecified period of time. Google LLC acquired Lytro, Inc.’s intellectual property and certain other assets. As a result of the transaction, we have received $0.8 million in net proceeds and expect to receive approximately $0.4 million in additional proceeds held in escrow. We have received approximately $170,000 in escrow proceeds in 2019 and expect to receive approximately $168,000 in additional escrow proceeds in 2020. |
(6) | On June 14, 2018, SugarCRM, Inc. entered into an agreement to be purchased by AKKR Candy Holdings, Inc. As a result of the transaction, we have received $2.6 million in net proceeds and expect to receive approximately $0.3 million in additional proceeds held in escrow. We received all escrow proceeds as of December 31, 2019. |
(7) | On July 18, 2018, DreamBox Learning, Inc. entered into a definitive agreement to be acquired by a wholly owned subsidiary of DreamBox Learning Holding, LLC, an entity owned by The Rise Fund Deneb, LP. As a result of the transaction, we have received $5.2 million in proceeds and expect to receive approximately $0.3 million in additional proceeds held in escrow. We received all escrow proceeds as of December 31, 2019. |
During the quarter and year ended December 31, 2018 we did not write-off any investments.
Portfolio and Investment Activity - 2017
During quarter and year ended December 31, 2017, we did not purchase or close on any investments. We did, however, pay $2,080 in capitalized fees. The table below summarizes the portfolio investments we wrote-off and sold during the year ended December 31, 2017:
Portfolio Company | Net Proceeds | Realized Gain/(Loss)(1) | ||||||
AliphCom, Inc. (d/b/a Jawbone) | $ | — | $ | (793,152 | ) | |||
AlwaysOn, Inc. | — | (1,903,414 | ) | |||||
Beamreach Solar, Inc. (f/k/a Solexel, Inc.) | — | (14,272,840 | ) | |||||
Cricket Media (f/k/a ePals Corporation) | — | (2,448,959 | ) | |||||
EarlyShares.com, Inc. | — | (312,438 | ) | |||||
Orchestra One, Inc. (f/k/a Learnist, Inc.) | — | (4,959,614 | ) | |||||
Global Education Learning (Holdings) Ltd. | — | (675,495 | ) | |||||
Snap, Inc. | 4,033,360 | 31,090 | ||||||
JAMF Holdings, Inc.(2) | 34,931,287 | 25,474,575 | ||||||
Spotify Technology S.A.(3) | 13,896,600 | 10,299,111 | ||||||
Dataminr, Inc. | 4,803,384 | 1,635,673 | ||||||
Whittle Schools, LLC | 4,575,000 | (181,045 | ) | |||||
Chegg, Inc.(3) | 10,246,005 | 2,231,611 | ||||||
Strategic Data Command, LLC(2) | 2,454,652 | 1,524,374 | ||||||
Palantir Technologies, Inc.(3) | 2,091,501 | 1,078,692 | ||||||
Circle Media (f/k/a S3 Digital Corp. (d/b/a S3i) | — | (1,839,914 | ) | |||||
Handle Financial, Inc. (f/k/a PayNearMe, Inc.) | — | (14,000,398 | ) | |||||
Total Disposals | $ | 77,031,789 | $ | 887,857 | ||||
_______________________
(1) | Realized gain/(loss) does not include any realized gain/(loss) incurred on the maturity of our U.S. Treasury investments. |
(2) | Net proceeds do not include amounts that were held in escrow. Refer to “Note 2—Significant Accounting Policies—Escrow Proceeds Receivable” to our consolidated financial statements as of December 31, 2018 for further detail. |
(3) | Represents only a partial sale of our investment in the denoted portfolio companies. |
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Results of Operations - Comparison of the years ended December 31, 2019, 2018, and 2017
Operating results for the years ended December 31, 2019, 2018, and 2017 are as follows:
Year Ended December 31, | |||||||||||
| 2019 | 2018 | 2017 | ||||||||
Total Investment Income | $ | 1,495,724 | $ | 1,617,836 | $ | 852,768 | |||||
Interest income | 995,724 | 992,836 | 304,672 | ||||||||
Dividend income | 500,000 | 625,000 | 475,000 | ||||||||
Other income | — | — | 73,096 | ||||||||
Net Operating Expenses | $ | 10,946,792 | $ | 9,252,413 | $ | 21,731,583 | |||||
Incentive fee waiver | — | (5,000,000 | ) | — | |||||||
Management fee waiver | — | (892,421 | ) | (708,272 | ) | ||||||
Gross Operating Expenses | $ | 10,946,792 | $ | 15,144,834 | $ | 22,439,855 | |||||
Management fees | 848,723 | 5,199,900 | 5,666,176 | ||||||||
Incentive fees/(Reversal of incentive fee accrual) | (4,660,472 | ) | 382,387 | 7,151,641 | |||||||
Costs incurred under Administration Agreement | 306,084 | 1,702,047 | 1,874,839 | ||||||||
Directors’ fees | 383,370 | 345,000 | 328,480 | ||||||||
Professional fees | 5,290,329 | 1,587,578 | 2,068,668 | ||||||||
Compensation expense | 4,286,972 | — | — | ||||||||
Interest expense | 2,372,570 | 4,545,471 | 4,696,819 | ||||||||
Income tax expense | 33,825 | 482,994 | 52,901 | ||||||||
Other expenses | 2,085,391 | 899,457 | 600,331 | ||||||||
Net Investment Loss | $ | (9,451,068 | ) | $ | (7,634,577 | ) | $ | (20,878,815 | ) | ||
Net realized gain/(loss) on investments | 19,179,340 | (7,433,619 | ) | 913,982 | |||||||
Realized loss on partial repurchase of 5.25% Convertible Senior Notes due 2018 | — | (397,846 | ) | — | |||||||
Net change in unrealized appreciation/(depreciation) of investments | 13,339,859 | 9,641,050 | 34,775,696 | ||||||||
Benefit from taxes on unrealized depreciation of investments | 885,566 | 6,716,735 | 2,757,070 | ||||||||
Net Increase in Net Assets Resulting from Operations | $ | 23,953,697 | $ | 891,743 | $ | 17,567,933 | |||||
Investment Income
For the year ended December 31, 2019 as compared to the year ended December 31, 2018
Investment income decreased to $1,495,724 for the year ended December 31, 2019 from $1,617,836 for the year ended December 31, 2018. The decrease was due to decreased dividend income received from SPBRX, Inc. (f/k/a GSV Sustainability Partners, Inc.) during the year ended December 31, 2019, relative to the year ended December 31, 2018. The decrease was offset by dividends received from Treehouse Real Estate Investment Trust, Inc. earned in the year ended December 31, 2019.
For the year ended December 31, 2018 as compared to the year ended December 31, 2017
Investment income increased to $1,617,836 for the year ended December 31, 2018 from $852,768 for the year ended December 31, 2017. The increase was primarily due to increased interest income related to our debt investments in Ozy Media, Inc., NestGSV, Inc. (d.b.a. GSV Labs, Inc.), and CUX, Inc. (d/b/a CorpU) and interest on cash balances not earned in the prior year. Dividend income also increased during the year as the total dividends received from SPBRX, Inc. (f/k/a GSV Sustainability Partners, Inc.) increased from $475,000 in 2017 to $625,000 in 2018.
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Operating Expenses
For the year ended December 31, 2019 as compared to the year ended December 31, 2018
Total operating expenses, net of waiver of management and incentive fees, increased to $10,946,792 for the year ended December 31, 2019, from $9,252,413 for the year ended December 31, 2018. The increase was primarily due to an increase in legal and audit fees, and the addition of temporary licensing fees and consulting fees, and compensation expense incurred in relation to our Internalization during the year ended December 31, 2019, relative to the year ended December 31, 2018. The increase was primarily offset by the removal of management fees, removal of previously accrued incentive fees, and removal of costs incurred under Administration Agreement in relation to Internalization in the year ended December 31, 2019. The increase was partially offset by a decrease in interest expense due to the extinguishment of the Convertible Senior Notes due September 15, 2018, as compared to the year ended December 31, 2018.
For the year ended December 31, 2018 as compared to the year ended December 31, 2017
Total operating expenses, net of waiver of management and incentive fees, decreased to $9,252,413 for the year ended December 31, 2018, from $21,731,583 for the year ended December 31, 2017. The decrease was primarily due to a decrease in the accrued incentive fees, enhanced by the one-time incentive fee accrual forfeiture of $5.0 million per the Waiver Agreement and, to a lesser extent, an increase in GSV Asset Management’s management fee waiver and costs incurred under Administration Agreement. The increase in GSV Asset Management’s management fee waiver under the Waiver Agreement during the year ended December 31, 2018 resulted primarily from the exclusion of our cash balance from the calculation of the base management fee. The decrease in total operating expenses between periods was also, to a lesser extent, the result of a decrease in professional fees, which include legal, valuation, audit, and consulting fees.
Net Investment Loss
For the year ended December 31, 2019 as compared to the year ended December 31, 2018
For the year ended December 31, 2019, we recognized net investment loss of $9,451,068, compared to net investment loss of $7,634,577 for the year ended December 31, 2018. The change between periods resulted from the increase in operating expenses, as discussed above, and a decrease in total investment income between periods.
For the year ended December 31, 2018 as compared to the year ended December 31, 2017
For the year ended December 31, 2018, we recognized a net investment loss of $7,634,577, compared to a net investment loss of $20,878,815 for the year ended December 31, 2017. The decrease in net investment loss resulted primarily from the decrease in operating expenses, net of waiver of management fees and one-time incentive fee accrual forfeiture, as discussed above, and an increase in total investment income between 2018 and 2017, also discussed above.
Net Realized Gain on Investments
For the year ended December 31, 2019 as compared to the year ended December 31, 2018
For the year ended December 31, 2019, we recognized net realized gain on our investments of $19,179,340, compared to net realized loss of $7,433,619 for the year ended December 31, 2018. The components of our net realized gains/losses on portfolio investments for the year ended December 31, 2019 and 2018, excluding U.S. Treasury investments, are reflected in the tables above, under “—Portfolio and Investment Activity.”
For the year ended December 31, 2018 as compared to the year ended December 31, 2017
For the year ended December 31, 2018, we recognized a net realized loss of $7,433,619 on our investments, compared to a net realized gain of $913,982 for the year ended December 31, 2017. The components of our net realized gains and losses on portfolio investments for the year ended December 31, 2018 and 2017, excluding U.S. Treasury investments, are reflected in the tables above, under “—Portfolio and Investment Activity.”
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Net Change in Unrealized Appreciation/(Depreciation) of Investments
For the year ended December 31, 2019, we had a net change in unrealized appreciation/depreciation of $13,339,859. For the year ended December 31, 2018, we had a net change in unrealized appreciation/depreciation of $9,641,050. For the year ended December 31, 2017, we had a net change in unrealized appreciation of $34,775,696. The following tables summarize, by portfolio company, the significant changes in unrealized appreciation and/or depreciation of our investment portfolio for the years ended December 31, 2019, 2018, and 2017.
Portfolio Company | Net Change in Unrealized Appreciation/(Depreciation) For the Year Ended December 31, 2019 | |||
Declara, Inc.(1) | $ | 12,334,151 | ||
Ozy Media, Inc. | 12,218,812 | |||
Course Hero, Inc. | 11,567,394 | |||
Coursera, Inc. | 10,458,012 | |||
Parchment, Inc. | 4,745,425 | |||
Knewton, Inc.(1) | 2,979,116 | |||
Aspiration Partners, Inc. | 3,511,682 | |||
Enjoy Technology, Inc. | 1,155,396 | |||
CUX, Inc. (d/b/a CorpU) | (1,804,892 | ) | ||
Palantir Technologies, Inc. | (2,471,310 | ) | ||
A Place for Rover Inc. (f/k/a DogVacay, Inc.) | (2,548,128 | ) | ||
NestGSV, Inc. (d/b/a GSV Labs, Inc.) | (3,663,624 | ) | ||
Dropbox, Inc.(1) | (4,219,119 | ) | ||
Stormwind, LLC | (4,343,218 | ) | ||
Lyft, Inc.(1) | (11,313,418 | ) | ||
Spotify Technology S.A.(1) | (16,711,276 | ) | ||
Other(2) | 1,444,856 | |||
Total | $ | 13,339,859 | ||
_______________________
(1) | The change in unrealized appreciation/(depreciation) reflected for these investments resulted from the full or partial sale, or write-off of the investment, which resulted in the reversal of previously accrued unrealized appreciation/(depreciation), as applicable. |
(2) | “Other” represents investments (including U.S. Treasury bills) for which individual change in unrealized appreciation/(depreciation) was less than $1.0 million for the year ended December 31, 2019. |
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Portfolio Company | Net Change in Unrealized Appreciation/(Depreciation) For the Year Ended December 31, 2018 | Portfolio Company | Net Change in Unrealized Appreciation/(Depreciation) for the Year Ended December 31, 2017 | |||||||
Lytro, Inc.(2) | $ | 8,387,816 | Spotify Technology S.A.(2) | $ | 15,394,865 | |||||
Lyft, Inc. | 5,486,237 | Beamreach Solar, Inc. (f/k/a Solexel, Inc.)(1) | 14,272,843 | |||||||
Coursera, Inc. | 4,751,216 | Handle Financial, Inc. (f/k/a PayNearMe, Inc.)(1) | 13,835,988 | |||||||
SharesPost, Inc. | 4,401,790 | Chegg, Inc.(2) | 7,445,390 | |||||||
Avenues Global Holdings, LLC(2) | 4,243,435 | Orchestra One, Inc. (f/k/a Learnist, Inc.)(1) | 4,959,614 | |||||||
Course Hero, Inc. | 4,065,198 | Dropbox, Inc. | 4,685,212 | |||||||
SugarCRM, Inc.(2) | 3,753,157 | NestGSV, Inc. (d/b/a GSV Labs, Inc.) | 4,308,957 | |||||||
Palantir Technologies, Inc. | (1,022,365 | ) | Coursera, Inc. | 3,849,819 | ||||||
Knewton, Inc. | (1,576,151 | ) | StormWind, LLC | 3,832,681 | ||||||
Declara, Inc. | (1,715,261 | ) | Lyft, Inc. | 2,671,022 | ||||||
Ozy Media, Inc. | (2,070,561 | ) | Cricket Media (f/k/a ePals, Inc.)(1) | 2,448,959 | ||||||
Chegg, Inc.(2) | (2,151,532 | ) | AlwaysOn, Inc.(1) | 1,903,414 | ||||||
Spotify Technology S.A. | (4,015,707 | ) | Aspiration Partners, Inc. | 1,440,417 | ||||||
General Assembly Space, Inc.(2) | (4,840,905 | ) | Circle Media (f/k/a/ S3 Digital Corp. (d/b/a S3i))(1) | 1,325,033 | ||||||
Curious.com, Inc. | (5,514,077 | ) | Strategic Data Command, LLC(2) | (1,063,278 | ) | |||||
Maven Research, Inc. | (1,672,521 | ) | ||||||||
Dataminr, Inc.(2) | (2,348,736 | ) | ||||||||
General Assembly Space, Inc. | (2,905,898 | ) | ||||||||
SugarCRM, Inc. | (2,893,050 | ) | ||||||||
SPBRX, INC. (f/k/a GSV Sustainability Partners, Inc.) | (3,239,916 | ) | ||||||||
JAMF Holdings, Inc.(2) | (3,856,826 | ) | ||||||||
Curious.com, Inc. | (4,470,877 | ) | ||||||||
Palantir Technologies, Inc.(2) | (5,424,238 | ) | ||||||||
Ozy Media, Inc. | (5,518,893 | ) | ||||||||
Declara, Inc. | (6,111,907 | ) | ||||||||
Lytro, Inc. | (8,793,884 | ) | ||||||||
Other(3) | (2,541,240 | ) | Other(3) | 701,506 | ||||||
Total | $ | 9,641,050 | Total | $ | 34,775,696 | |||||
_______________________
(1) | The change in unrealized appreciation for this investment resulted from writing off an investment that was previously reduced in value to zero. |
(2) | The change in unrealized appreciation/(depreciation) reflected for these investments resulted from the full or partial sale of the relevant investment, which resulted in the reversal of previously accrued unrealized appreciation/(depreciation), as applicable. |
(3) | “Other” represents investments (including U.S. Treasury bills) for which individual change in unrealized appreciation/(depreciation) was less than $1.0 million for the years ended December 31, 2018 or 2017. |
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Recent Developments
Portfolio Activity
Please refer to “Note 12—Subsequent Events” to our consolidated financial statements as of December 31, 2019 for details regarding activity in our investment portfolio from January 1, 2020 through March 13, 2020.
We are frequently in negotiations with various private companies with respect to investments in such companies. Investments in private companies are generally 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.
Share Repurchase Program
On March 9, 2020, our Board of Directors authorized a $5.0 million increase in the amount of shares of our common stock that may be repurchased under the discretionary Share Repurchase Program until the earlier of (i) March 8, 2021 or (ii) the repurchase of $30.0 million in aggregate amount of our common stock. Under the Share Repurchase Program, we may repurchase our outstanding common stock in the open market provided that we comply with the prohibitions under our insider trading policies and procedures and the applicable provisions of the 1940 Act and the Securities Exchange Act of 1934, as amended. Please refer to "Note 5—Share Repurchase Program, Equity Offerings and Related Expenses” to our consolidated financial statements as of December 31, 2019 for additional information on the Share Repurchase Program.
From January 1, 2020 through March 13, 2020, we repurchased an additional 237,612 shares under the Share Repurchase Program for an aggregate purchase price of $1.5 million.
Appointment of CCO
On March 9, 2020, our Board of Directors appointed Allison Green, our Chief Financial Officer, Treasurer and Secretary, to serve as our Chief Compliance Officer effective March 15, 2020. Carl Rizzo served as our Chief Compliance Officer pursuant to an agreement between us and Alaric Compliance Services LLC until March 15, 2020.
Liquidity and Capital Resources
Our liquidity and capital resources are generated primarily from the sales of our investments and advances from our $12.0 million Credit Facility. The Credit Facility matured and expired on May 31, 2019. See "—Credit Facility" for details. In addition, on March 28, 2018, we issued $40.0 million aggregate principal amount of 4.75% Convertible Senior Notes due 2023, as discussed further below and in “Note 10—Debt Capital Activities” to our consolidated financial statements as of December 31, 2019.
Our primary uses of cash are to make investments, pay our operating expenses, and make distributions to our stockholders. For the year ended December 31, 2019, our operating expenses were $10,946,792. For the years ended December 31, 2018 and 2017, our operating expenses, net of any fee waivers, were $9,252,413 and $21,731,583, respectively.
Cash Reserves and Liquid Securities | December 31, 2019 | December 31, 2018 | December 31, 2017 | |||||||||
Cash | $ | 44,861,263 | $ | 28,184,163 | $ | 59,838,600 | ||||||
Borrowing availability under the Credit Facility(1) | — | 12,000,000 | 12,000,000 | |||||||||
Securities of publicly traded portfolio companies: | ||||||||||||
Unrestricted securities(2) | — | 44,589,406 | 8,160,000 | |||||||||
Total securities of publicly traded portfolio companies | — | 44,589,406 | 8,160,000 | |||||||||
Total Cash Reserves and Liquid Securities | $ | 44,861,263 | $ | 84,773,569 | $ | 79,998,600 | ||||||
_______________________
(1) | Subject to leverage and borrowing base restrictions and other requirements under the Credit Facility as of December 31, 2019 and December 31, 2018. The Credit Facility matured on May 31, 2019. Refer to “Note 10—Debt Capital Activities” to our consolidated financial statements as of December 31, 2019 for details. |
(2) | “Unrestricted securities” represents common stock of our publicly traded companies that are not subject to any restrictions upon sale. We may incur losses if we liquidate these positions to pay operating expenses or fund new investments. As of December 31, 2019, this |
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balance is $0 as we are not holding any publicly traded portfolio companies. As of December 31, 2018, this balance represents our shares of common stock in Spotify Technology S.A. and Dropbox, Inc.
During the year ended December 31, 2019, cash increased to $44,861,263 from $28,184,163 at the beginning of the year. The increase in cash was primarily due to proceeds from the sale of our Spotify Technology S.A., Dropbox, Inc., and Lyft, Inc. shares, offset by our investments in Neutron Holdings, Inc. (d/b/a Lime), Aspiration Partners, Inc., GreenAcreage Real Estate Corp., Treehouse Real Estate Investment Trust, Inc., and Stormwind LLC, interest payments related to our 4.75% Convertible Senior Notes due 2023, cash used to repurchase our common stock under the Share Repurchase Program and Modified Dutch Auction Tender Offer, cash used to pay dividends, and cash used for our operating expenses.
Contractual Obligations
| Payments Due By Period (dollars in millions) | ||||||||||||||||||
| Total | Less than 1 year | 1–3 years | 3–5 years | More than 5 years | ||||||||||||||
Payable for securities purchased(1) | $ | 44.7 | $ | 44.7 | $ | — | $ | — | $ | — | |||||||||
Credit Facility payable(2) | — | — | — | — | — | ||||||||||||||
Convertible Senior Notes(3) | 40.0 | — | — | 40.0 | — | ||||||||||||||
Operating lease liability | $ | 0.9 | $ | 0.2 | $ | 0.4 | $ | 0.3 | $ | — | |||||||||
Total | $ | 85.6 | $ | 44.9 | $ | 0.4 | $ | 40.3 | $ | — | |||||||||
_______________________
(1) | “Payable for securities purchased” relates to the purchase of U.S. Treasury bills on margin. This balance was subsequently repaid on January 2, 2020, when the $50.0 million United States Treasury bill matured and the $5.25 million margin deposit that we posted as collateral was returned. |
(2) | The Credit Facility matured on May 31, 2019. The weighted-average interest rate incurred under the Credit Facility was 0.00% for the year ended December 31, 2019. |
(3) | The balance shown for the "Convertible Senior Notes" reflects the principal balance payable to investors for the 4.75% Convertible Senior Notes due 2023 as of December 31, 2019. Refer to “Note 10—Debt Capital Activities” to our consolidated financial statements as of December 31, 2019 for more information. |
Share Repurchase Program
During the year ended December 31, 2019, we repurchased 749,128 shares of our common stock pursuant to the Share Repurchase Program. As of December 31, 2019, the dollar value of shares that remained available to be purchased under the Share Repurchase Program was approximately $5.0 million.
Under the Share Repurchase Program, we may repurchase our outstanding common stock in the open market provided that we comply with the prohibitions under our insider trading policies and procedures and the applicable provisions of the 1940 Act and the Securities Exchange Act of 1934, as amended.
For more information on the Share Repurchase Program, see "—Recent Developments" and "Part II. Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities".
Modified Dutch Auction Tender Offer
On October 21, 2019, the Company commenced a modified “Dutch Auction” tender offer (the “Modified Dutch Auction Tender Offer”) to purchase for cash up to $10.0 million in shares of its common stock from its stockholders, which expired on November 20, 2019. In accordance with the terms of the Modified Dutch Auction Tender Offer, the Company selected the lowest price per share of not less than $6.00 per share and not greater than $8.00 per share, less any applicable withholding taxes and without interest, that could allow the Company to purchase that number of shares having an aggregate purchase price of $10.0 million. Upon the terms and subject to the conditions of the Modified Dutch Auction Tender Offer, if shares having an aggregate purchase price of less than $10.0 million were properly tendered and not properly withdrawn, the Company would purchase all shares properly tendered and not properly withdrawn.
Pursuant to the Modified Dutch Auction Tender Offer, the Company repurchased 1,449,275 shares, representing 7.6% of its outstanding shares, on or about November 22, 2019, at a price of $6.90 per share on a pro rata basis, excluding fees and expenses relating to the self-tender offer. The Company has determined that the proration factor for the tender offer was 78.1%. The Company
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used available cash to fund the purchases of its shares of common stock in the Modified Dutch Auction Tender Offer and to pay for all related fees and expenses.
Off-Balance Sheet Arrangements
As of December 31, 2019, 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.
Credit Facility
Pursuant to the Loan Agreement, Western Alliance Bank had agreed to provide us with the $12.0 million Credit Facility, which, among other things, matured on May 31, 2019 and bore interest at a per annum rate equal to the prime rate plus 3.50%. In addition, the Loan Agreement required payment of a fee for unused amounts during the revolving period. During year ended December 31, 2019 we had no borrowings outstanding under the Credit Facility and had paid no unused fee. Refer to “Note 10—Debt Capital Activities” to our consolidated financial statements as of December 31, 2019 for more information.
Equity Issuances & Debt Capital Activities
We made no sales of our equity securities during the year ended December 31, 2019 or the year ended December 31, 2018.
4.75% Convertible Senior Notes due 2023
On March 28, 2018, we issued $40.0 million aggregate principal amount of 4.75% Convertible Senior Notes due 2023, which bear interest at a fixed rate of 4.75% per year, payable semi-annually in arrears on March 31 and September 30 of each year, commencing on September 30, 2018. We received $38.8 million in proceeds from the offering, net of underwriting discounts and commissions and other offering expenses. The 4.75% Convertible Senior Notes due 2023 mature on March 28, 2023, unless previously repurchased or converted in accordance with their terms. We do not have the right to redeem the 4.75% Convertible Senior Notes due 2023 prior to March 27, 2021.
In connection with the issuance of the 4.75% Convertible Senior Notes due 2023, we were required under the terms of the Credit Facility to deposit the proceeds from the 4.75% Convertible Senior Notes due 2023 offering into an account at Western Alliance Bank and were required to maintain at least $65.0 million (or such lesser amount to the extent such funds would be used to repay or repurchase a portion of the outstanding 5.25% Convertible Senior Notes due 2018 prior to their maturity and repayment in full) in an account at Western Alliance Bank until such time as the 5.25% Convertible Senior Notes due 2018 were repaid in full. Refer to “Note 10—Debt Capital Activities” to our consolidated financial statements as of December 31, 2019 for more information regarding the 4.75% Convertible Senior Notes due 2023.
5.25% Convertible Senior Notes due 2018 - Tender Offer, Repurchase, and Repayment
On December 15, 2017, we announced the commencement of a cash tender offer (the "Tender Offer") to purchase any and all of the $69.0 million aggregate principal amount of outstanding 5.25% Convertible Senior Notes due 2018. As of the expiration of the Tender Offer on January 17, 2018, approximately $4.8 million aggregate principal amount of the 5.25% Convertible Senior Notes due 2018 representing approximately 7.0% of the outstanding 5.25% Convertible Senior Notes due 2018, were validly tendered and not validly withdrawn pursuant to the Tender Offer. On March 27, 2018, we repurchased an additional $14.2 million aggregate principal amount of the outstanding 5.25% Convertible Senior Notes due 2018.
The 5.25% Convertible Senior Notes due 2018 matured on September 15, 2018 (the “Maturity Date”). Pursuant to the terms of the 5.25% Convertible Senior Notes due 2018 and the indenture related thereto, we repaid the remaining outstanding aggregate principal amount of the 5.25% Convertible Senior Notes due 2018, including accrued but unpaid interest, on the Maturity Date and the 5.25% Convertible Senior Notes were no longer outstanding as of such date. Refer to “Note 10—Debt Capital Activities” to our consolidated financial statements as of December 31, 2019 for more information regarding the 5.25% Convertible Senior Notes due 2018.
Distributions
The timing and amount of our distributions, if any, will be determined by our Board of Directors and will be declared out of assets legally available for distribution. See “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” in Part II, Item 5 of this Form 10-K for a list of our past distributions, including dividends and returns of capital, if any, per share that we have declared since our formation through December 31, 2019.
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Critical Accounting Policies
Critical accounting policies and practices are the policies that are both most important to the portrayal of our financial condition and results, and require management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. These include estimates of the fair value of our Level 3 investments and other estimates that affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements and the reported amounts of certain revenues and expenses during the reporting period. It is likely that changes in these estimates will occur in the near term. Our estimates are inherently subjective in nature and actual results could differ materially from such estimates. See “Note 2—Significant Accounting Policies” to our consolidated financial statements as of December 31, 2019 for further detail regarding our critical accounting policies and recently issued or adopted accounting pronouncements.
Related-Party Transactions
See “Note 3—Related-Party Arrangements” to our consolidated financial statements as of December 31, 2019 for more information.
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Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market Risk
Our equity investments are primarily in growth companies that in many cases have short operating histories and are generally illiquid. In addition to the risk that these companies may fail to achieve their objectives, the price we may receive for these companies in private transactions may be significantly impacted by periods of disruption and instability in the capital markets. While these periods of disruption generally have little actual impact on the operating results of our equity investments, these events may significantly impact the prices that market participants will pay for our equity investments in private transactions. This may have a significant impact on the valuation of our equity investments.
Interest Rate Risk
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 the return on our portfolio investments, although any significant change in market interest rates could potentially have an adverse effect on the business, financial condition and results of operations of the portfolio companies in which we invest.
As of December 31, 2019, all of our debt investments and outstanding borrowings bore fixed rates of interest. The Credit Facility, however, which matured on May 31, 2019, was indexed to the prime rate. During the year ended December 31, 2019, we had no borrowings outstanding under the Credit Facility. We do not expect a significant impact on our net investment income or loss due to changes in the prime rate; however, the table below indicates the impact on our net investment income or loss should the prime rate change. Based on our December 31, 2019 Consolidated Statement of Assets and Liabilities, the following table shows the various, incremental impact of changes in interest rates on our net income or loss related to the Credit Facility for the year ended December 31, 2019, assuming no changes in our investment income and borrowing structure. Although we believe that this measure is indicative of our sensitivity to the below-referenced interest rate changes, it does not reflect potential changes in credit quality, size and composition of the assets on our statement of assets and liabilities and other BDCs that could affect net increase or decrease in net assets resulting from operations, or net income or loss.
Basis Point Change(1) | Interest Income | Interest Expense | Net Income/(Loss) | |||||||||
Up 300 Basis points | $ | — | $ | 360,000 | $ | (360,000 | ) | |||||
Up 200 Basis points | $ | — | $ | 240,000 | $ | (240,000 | ) | |||||
Up 100 Basis points | $ | — | $ | 120,000 | $ | (120,000 | ) | |||||
Down 100 Basis points | $ | — | $ | (120,000 | ) | $ | 120,000 | |||||
Down 200 Basis points | $ | — | $ | (240,000 | ) | $ | 240,000 | |||||
Down 300 Basis points | $ | — | $ | (360,000 | ) | $ | 360,000 | |||||
_______________________
(1) | Assumes we have borrowed $12.0 million under the Credit Facility for the year ended December 31, 2019. Our actual borrowings under the Credit Facility will vary based on our needs throughout the year. For the year ended December 31, 2019, our actual average borrowings under the Credit Facility were $0. The Credit Facility matured on May 31, 2019. |
Although we believe that this measure is indicative of our sensitivity to the above-referenced interest rate changes, it does not reflect potential changes in credit quality, size and composition of the assets on our statement of assets and liabilities and other BDC’s that could affect net increase or decrease in net assets resulting from operations, or net income or loss.
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Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
| Page |
Report of Independent Registered Public Accounting Firm | |
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting | |
Consolidated Statements of Assets and Liabilities as of December 31, 2019 and 2018 | |
Consolidated Statements of Operations for the years ended December 31, 2019, 2018 and 2017 | |
Consolidated Statements of Changes in Net Assets for the years ended December 31, 2019, 2018 and 2017 | |
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017 | |
Consolidated Schedule of Investments as of December 31, 2019 | |
Consolidated Schedule of Investments as of December 31, 2018 | |
Notes to Consolidated Financial Statements | |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Sutter Rock Capital Corp.
Opinion on the Consolidated Financial Statements and Financial Highlights
We have audited the accompanying consolidated statements of assets and liabilities of Sutter Rock Capital Corp. and subsidiaries (the “Company”) including the consolidated schedule of investments as of December 31, 2019, the related consolidated statements of operations, cash flows, and changes in net assets for the year ended December 31, 2019, the financial highlights (presented in Note 8) for the year then ended, and the related notes. In our opinion, the consolidated financial statements and financial highlights present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations, changes in net assets, and cash flows for the year ended December 31, 2019, and the financial highlights for the year then ended in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2019, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013 and our report dated March 13, 2020, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements and financial highlights are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements and financial highlights based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements and financial highlights are free of material misstatement, whether due to error or fraud.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements and financial highlights, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements and financial highlights. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements and financial highlights. Our procedures included confirmation of investments owned as of December 31, 2019, by correspondence with the custodian, loan agents, and borrowers; when replies were not received, we performed other auditing procedures. We believe that our audit provides a reasonable basis for our opinion.
/s/ Marcum LLP
San Francisco, CA
March 13, 2020
We have served as the Company’s auditor since 2019.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Shareholders and Board of Directors of
Sutter Rock Capital Corp.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Sutter Rock Capital Corp. and subsidiaries (the “Company”) as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated statements of assets and liabilities including the consolidated schedule of investments as of December 31, 2019, the related consolidated statements of operations, cash flows, changes in net assets and the financial highlights for the year ended December 31, 2019 of the Company, and our report dated March 13, 2020 expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Report on Internal Control over Financial Reporting”. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that degree of compliance with the policies or procedures may deteriorate.
/s/ Marcum LLP
San Francisco, CA
March 13, 2020
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Sutter Rock Capital Corp.
Opinion on the Consolidated Financial Statements and Financial Highlights
We have audited the accompanying consolidated statements of assets and liabilities of Sutter Rock Capital Corp. and subsidiaries (the "Company"), including the consolidated schedule of investments, as of December 31, 2018, the related consolidated statements of operations, cash flows, and changes in net assets for each of the two years in the period ended December 31, 2018, the financial highlights (presented in Note 8) for each of the four years in the period then ended, and the related notes. In our opinion, the consolidated financial statements and financial highlights present fairly, in all material respects, the financial position of the Company as of December 31, 2018, and the results of its operations, changes in net assets, and cash flows for each of the two years in the period ended December 31, 2018, and the financial highlights for each of the four years in the period then ended in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements and financial highlights are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements and financial highlights based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements and financial highlights are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements and financial highlights, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements and financial highlights. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statement and financial highlights. Our procedures included confirmation of investments owned as of December 31, 2018, by correspondence with the custodian, loan agents, and borrowers; when replies were not received, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
San Francisco, California
April 17, 2019
We began serving as the Company's auditor in 2015. In 2019 we became the predecessor auditor.
75
SUTTER ROCK CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
| December 31, 2019 | December 31, 2018 | |||||
ASSETS | | | |||||
Investments at fair value: | | | |||||
Non-controlled/non-affiliate investments (cost of $90,567,041 and $105,869,607, respectively) | $ | 152,866,112 | $ | 170,067,233 | |||
Non-controlled/affiliate investments (cost of $52,857,243 and $42,333,854, respectively) | 37,944,268 | 5,931,863 | |||||
Controlled investments (cost of $7,161,412 and $22,960,942, respectively) | 775,198 | 22,816,733 | |||||
Total Portfolio Investments | 191,585,578 | 198,815,829 | |||||
Investments in U.S. Treasury bills (cost of $49,996,667 and $99,982,067, respectively) | 50,000,000 | 99,994,000 | |||||
Total Investments (cost of $200,582,363 and $271,146,470, respectively) | 241,585,578 | 298,809,829 | |||||
Cash | 44,861,263 | 28,184,163 | |||||
Escrow proceeds receivable | 265,303 | 2,494,582 | |||||
Interest and dividends receivable | 84,630 | 255,670 | |||||
Deferred financing costs | 11,382 | 267,541 | |||||
Prepaid expenses and other assets(3) | 1,755,933 | 207,769 | |||||
Total Assets | 288,564,089 | 330,219,554 | |||||
LIABILITIES | | | |||||
Accounts payable and accrued expenses(3) | 1,143,923 | 490,687 | |||||
Accrued incentive fees, net of waiver of incentive fees(1) | — | 4,660,472 | |||||
Accrued management fees, net of waiver of management fees(1) | — | 415,056 | |||||
Payable to executive officers | 1,369,873 | — | |||||
Accrued interest payable | 475,000 | 475,000 | |||||
Dividends payable | 2,107,709 | — | |||||
Payable for securities purchased | 44,746,660 | 89,480,103 | |||||
Deferred tax liability | — | 885,566 | |||||
4.75% Convertible Senior Notes due March 28, 2023(2) | 38,803,635 | 38,434,511 | |||||
Total Liabilities | 88,646,800 | 134,841,395 | |||||
Commitments and contingencies (Notes 7 and 10) | | | |||||
Net Assets | $ | 199,917,289 | $ | 195,378,159 | |||
NET ASSETS | | | |||||
Common stock, par value $0.01 per share (100,000,000 authorized; 17,564,244 and 19,762,647 issued and outstanding, respectively) | $ | 175,642 | $ | 197,626 | |||
Paid-in capital in excess of par | 178,550,374 | 192,322,399 | |||||
Accumulated net investment loss | (25,679,362 | ) | (16,228,294 | ) | |||
Accumulated net realized gain/(loss) on investments | 5,867,417 | (7,691,365 | ) | ||||
Accumulated net unrealized appreciation/(depreciation) of investments | 41,003,218 | 26,777,793 | |||||
Net Assets | $ | 199,917,289 | $ | 195,378,159 | |||
Net Asset Value Per Share | $ | 11.38 | $ | 9.89 | |||
See accompanying notes to consolidated financial statements.
__________________________________________________
(1) | This balance references a related-party transaction. Refer to “Note 3—Related-Party Arrangements” for more detail. |
(2) | As of December 31, 2019 and December 31, 2018, the 4.75% Convertible Senior Notes due March 28, 2023 had a face value of $40,000,000. Refer to “Note 10—Debt Capital Activities” for a reconciliation of the carrying value to the face value. |
(3) | This balance includes a right of use asset and corresponding operating lease liability, respectively. Refer to "Note 7—Commitments and Contingencies—Operating Leases and Related Deposits" for more detail. |
76
| Year Ended December 31, | ||||||||||
2019 | 2018 | 2017 | |||||||||
INVESTMENT INCOME | |||||||||||
Non-controlled/non-affiliate investments: | |||||||||||
Interest income | $ | 828,392 | $ | 351,188 | $ | (4,627 | ) | ||||
Dividend income | 100,000 | — | 73,096 | ||||||||
Non-controlled/affiliate investments: | | | |||||||||
Interest income | 108,395 | 581,813 | 59,460 | ||||||||
Controlled investments: | | | |||||||||
Interest income | 58,937 | 59,835 | 249,839 | ||||||||
Dividend income | 400,000 | 625,000 | 475,000 | ||||||||
Total Investment Income | 1,495,724 | 1,617,836 | 852,768 | ||||||||
OPERATING EXPENSES | | | |||||||||
Management fees(1) | 848,723 | 5,199,900 | 5,666,176 | ||||||||
Incentive fees/(Reversal of incentive fee accrual)(1) | (4,660,472 | ) | 382,387 | 7,151,641 | |||||||
Costs incurred under Administration Agreement(1) | 306,084 | 1,702,047 | 1,874,839 | ||||||||
Compensation expense(2) | 4,286,972 | — | — | ||||||||
Directors’ fees | 383,370 | 345,000 | 328,480 | ||||||||
Professional fees | 5,290,329 | 1,587,578 | 2,068,668 | ||||||||
Interest expense | 2,372,570 | 4,545,471 | 4,696,819 | ||||||||
Income tax expense | 33,825 | 482,994 | 52,901 | ||||||||
Other expenses | 2,085,391 | 899,457 | 600,331 | ||||||||
Total Operating Expenses | 10,946,792 | 15,144,834 | 22,439,855 | ||||||||
Management fee waiver(1) | — | (892,421 | ) | (708,272 | ) | ||||||
Incentive fee waiver(1) | — | (5,000,000 | ) | — | |||||||
Total operating expenses, net of waiver of management and incentive fees | 10,946,792 | 9,252,413 | 21,731,583 | ||||||||
Net Investment Loss | (9,451,068 | ) | (7,634,577 | ) | (20,878,815 | ) | |||||
Realized Gains/(Losses) on Investments: | | | | ||||||||
Non-controlled/non-affiliated investments | 32,625,663 | (7,432,939 | ) | 3,989,476 | |||||||
Non-controlled/affiliate investments | (13,446,323 | ) | — | — | |||||||
Controlled investments | — | (680 | ) | (3,075,494 | ) | ||||||
Net Realized Gain/(Loss) on Investments | 19,179,340 | (7,433,619 | ) | 913,982 | |||||||
Realized loss on partial repurchase of 5.25% Convertible Senior Notes due 2018 | — | (397,846 | ) | — | |||||||
Change in Unrealized Appreciation/(Depreciation) of Investments: | | ||||||||||
Non-controlled/non-affiliated investments | (1,907,148 | ) | 21,819,883 | 45,958,490 | |||||||
Non-controlled/affiliate investments | 21,489,014 | (10,988,777 | ) | (16,084,516 | ) | ||||||
Controlled investments | (6,242,007 | ) | (1,190,056 | ) | 4,901,722 | ||||||
Net Change in Unrealized Appreciation/(Depreciation) of Investments | 13,339,859 | 9,641,050 | 34,775,696 | ||||||||
Benefit from taxes on unrealized depreciation of investments | 885,566 | 6,716,735 | 2,757,070 | ||||||||
Net Change in Net Assets Resulting from Operations | $ | 23,953,697 | $ | 891,743 | $ | 17,567,933 | |||||
Net Change in Net Assets Resulting from Operations per Common Share: | | ||||||||||
Basic | $ | 1.24 | $ | 0.04 | $ | 0.80 | |||||
Diluted(3) | $ | 1.14 | $ | 0.04 | $ | 0.80 | |||||
Weighted-Average Common Shares Outstanding | | | | ||||||||
Basic | 19,328,414 | 20,617,890 | 21,924,490 | ||||||||
Diluted(3) | 23,069,622 | 20,617,890 | 21,924,490 | ||||||||
____________________________________________________________________________________________________________________________
(1) | This balance references a related-party transaction. Refer to “Note 3—Related-Party Arrangements” for more detail. |
(2) | This balance includes stock-based compensation to executive officers and employees. Refer to "Note 11— Stock-Based Compensation" for more detail. |
(3) | For the years ended December 31, 2019, 2018, and 2017, 0, 6,079,068, and 5,751,815 potentially dilutive common shares, respectively, were excluded from the weighted-average common shares outstanding for diluted net increase in net assets resulting from operations per common share because the effect of these shares would have been anti-dilutive. Refer to “Note 6—Net Change in Net Assets Resulting from Operations per Common Share—Basic and Diluted” |
77
SUTTER ROCK CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
| Year Ended December 31, | ||||||||||
2019 | 2018 | 2017 | |||||||||
Change in Net Assets Resulting from Operations | | | |||||||||
Net investment loss | $ | (9,451,068 | ) | $ | (7,634,577 | ) | $ | (20,878,815 | ) | ||
Net realized gains/(losses) on investments | 19,179,340 | (7,433,619 | ) | 913,982 | |||||||
Realized loss on partial repurchase of 5.25% Convertible Senior Notes due 2018 | — | (397,846 | ) | — | |||||||
Net change in unrealized appreciation/(depreciation) of investments | 13,339,859 | 9,641,050 | 34,775,696 | ||||||||
Benefit from taxes on unrealized depreciation of investments | 885,566 | 6,716,735 | 2,757,070 | ||||||||
Net Change in Net Assets Resulting from Operations | 23,953,697 | 891,743 | 17,567,933 | ||||||||
Distributions | |||||||||||
Dividends declared | (5,620,558 | ) | — | — | |||||||
Total Distributions | (5,620,558 | ) | — | — | |||||||
Change in Net Assets Resulting from Capital Transactions | |||||||||||
Stock-based compensation | 998,355 | — | — | ||||||||
Repurchases of common stock | (14,792,364 | ) | (10,276,450 | ) | (4,933,877 | ) | |||||
Net Decrease in Net Assets Resulting from Capital Transactions | (13,794,009 | ) | (10,276,450 | ) | (4,933,877 | ) | |||||
Total Change in Net Assets | 4,539,130 | (9,384,707 | ) | 12,634,056 | |||||||
Net Assets at Beginning of Year | 195,378,159 | 204,762,866 | 192,128,810 | ||||||||
Net Assets at End of Year | $ | 199,917,289 | $ | 195,378,159 | $ | 204,762,866 | |||||
Capital Share Activity | | | |||||||||
Shares outstanding at beginning of year | 19,762,647 | 21,246,345 | 22,181,003 | ||||||||
Shares issued | — | — | — | ||||||||
Shares repurchased | (2,198,403 | ) | (1,483,698 | ) | (934,658 | ) | |||||
Shares Outstanding at End of Year | 17,564,244 | 19,762,647 | 21,246,345 | ||||||||
See accompanying notes to consolidated financial statements.
78
| Year Ended December 31, | ||||||||||
2019 | 2018 | 2017 | |||||||||
Cash Flows from Operating Activities | | | |||||||||
Net change in net assets resulting from operations | $ | 23,953,697 | $ | 891,743 | $ | 17,567,933 | |||||
Adjustments to reconcile net change in net assets resulting from operations to net cash provided by operating activities: | | | | ||||||||
Net realized (gain)/loss on investments | (19,179,340 | ) | 7,433,619 | (913,982 | ) | ||||||
Net change in unrealized (appreciation)/depreciation of investments | (13,339,859 | ) | (9,641,050 | ) | (34,775,696 | ) | |||||
Change in deferred tax liability | (885,566 | ) | (6,716,735 | ) | (2,757,070 | ) | |||||
Amortization of discount on 5.25% Convertible Senior Notes due 2018 | — | 492,170 | 869,751 | ||||||||
Amortization of discount on 4.75% Convertible Senior Notes due 2023 | 369,124 | 281,130 | — | ||||||||
Amortization of deferred financing costs | — | 51,636 | 48,678 | ||||||||
Amortization of fixed income security premiums and discounts | (5,066 | ) | (30,660 | ) | (139,544 | ) | |||||
Write-off of deferred offering costs | 267,541 | 325,248 | — | ||||||||
Stock-based compensation | 998,355 | — | — | ||||||||
Paid-in-kind interest | (383,980 | ) | (386,546 | ) | (152,270 | ) | |||||
Adjustments to escrow proceeds receivable | 29,178 | 1,034,704 | 603,456 | ||||||||
Purchases of investments in: | | | | ||||||||
Portfolio investments | (25,569,685 | ) | (10,669,035 | ) | (191,274 | ) | |||||
U.S. Treasury bills | (299,930,250 | ) | (399,893,952 | ) | (360,031,336 | ) | |||||
Proceeds from sales or maturity of investments in: | | | | ||||||||
Portfolio investments | 65,603,252 | 33,925,585 | 77,031,789 | ||||||||
U.S. Treasury bills | 350,000,000 | 400,000,000 | 290,000,000 | ||||||||
Change in operating assets and liabilities: | | | | ||||||||
Due from controlled investments | — | 840 | (840 | ) | |||||||
Prepaid expenses and other assets | (1,548,164 | ) | 1,214 | 4,959 | |||||||
Interest and dividends receivable | 171,040 | (220,529 | ) | 57,805 | |||||||
Deferred financing costs | (11,382 | ) | — | — | |||||||
Escrow proceeds receivable | 2,229,279 | (1,891,126 | ) | (603,456 | ) | ||||||
Due to GSV Asset Management(1) | — | (231,697 | ) | (190,328 | ) | ||||||
Payable for securities purchased | (44,733,443 | ) | (5,722 | ) | 62,987,075 | ||||||
Accounts payable and accrued expenses | 653,236 | 32,484 | 122,592 | ||||||||
Payable to executive officers | 1,369,873 | — | — | ||||||||
Accrued incentive fees(1) | (4,660,472 | ) | (4,617,613 | ) | 7,151,641 | ||||||
Accrued management fees(1) | (415,056 | ) | (9,391 | ) | (99,607 | ) | |||||
Accrued interest payable | — | (581,563 | ) | — | |||||||
Net Cash Provided by Operating Activities | 34,982,312 | 9,574,753 | 56,590,276 | ||||||||
Cash Flows from Financing Activities | | | | ||||||||
Proceeds from the issuance of 4.75% Convertible Senior Notes due 2023 | — | 40,000,000 | — | ||||||||
Deferred debt issuance costs | — | (1,846,620 | ) | — | |||||||
Repurchases of common stock | (14,792,364 | ) | (10,276,450 | ) | (4,933,877 | ) | |||||
Repayment of 5.25% Convertible Senior Notes due 2018 | — | (69,272,565 | ) | — | |||||||
Dividends paid | (3,512,849 | ) | — | — | |||||||
Realized loss on repurchase of 5.25% Convertible Senior Notes due 2018 | — | 397,846 | — | ||||||||
Borrowings under credit facility | — | — | 16,000,000 | ||||||||
Repayments under credit facility | — | — | (16,000,000 | ) | |||||||
Deferred credit facility costs | — | — | (100,313 | ) | |||||||
Deferred offering costs | — | (231,401 | ) | (50,120 | ) | ||||||
Net Cash Used in Financing Activities | $ | (18,305,213 | ) | $ | (41,229,190 | ) | $ | (5,084,310 | ) | ||
Year Ended December 31, | |||||||||||
2019 | 2018 | 2017 | |||||||||
Total Increase/(Decrease) in Cash Balance | $ | 16,677,099 | $ | (31,654,437 | ) | $ | 51,505,966 | ||||
Cash Balance at Beginning of Year | 28,184,163 | 59,838,600 | 8,332,634 | ||||||||
Cash Balance at End of Year | $ | 44,861,262 | $ | 28,184,163 | $ | 59,838,600 | |||||
Supplemental Information: | | | |||||||||
Interest paid | $ | 2,018,336 | $ | 4,127,163 | $ | 3,684,410 | |||||
Taxes paid | $ | 33,825 | $ | 496,912 | $ | 54,014 | |||||
See accompanying notes to consolidated financial statements.
_______________________
(1) | This balance references a related-party transaction. Refer to “Note 3—Related-Party Arrangements” for more detail. |
79
SUTTER ROCK CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2019
Portfolio Investments* | Headquarters/ Industry | Date of Initial Investment | Shares/ Principal | Cost | Fair Value | % of Net Assets | |||||||||||||
NON-CONTROLLED/NON-AFFILIATE | |||||||||||||||||||
Coursera, Inc. | Mountain View, CA | ||||||||||||||||||
Preferred shares, Series B 8% | Online Education | 6/9/2013 | 2,961,399 | $ | 14,519,519 | $ | 33,569,902 | 16.79 | % | ||||||||||
Palantir Technologies, Inc. | Palo Alto, CA | ||||||||||||||||||
Common shares, Class A | Data Analysis | 5/7/2012 | 5,773,690 | 16,189,935 | 31,582,084 | 15.80 | % | ||||||||||||
Course Hero, Inc. | Redwood City, CA | ||||||||||||||||||
Preferred shares, Series A 8% | Online Education | 9/18/2014 | 2,145,509 | 5,000,001 | 25,674,019 | 12.84 | % | ||||||||||||
Parchment, Inc. | Scottsdale, AZ | ||||||||||||||||||
Preferred shares, Series D 8% | E-Transcript Exchange | 10/1/2012 | 3,200,512 | 4,000,982 | 10,896,585 | 5.45 | % | ||||||||||||
Nextdoor.com, Inc. | San Francisco, CA | ||||||||||||||||||
Common shares | Social Networking | 9/27/2018 | 580,360 | 10,006,578 | 10,867,365 | 5.43 | % | ||||||||||||
Neutron Holdings, Inc. (d/b/a/ Lime) | San Francisco, CA | ||||||||||||||||||
Preferred shares, Series D 6% | Micromobility | 1/25/2019 | 41,237,113 | 10,006,800 | 10,000,000 | 5.00 | % | ||||||||||||
Treehouse Real Estate Investment Trust, Inc. | Chicago, IL | ||||||||||||||||||
Common shares***(11) | Cannabis REIT | 9/11/2019 | 312,500 | 7,500,000 | 7,384,738 | 3.69 | % | ||||||||||||
Enjoy Technology, Inc. | Menlo Park, CA | ||||||||||||||||||
Preferred shares, Series B 6% | On-Demand Commerce | 7/29/2015 | 1,681,520 | 4,000,280 | 4,758,702 | 2.38 | % | ||||||||||||
Preferred shares, Series A 6% | 10/16/2014 | 879,198 | 1,002,440 | 2,488,130 | 1.24 | % | |||||||||||||
Total | 5,002,720 | 7,246,832 | 3.62 | % | |||||||||||||||
SharesPost, Inc. | San Francisco, CA | ||||||||||||||||||
Preferred shares, Series B 6% | Online Marketplace Finance | 7/19/2011 | 1,771,653 | 2,259,716 | 6,186,877 | 3.09 | % | ||||||||||||
Common shares | 7/20/2011 | 770,934 | 123,987 | 890,340 | 0.45 | % | |||||||||||||
Total | 2,383,703 | 7,077,217 | 3.54 | % | |||||||||||||||
Aspiration Partners, Inc. | Marina Del Rey, CA | ||||||||||||||||||
Preferred shares, Series A | Financial Services | 8/11/2015 | 540,270 | 1,001,815 | 4,471,678 | 2.24 | % | ||||||||||||
Convertible Promissory Note 5%, Due 1/31/2021*** | 8/12/2019 | $ | 280,000 | 281,190 | 321,168 | 0.16 | % | ||||||||||||
Total | 1,283,005 | 4,792,846 | 2.40 | % | |||||||||||||||
Clever, Inc. | San Francisco, CA | ||||||||||||||||||
Preferred shares, Series B 8% | Education Software | 12/5/2014 | 1,799,047 | 2,000,601 | 2,000,001 | 1.00 | % | ||||||||||||
A Place for Rover Inc. (f/k/a DogVacay, Inc.) | Seattle, WA | ||||||||||||||||||
Common shares | Peer-to-Peer Pet Services | 11/3/2014 | 707,991 | 2,506,119 | 963,533 | 0.48 | % | ||||||||||||
Tynker (f/k/a Neuron Fuel, Inc.) | Mountain View, CA | ||||||||||||||||||
Preferred shares, Series A 8% | Computer Software | 8/8/2012 | 534,162 | 309,310 | 789,491 | 0.39 | % | ||||||||||||
4C Insights (f/k/a The Echo Systems Corp.) | Chicago, IL | ||||||||||||||||||
Common shares | Social Data Platform | 3/30/2012 | 436,219 | 1,436,404 | 21,499 | 0.01 | % | ||||||||||||
Fullbridge, Inc. | Cambridge, MA | ||||||||||||||||||
Common shares | Business Education | 5/13/2012 | 517,917 | 6,150,506 | — | — | % | ||||||||||||
Promissory Note 1.47%, Due 11/9/2021(4) | 3/3/2016 | $ | 2,270,458 | 2,270,858 | — | — | % | ||||||||||||
Total | 8,421,364 | — | — | % | |||||||||||||||
Total Non-controlled/Non-affiliate | $ | 90,567,041 | $ | 152,866,112 | 76.46 | % | |||||||||||||
See accompanying notes to consolidated financial statements.
80
SUTTER ROCK CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS - continued
December 31, 2019
Portfolio Investments* | Headquarters/ Industry | Date of Initial Investment | Shares/ Principal | Cost | Fair Value | % of Net Assets | |||||||||||||
NON-CONTROLLED/AFFILIATE(1) | |||||||||||||||||||
Ozy Media, Inc. | Mountain View, CA | ||||||||||||||||||
Preferred shares, Series C-2 6%(7) | Digital Media Platform | 9/11/2019 | 683,482 | $ | 2,414,178 | $ | 2,970,252 | 1.49 | % | ||||||||||
Common Warrants, Strike Price $0.01, Expiration Date 4/9/2028 | 4/9/2018 | 295,565 | 30,647 | 1,182,260 | 0.59 | % | |||||||||||||
Preferred shares, Series B 6% | 10/3/2014 | 922,509 | 4,999,999 | 5,001,420 | 2.50 | % | |||||||||||||
Preferred shares, Series A 6% | 12/11/2013 | 1,090,909 | 3,000,200 | 4,528,107 | 2.27 | % | |||||||||||||
Preferred shares, Series Seed 6% | 11/2/2012 | 500,000 | 500,000 | 2,002,143 | 1.00 | % | |||||||||||||
Total | 10,945,024 | 15,684,182 | 7.85 | % | |||||||||||||||
StormWind, LLC(5) | Scottsdale, AZ | ||||||||||||||||||
Preferred shares, Series D 8%(10) | Interactive Learning | 11/26/2019 | 329,337 | 257,267 | 503,120 | 0.25 | % | ||||||||||||
Preferred shares, Series C 8% | 1/7/2014 | 2,779,134 | 4,000,787 | 5,391,000 | 2.70 | % | |||||||||||||
Preferred shares, Series B 8% | 12/16/2011 | 3,279,629 | 2,019,687 | 3,248,804 | 1.62 | % | |||||||||||||
Preferred shares, Series A 8% | 2/25/2014 | 366,666 | 110,000 | 157,949 | 0.08 | % | |||||||||||||
Total | 6,387,741 | 9,300,873 | 4.65 | % | |||||||||||||||
GreenAcreage Real Estate Corp. | New York, NY | ||||||||||||||||||
Common shares | Cannabis REIT | 8/12/2019 | 375,000 | 7,501,530 | 7,500,000 | 3.75 | % | ||||||||||||
NestGSV, Inc. (d/b/a GSV Labs, Inc.) | San Mateo, CA | ||||||||||||||||||
Derivative Security, Expiration Date 8/23/2024(9) | Global Innovation Platform | 8/23/2019 | 1 | 8,555,124 | 3,880,621 | 1.94 | % | ||||||||||||
Convertible Promissory Note 8% Due 8/23/2024***(9) | 2/17/2016 | $ | 1,010,198 | 1,030,176 | 1,010,198 | 0.51 | % | ||||||||||||
Preferred Warrants Series A-3, Strike Price $1.33, Expiration Date 4/4/2021 | 4/4/2014 | 187,500 | — | 20,625 | 0.01 | % | |||||||||||||
Preferred Warrants Series A-4, Strike Price $1.33, Expiration Date 10/6/2021 | 10/6/2014 | 500,000 | — | 135,000 | 0.07 | % | |||||||||||||
Preferred Warrants Series A-4, Strike Price $1.33, Expiration Date 7/18/2021 | 7/8/2016 | 250,000 | 74,380 | 62,500 | 0.03 | % | |||||||||||||
Preferred Warrants Series B, Strike Price $2.31, Expiration Date 11/29/2021 | 11/29/2016 | 100,000 | 29,275 | — | — | % | |||||||||||||
Preferred Warrant Series B, Strike Price $2.31, Expiration Date 5/29/2022 | 5/29/2017 | 125,000 | 70,379 | — | — | % | |||||||||||||
Preferred Warrant Series B, Strike Price $2.31, Expiration Date 12/31/2023 | 12/31/2018 | 250,000 | 5,080 | 2,500 | 0.00 | % | |||||||||||||
Total | 9,764,414 | 5,111,444 | 2.56 | % | |||||||||||||||
CUX, Inc. (d/b/a CorpU) | Philadelphia, PA | ||||||||||||||||||
Senior Subordinated Convertible Promissory Note 4% Due 2/14/2023(4)(6) | Corporate Education | 11/26/2014 | $ | 1,251,158 | 1,256,191 | 312,789 | 0.15 | % | |||||||||||
Convertible preferred shares, Series D 6% | 5/31/2013 | 169,033 | 778,607 | 34,980 | 0.02 | % | |||||||||||||
Convertible preferred shares, Series C 8% | 3/29/2012 | 615,763 | 2,006,077 | — | — | % | |||||||||||||
Preferred Warrants Series D, Strike Price $4.59, Expiration Date 2/14/2020 | 5/31/2013 | 16,903 | — | — | — | % | |||||||||||||
Total | 4,040,875 | 347,769 | 0.17 | % | |||||||||||||||
Maven Research, Inc. | San Francisco, CA | ||||||||||||||||||
Preferred shares, Series C 8% | Knowledge Networks | 7/2/2012 | 318,979 | 2,000,447 | — | — | % | ||||||||||||
Preferred shares, Series B 5% | 2/28/2012 | 49,505 | 217,206 | — | — | % | |||||||||||||
Total | 2,217,653 | — | — | % | |||||||||||||||
Curious.com, Inc. | Menlo Park, CA | ||||||||||||||||||
Common shares | Online Education | 11/22/2013 | 1,135,944 | 12,000,006 | — | — | % | ||||||||||||
Total Non-controlled/Affiliate | $ | 52,857,243 | $ | 37,944,268 | 18.98 | % | |||||||||||||
See accompanying notes to consolidated financial statements.
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SUTTER ROCK CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS - continued
December 31, 2019
Portfolio Investments* | Headquarters/ Industry | Date of Initial Investment | Shares/ Principal | Cost | Fair Value | % of Net Assets | |||||||||||||
CONTROLLED(2) | |||||||||||||||||||
SPBRX, INC. (f/k/a GSV Sustainability Partners, Inc.) | Cupertino, CA | ||||||||||||||||||
Preferred shares, Class A***(8) | Clean Technology | 4/15/2014 | 14,300,000 | $ | 7,151,412 | $ | 775,198 | 0.39 | % | ||||||||||
Common shares | 4/15/2014 | 100,000 | 10,000 | — | — | % | |||||||||||||
Total | 7,161,412 | 775,198 | 0.39 | % | |||||||||||||||
Total Controlled | $ | 7,161,412 | $ | 775,198 | 0.39 | % | |||||||||||||
Total Portfolio Investments | $ | 150,585,696 | $ | 191,585,578 | 95.83 | % | |||||||||||||
U.S. Treasury | |||||||||||||||||||
U.S. Treasury bill, 0%, due 1/2/2020***(3) | 12/30/2019 | $ | 50,000,000 | 49,996,667 | 50,000,000 | 25.01 | % | ||||||||||||
TOTAL INVESTMENTS | $ | 200,582,363 | $ | 241,585,578 | 120.84 | % | |||||||||||||
See accompanying notes to consolidated financial statements.
__________________________________________
* | All portfolio investments are non-control/non-affiliated and non-income-producing, unless otherwise identified. Equity investments are subject to lock-up restrictions upon their initial public offering (“IPO”). Preferred dividends are generally only payable when declared and paid by the portfolio company's board of directors. The Company’s directors, officers, employees and staff, as applicable, may serve on the board of directors of the Company’s portfolio investments. (Refer to “Note 3—Related-Party Arrangements”). All portfolio investments are considered Level 3 and valued using significant unobservable inputs, unless otherwise noted. (Refer to “Note 4—Investments at Fair Value”). All of the Company's portfolio investments are restricted as to resale, unless otherwise noted, and were valued at fair value as determined in good faith by the Company’s Board of Directors. (Refer to "Note 2—Significant Accounting Policies—Investments at Fair Value"). |
** | Indicates assets that Sutter Rock Capital Corp. believes do not represent “qualifying assets” under Section 55(a) of the Investment Company Act of 1940, as amended (the “1940 Act”). Of the Company’s total investments as of December 31, 2019, 0.00% of its total investments are non-qualifying assets. |
*** | Investment is income-producing. |
(1) | “Affiliate Investments” are investments in those companies that are “Affiliated Companies” of Sutter Rock Capital Corp., as defined in the 1940 Act. In general, a company is deemed to be an “Affiliate” of Sutter Rock Capital Corp. if Sutter Rock Capital Corp. owns 5% or more of the voting securities (i.e., securities with the right to elect directors) of such company. For the Schedule of Investments In, and Advances To, Affiliates, as required by SEC Regulation S-X, Rule 12-14, refer to “Note 4—Investments at Fair Value”. |
(2) | “Control Investments” are investments in those companies that are “Controlled Companies” of Sutter Rock Capital Corp., as defined in the 1940 Act. In general, under the 1940 Act, the Company would “Control” a portfolio company if the Company owned more than 25% of its outstanding voting securities (i.e., securities with the right to elect directors) and/or had the power to exercise control over the management or policies of such portfolio company. For the Schedule of Investments In, and Advances To, Affiliates, as required by SEC Regulation S-X, Rule 12-14, refer to “Note 4—Investments at Fair Value”. |
(3) | Denotes an investment considered Level 1 or Level 2 and valued using observable inputs. As of December 31, 2019, no investments held by Sutter Rock Capital Corp. were considered Level 1 or Level 2. Refer to “Note 4—Investments at Fair Value”. |
(4) | As of December 31, 2019, the investments noted had been placed on non-accrual status. |
(5) | Sutter Rock Capital Corp.’s investments in StormWind, LLC are held through Sutter Rock Capital Corp.'s wholly owned subsidiary, GSVC SW Holdings, Inc. |
(6) | On October 24, 2019, CUX, Inc. (d/b/a CorpU) completed a recapitalization, which amended Sutter Rock Capital Corp.'s investment in the Senior Subordinated Convertible Promissory Note. As a result of the recapitalization, the principal amount of Sutter Rock Capital Corp.'s Senior Subordinated Convertible Promissory Note was reduced by $109,331, the interest rate was reduced to 4%, and the maturity was extended to February 14, 2023. |
(7) | On September 11, 2019, Sutter Rock Capital Corp. agreed to convert its 5% Convertible Promissory Note due 12/31/2018 to Ozy Media, Inc. and all related accrued interest, into 683,482 shares of Ozy Media, Inc.'s Series C-2 preferred shares. |
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SUTTER ROCK CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS - continued
December 31, 2019
(8) | During the year ended December 31, 2019, SPBRX, INC. (f/k/a GSV Sustainability Partners, Inc.) declared, and Sutter Rock Capital Corp. received, an aggregate of $400,000 in dividend distributions. |
(9) | On August 23, 2019, Sutter Rock Capital Corp. amended the structure of its investment in NestGSV, Inc. (d/b/a GSV Labs, Inc.). As part of the agreement, Sutter Rock Capital Corp’s equity holdings (warrants notwithstanding) were restructured into a derivative security. NestGSV, Inc. (d/b/a GSV Labs,Inc.) has the right to call the position at any time over a five year period, while Sutter Rock Capital Corp. can put the shares to NestGSV, Inc. (d/b/a GSV Labs, Inc.) at the end of the five year period. As part of the agreement, previously accrued interest under Sutter Rock Capital Corp’s 12% Convertible Promissory Note due 12/31/2019 will be capitalized into the principal of the extended Convertible Promissory Note, and the interest on the Convertible Promissory Note is reduced from 12% to 8%. The Convertible Promissory Note’s maturity was extended to August 23, 2024. Under the amended structure, Sutter Rock Capital Corp.’s fully diluted ownership of voting securities in the company decreased from 50.0% to 8.5%. As such, Sutter Rock Capital Corp.'s investments in NestGSV, Inc. (d/b/a GSV Labs, Inc.) have been recategorized from controlled investments to non-controlled/affiliated investments. |
(10) | On November 26, 2019, Sutter Rock Capital Corp. invested $250,000 in StormWind, LLC's Series D financing round. As part of the round, Sutter Rock Capital Corp.'s fully diluted ownership of voting securities decreased from 25.6% to 23.4%. As such, Sutter Rock Capital Corp.'s investments in StormWind, LLC have been recategorized from controlled investments to non-controlled/affiliated investments. |
(11) | During year ended December 31, 2019, Treehouse Real Estate Investment Trust Inc. declared, and Sutter Rock Capital Corp. received an aggregate of $100,000 in dividend distributions. |
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SUTTER ROCK CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2018
Portfolio Investments* | Headquarters/ Industry | Date of Initial Investment | Shares/ Principal | Cost | Fair Value | % of Net Assets | |||||||||||||
NON-CONTROLLED/NON-AFFILIATE | |||||||||||||||||||
Palantir Technologies, Inc. | Palo Alto, CA | ||||||||||||||||||
Common shares, Class A | Data Analysis | 5/7/2012 | 5,773,690 | $ | 16,189,935 | $ | 34,053,394 | 17.43 | % | ||||||||||
Spotify Technology S.A.** | Stockholm, Sweden | ||||||||||||||||||
Common shares(3)(7) | On-Demand Music Streaming | 8/6/2012 | 235,360 | 10,002,084 | 26,713,360 | 13.67 | % | ||||||||||||
Coursera, Inc. | Mountain View, CA | ||||||||||||||||||
Preferred shares, Series B | Online Education | 6/9/2013 | 2,961,399 | 14,519,519 | 23,111,889 | 11.83 | % | ||||||||||||
Dropbox, Inc.** | San Francisco, CA | ||||||||||||||||||
Common shares(3)(8) | Cloud Computing Services | 11/15/2011 | 874,990 | 13,656,926 | 17,876,046 | 9.15 | % | ||||||||||||
Lyft, Inc. | San Francisco, CA | ||||||||||||||||||
Preferred shares, Series E | On-Demand Transportation | 3/11/2015 | 128,563 | 2,503,585 | 6,583,483 | 3.37 | % | ||||||||||||
Preferred shares, Series D | 3/21/2014 | 176,266 | 1,792,749 | 9,026,269 | 4.62 | % | |||||||||||||
Total | 4,296,334 | 15,609,752 | 7.99 | % | |||||||||||||||
Course Hero, Inc. | Redwood City, CA | ||||||||||||||||||
Preferred shares, Series A | Online Education | 9/18/2014 | 2,145,509 | 5,000,001 | 14,106,625 | 7.22 | % | ||||||||||||
Nextdoor.com, Inc. | San Francisco, CA | ||||||||||||||||||
Common shares | Social Networking | 9/27/2018 | 580,360 | 10,006,578 | 10,097,442 | 5.17 | % | ||||||||||||
SharesPost, Inc. | San Francisco, CA | ||||||||||||||||||
Preferred shares, Series B | Online Marketplace Finance | 7/19/2011 | 1,771,653 | 2,259,716 | 5,943,577 | 3.04 | % | ||||||||||||
Common shares(13) | 7/20/2011 | 770,934 | 123,987 | 855,327 | 0.44 | % | |||||||||||||
Total | 2,383,703 | 6,798,904 | 3.48 | % | |||||||||||||||
Parchment, Inc. | Scottsdale, AZ | ||||||||||||||||||
Preferred shares, Series D 8% | E-Transcript Exchange | 10/1/2012 | 3,200,512 | 4,000,982 | 6,151,161 | 3.15 | % | ||||||||||||
Enjoy Technology, Inc. | Menlo Park, CA | ||||||||||||||||||
Preferred shares, Series B | On-Demand Commerce | 7/29/2015 | 1,681,520 | 4,000,280 | 4,000,000 | 2.05 | % | ||||||||||||
Preferred shares, Series A | 10/16/2014 | 879,198 | 1,002,440 | 2,091,436 | 1.07 | % | |||||||||||||
Total | 5,002,720 | 6,091,436 | 3.12 | % | |||||||||||||||
A Place for Rover Inc. (f/k/a DogVacay, Inc.) | Seattle, WA | ||||||||||||||||||
Common shares | Peer-to-Peer Pet Services | 11/3/2014 | 707,991 | 2,506,119 | 3,511,661 | 1.80 | % | ||||||||||||
Knewton, Inc. | New York, NY | ||||||||||||||||||
Preferred shares, Series E | Online Education | 12/16/2013 | 375,985 | 4,999,999 | 2,021,690 | 1.03 | % | ||||||||||||
Convertible Promissory Note 8% Due 12/31/2019(12) | 7/23/2018 | $ | 134,405 | 135,213 | 134,405 | 0.07 | % | ||||||||||||
Total | 5,135,212 | 2,156,095 | 1.10 | % | |||||||||||||||
Clever, Inc. | San Francisco, CA | ||||||||||||||||||
Preferred shares, Series B | Education Software | 12/5/2014 | 1,799,047 | 2,000,601 | 2,000,001 | 1.02 | % | ||||||||||||
Aspiration Partners, Inc. | Marina Del Rey, CA | ||||||||||||||||||
Preferred shares, Series A | Financial Services | 8/11/2015 | 540,270 | 1,001,815 | 999,975 | 0.51 | % | ||||||||||||
Tynker (f/k/a Neuron Fuel, Inc.) | Mountain View, CA | ||||||||||||||||||
Preferred shares, Series A 8% | Computer Software | 8/8/2012 | 534,162 | 309,310 | 789,492 | 0.41 | % | ||||||||||||
4C Insights (f/k/a The Echo Systems Corp.) | Chicago, IL | ||||||||||||||||||
Common shares | Social Data Platform | 3/30/2012 | 436,219 | 1,436,404 | — | — | % | ||||||||||||
Fullbridge, Inc. | Cambridge, MA | ||||||||||||||||||
Common shares | Business Education | 5/13/2012 | 517,917 | 6,150,506 | — | — | % | ||||||||||||
Promissory Note 1.49% Due 11/9/2021(4) | 3/3/2016 | $ | 2,270,458 | 2,270,858 | — | — | % | ||||||||||||
Total | 8,421,364 | — | — | % | |||||||||||||||
Total Non-controlled/Non-affiliate | $ | 105,869,607 | $ | 170,067,233 | 87.05 | % | |||||||||||||
See accompanying notes to condensed consolidated financial statements.
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SUTTER ROCK CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS –continued
December 31, 2018
Portfolio Investments* | Headquarters/ Industry | Date of Initial Investment | Shares/ Principal | Cost | Fair Value | % of Net Assets | |||||||||||||
NON-CONTROLLED/AFFILIATE(1) | |||||||||||||||||||
Ozy Media, Inc. | Mountain View, CA | ||||||||||||||||||
Convertible Promissory Note 5% Due 12/31/2018(11) | Digital Media Platform | 8/31/2016 | $ | 2,102,384 | $ | 2,102,384 | $ | 3,153,575 | 1.61 | % | |||||||||
Preferred shares, Series B 6% | 10/3/2014 | 922,509 | 4,999,999 | — | — | % | |||||||||||||
Preferred shares, Series A 6% | 12/11/2013 | 1,090,909 | 3,000,200 | — | — | % | |||||||||||||
Preferred shares, Series Seed 6% | 11/2/2012 | 500,000 | 500,000 | — | — | % | |||||||||||||
Common Warrants, Strike Price $0.01, Expiration Date 4/9/2028(11) | 4/9/2018 | 295,565 | 30,647 | — | — | % | |||||||||||||
Total | 10,633,230 | 3,153,575 | 1.61 | % | |||||||||||||||
CUX, Inc. (d/b/a CorpU) | Philadelphia, PA | ||||||||||||||||||
Senior Subordinated Convertible Promissory Note 10% Due 2/14/2020***(6) | Corporate Education | 11/26/2014 | $ | 1,360,489 | 1,361,969 | 1,360,489 | 0.70 | % | |||||||||||
Convertible preferred shares, Series D 6% | 5/31/2013 | 169,033 | 778,607 | 878,005 | 0.45 | % | |||||||||||||
Convertible preferred shares, Series C 8% | 3/29/2012 | 615,763 | 2,006,077 | — | — | % | |||||||||||||
Preferred Warrants Series D, Strike Price $4.59, Expiration Date 2/14/2020(9) | 5/31/2013 | 16,903 | — | 19,946 | 0.01 | % | |||||||||||||
Total | 4,146,653 | 2,258,440 | 1.16 | % | |||||||||||||||
EdSurge, Inc. | Burlingame, CA | ||||||||||||||||||
Preferred shares, Series A-1 | Education Media Platform | 11/12/2015 | 378,788 | 501,360 | 250,000 | 0.13 | % | ||||||||||||
Preferred shares, Series A | 2/28/2014 | 494,365 | 500,801 | 269,848 | 0.14 | % | |||||||||||||
Total | 1,002,161 | 519,848 | 0.27 | % | |||||||||||||||
Maven Research, Inc. | San Francisco, CA | ||||||||||||||||||
Preferred shares, Series C | Knowledge Networks | 7/2/2012 | 318,979 | 2,000,447 | — | — | % | ||||||||||||
Preferred shares, Series B | 2/28/2012 | 49,505 | 217,206 | — | — | % | |||||||||||||
Total | 2,217,653 | — | — | % | |||||||||||||||
Curious.com, Inc. | Menlo Park, CA | ||||||||||||||||||
Common shares(15) | Online Education | 11/22/2013 | 1,135,944 | 12,000,006 | — | — | % | ||||||||||||
Declara, Inc. | Palo Alto, CA | ||||||||||||||||||
Convertible Promissory Note 12% Due 4/30/2018(4)(10) | Social Cognitive Learning | 12/30/2015 | $ | 2,327,727 | 2,334,152 | — | — | % | |||||||||||
Preferred shares, Series A 8% | 4/17/2014 | 10,716,390 | 9,999,999 | — | — | % | |||||||||||||
Total | 12,334,151 | — | — | % | |||||||||||||||
Total Non-controlled/Affiliate | $ | 42,333,854 | $ | 5,931,863 | 3.04 | % | |||||||||||||
CONTROLLED(2) | |||||||||||||||||||
StormWind, LLC(5) | Scottsdale, AZ | ||||||||||||||||||
Preferred shares, Series C 8% | Interactive Learning | 1/7/2014 | 2,779,134 | 4,000,787 | 7,194,971 | 3.68 | % | ||||||||||||
Preferred shares, Series B 8% | 12/16/2011 | 3,279,629 | 2,019,687 | 5,770,328 | 2.95 | % | |||||||||||||
Preferred shares, Series A 8% | 2/25/2014 | 366,666 | 110,000 | 421,525 | 0.22 | % | |||||||||||||
Total | 6,130,474 | 13,386,824 | 6.85 | % | |||||||||||||||
See accompanying notes to condensed consolidated financial statements.
85
SUTTER ROCK CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS –continued
December 31, 2018
Portfolio Investments* | Headquarters/ Industry | Date of Initial Investment | Shares/ Principal | Cost | Fair Value | % of Net Assets | |||||||||||||
NestGSV, Inc. (d/b/a GSV Labs, Inc.) | San Mateo, CA | ||||||||||||||||||
Convertible Promissory Note 12% Due 12/31/2019***(14) | Global Innovation Platform | 2/17/2016 | $ | 936,525 | 951,436 | 936,525 | 0.48 | % | |||||||||||
Preferred shares, Series A-4 | 10/6/2014 | 3,720,424 | 4,904,498 | 4,960,553 | 2.54 | % | |||||||||||||
Preferred shares, Series A-3 | 4/4/2014 | 1,561,625 | 2,005,730 | 1,735,134 | 0.89 | % | |||||||||||||
Preferred shares, Series A-2 | 7/15/2013 | 450,001 | 605,500 | 300,000 | 0.15 | % | |||||||||||||
Preferred shares, Series A-1 | 5/25/2012 | 1,000,000 | 1,021,778 | 499,999 | 0.26 | % | |||||||||||||
Common shares | 7/1/2014 | 200,000 | 1,000 | — | — | % | |||||||||||||
Preferred Warrants Series A-3, Strike Price $1.33, Expiration Date 4/4/2021(14) | 4/4/2014 | 187,500 | — | 26,250 | 0.01 | % | |||||||||||||
Preferred Warrants Series A-4, Strike Price $1.33, Expiration Date 10/6/2021(14) | 10/6/2014 | 500,000 | — | 145,000 | 0.07 | % | |||||||||||||
Preferred Warrants Series A-4, Strike Price $1.33, Expiration Date 7/18/2021 | 7/8/2016 | 250,000 | 74,380 | 70,000 | 0.04 | % | |||||||||||||
Preferred Warrants Series B, Strike Price $2.31, Expiration Date 11/29/2021 | 11/29/2016 | 100,000 | 29,275 | 556 | 0.00 | % | |||||||||||||
Preferred Warrant Series B, Strike Price $2.31, Expiration Date 5/29/2022 | 5/29/2017 | 125,000 | 70,379 | 694 | 0.00 | % | |||||||||||||
Preferred Warrant Series B–Strike Price $2.31, Expiration Date 12/31/2023(14) | 12/31/2018 | 250,000 | 5,080 | 5,000 | 0.00 | % | |||||||||||||
Total | 9,669,056 | 8,679,711 | 4.44 | % | |||||||||||||||
SPBRX, INC. (f/k/a GSV Sustainability Partners, Inc.) | Woodside, CA | ||||||||||||||||||
Preferred shares, Class A***(16) | Clean Technology | 4/15/2014 | 14,300,000 | 7,151,412 | 750,198 | 0.38 | % | ||||||||||||
Common shares | 4/15/2014 | 100,000 | 10,000 | — | — | % | |||||||||||||
Total | 7,161,412 | 750,198 | 0.38 | % | |||||||||||||||
Total Controlled | $ | 22,960,942 | $ | 22,816,733 | 11.68 | % | |||||||||||||
Total Portfolio Investments | $ | 171,164,403 | $ | 198,815,829 | 101.76 | % | |||||||||||||
U.S. Treasury | |||||||||||||||||||
U.S. Treasury bills, 0%, due 1/3/2019***(3) | 12/27/2018 | $ | 100,000,000 | 99,982,067 | 99,994,000 | 51.18 | % | ||||||||||||
TOTAL INVESTMENTS | $ | 271,146,470 | $ | 298,809,829 | 152.94 | % | |||||||||||||
See accompanying notes to condensed consolidated financial statements.
_________________
* | All portfolio investments are non-control/non-affiliated and non-income-producing, unless otherwise identified. Equity investments are subject to lock-up restrictions upon their initial public offering (“IPO”). Preferred dividends are generally only payable when declared and paid by the portfolio company's board of directors. The Company’s and GSV Asset Management’s officers and staff, as applicable, may serve on the board of directors of the Company’s portfolio investments. (Refer to “Note 3—Related-Party Arrangements”). All portfolio investments are considered Level 3 and valued using significant unobservable inputs, unless otherwise noted. (Refer to “Note 4—Investments at Fair Value”). All of the Company's portfolio investments are restricted as to resale, unless otherwise noted, and were valued at fair value as determined in good faith by the Company’s Board of Directors. (Refer to "Note 2—Significant Accounting Policies—Investments at Fair Value"). |
** | Indicates assets that GSV Capital Corp. believes do not represent “qualifying assets” under Section 55(a) of the Investment Company Act of 1940, as amended (the “1940 Act”). Of GSV Capital Corp.’s total investments as of December 31, 2018, 14.92% of its total investments are non-qualifying assets. |
*** | Investment is income-producing. |
86
SUTTER ROCK CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED SCHEDULE OF INVESTMENTS –continued
December 31, 2018
(1) | “Affiliate Investments” are investments in those companies that are “Affiliated Companies” of GSV Capital Corp., as defined in the 1940 Act. In general, a company is deemed to be an “Affiliate” of GSV Capital Corp. if GSV Capital Corp. owns 5% or more of the voting securities (i.e., securities with the right to elect directors) of such company. For the Schedule of Investments In, and Advances To, Affiliates, as required by SEC Regulation S-X, Rule 12-14, refer to “Note 4—Investments at Fair Value”. |
(2) | “Control Investments” are investments in those companies that are “Controlled Companies” of GSV Capital Corp., as defined in the 1940 Act. In general, under the 1940 Act, the Company would “Control” a portfolio company if the Company owned more than 25% of its outstanding voting securities (i.e., securities with the right to elect directors) and/or had the power to exercise control over the management or policies of such portfolio company. For the Schedule of Investments In, and Advances To, Affiliates, as required by SEC Regulation S-X, Rule 12-14, refer to “Note 4—Investments at Fair Value”. |
(3) | Denotes an investment considered Level 1 or Level 2 and valued using observable inputs. |
(4) | As of December 31, 2018, the investments noted had been placed on non-accrual status. |
(5) | GSV Capital Corp.’s investments in StormWind, LLC are held through GSV Capital Corp.'s wholly owned subsidiary, GSVC SW Holdings, Inc. |
(6) | Interest will accrue daily on the unpaid principal balance of the note. Interest began compounding annually on November 26, 2015. Accrued interest is not payable until the earlier of (a) the closing of a subsequent equity offering by CUX, Inc. (d/b/a CorpU), or (b) the maturity of the note. On October 31, 2018, GSV Capital Corp. agreed to extend the maturity of the Senior Subordinated Convertible Promissory Note to CUX, Inc. (d/b/a CorpU) until February 14, 2020, with a new interest rate of 10%. Accrued interest will continue to be compounded annually on November 26 of the current and each subsequent year until repaid. |
(7) | On March 14, 2018, as disclosed in its Amendment No. 1 to its Form F-1 Registration Statement filed in connection with its direct listing, Spotify Technology S.A. effectuated a 40:1 stock split of its ordinary shares, beneficiary certificates and any other of its outstanding securities. On April 3, 2018, Spotify Technology S.A., registered for resale up to 55,731,480 ordinary shares by the registered shareholders in a direct listing. GSV Capital Corp.'s common shares of Spotify Technology S.A. are considered unrestricted as they are not subject to restriction upon sale. At December 31, 2018, GSV Capital Corp. valued its common shares of Spotify Technology S.A. based on its December 31, 2018 closing price. |
(8) | On March 7, 2018, as disclosed in its Amendment No. 1 to its Form S-1 Registration Statement filed in connection with its initial public offering, Dropbox, Inc. effectuated a 1:1.5 reverse stock split of its capital stock. On March 23, 2018, Dropbox, Inc. priced its initial public offering for 26,822,409 Class A common shares at a price of $21.00 per share. Dropbox, Inc., also registered for resale up to 9,177,591 Class A common shares by the registered shareholders. As of August 23, 2018 GSV Capital Corp.'s shares of common stock in Dropbox, Inc. were no longer restricted. At December 31, 2018, GSV Capital Corp. valued its common shares of Dropbox, Inc. based on its December 31, 2018 closing price. |
(9) | On February 23, 2018, CUX, Inc. (d/b/a CorpU) agreed to extend the maturity of the GSV Capital Corp.'s Series D warrants until August 1, 2018. On July 31, 2018, CUX, Inc. (d/b/a CorpU) agreed to further extend the maturity of GSV Capital Corp.'s Series D warrants until November 26, 2018. On October 31, 2018 and in connection with the extension of the maturity date on the related debt investment, CUX, Inc. (d/b/a CorpU) agreed to further extend the maturity of GSV Capital Corp's Series D warrants until February 14, 2020. |
(10) | On January 31, 2018, the maturity date of the convertible promissory note to Declara, Inc. was extended an additional three months to April 30, 2018 and the interest rate on the convertible promissory note increased to 12% per annum (including 365 days for the purposes of accrual). On January 31, 2018 the convertible promissory note to Declara Inc. was placed on non-accrual status. On April 30, 2018, the Company deemed this investment to be in default based on Declara Inc.'s financial position. |
(11) | Effective April 9, 2018, the term of Ozy Media Inc.'s notes were extended through the issuance of a new convertible promissory note, which extended the maturity date of the existing notes to October 31, 2018 and then to December 31, 2018 once certain conditions were satisfied. Effective August 17, 2018, Ozy Media Inc. executed an additional debt amendment, which expanded its borrowing limit. In consideration for amending and restating the existing notes, the Company was issued warrants exercisable for 295,565 shares of Ozy Media Inc.'s common stock. Subsequent to December 31, 2018, Ozy Media Inc.'s obligations under its financing arrangements with the Company became past due. |
(12) | On July 23, 2018, Knewton, Inc. issued an 8% unsecured convertible promissory amount with a principal amount of $134,405 and a maturity date of December 31, 2019 to GSV Capital Corp. |
(13) | On June 15, 2018 GSV Capital Corp. exercised its 770,934 warrants to purchase shares of SharesPost, Inc.'s common stock, with a $0.13 strike price. |
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CONSOLIDATED SCHEDULE OF INVESTMENTS –continued
December 31, 2018
(14) | Effective July 31, 2018, GSV Capital Corp agreed to extend the Convertible Promissory Note to NestGSV, Inc. (d/b/a GSV Labs, Inc.) until December 31, 2018, with a new interest rate of 12%. Previously accrued interest will be capitalized into the principal of the extended note. On December 31, 2018, GSV Capital Corp extended the maturity of the Convertible Promissory Note to December 31, 2019, compounded the previously accrued and then-outstanding interest and invested an additional $300,000. The Convertible Promissory Note continues to accrue interest at 12%. In consideration for the extension and additional investment, the 500,000 Series A-3 Preferred Warrants due April 4, 2019 and the 187,500 Series A-4 Preferred Warrants due October 6, 2019, were extended to April 4, 2021 and October 6, 2021, respectively. The Company also received an additional 250,000 Series B Preferred Warrants due December 31, 2023. |
(15) | On June 8, 2018, Curious.com, Inc. completed a recapitalization and issued new Series C preferred shares. In connection with the offering, GSV Capital Corp.'s 3,407,834 Series B preferred shares were converted into common shares. Additionally, a 1:3 reverse stock split was declared on the now common shares. |
(16) | The SPBRX, INC. (f/k/a GSV Sustainability Partners, Inc.) preferred shares held by GSV Capital Corp. do not entitle GSV Capital Corp. to a preferred dividend rate. During the year ended December 31, 2018, SPBRX, INC. declared, and GSV Capital Corp. received, an aggregate of $625,000 in cash distributions. GSV Capital Corp. does not anticipate that SPBRX, INC. will pay distributions on a quarterly or regular basis or become a predictable distributor of distributions. |
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SUTTER ROCK CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 1—NATURE OF OPERATIONS
Sutter Rock Capital Corp. ("we", "us", "our", “Company” or “Sutter Rock Capital”), formerly known as GSV Capital Corp. and formed in September 2010 as a Maryland corporation, is an internally-managed, non-diversified closed-end management investment company. The Company has elected to be regulated as a business development company ("BDC") under the Investment Company Act of 1940, as amended (the “1940 Act”), and has elected to be treated, and intends to qualify annually, as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).
On and effective March 12, 2019, our Board of Directors approved internalizing our operating structure ("Internalization") and we began operating as an internally-managed non-diversified closed-end management investment company that has elected to be regulated as a BDC under the 1940 Act. Prior to March 12, 2019, we were externally managed by our former investment adviser, GSV Asset Management, LLC (“GSV Asset Management”), pursuant to an investment advisory agreement (the “Investment Advisory Agreement”), and our former administrator, GSV Capital Service Company, LLC (“GSV Capital Service Company”), provided the administrative services necessary for our operations pursuant to an administration agreement (the “Administration Agreement”). Refer to "Note 3 — Related-Party Arrangements" for further detail.
The Company’s date of inception was January 6, 2011, which is the date it commenced its development stage activities. The Company’s common stock is currently listed on the Nasdaq Capital Market under the symbol “SSSS” (formerly "GSVC"). The Company began its investment operations during the second quarter of 2011.
The table below displays the Company’s subsidiaries as of December 31, 2019, which, other than GSV Capital Lending, LLC (“GCL”), are collectively referred to as the “Taxable Subsidiaries.” The Taxable Subsidiaries were formed to hold portfolio investments. The Taxable Subsidiaries, including their associated portfolio investments, are consolidated with the Company for accounting purposes, but have elected to be treated as separate entities for U.S. federal income tax purposes. GCL was formed to originate portfolio loan investments within the state of California and is consolidated with the Company for accounting purposes. Refer to “Note 2—Significant Accounting Policies—Basis of Consolidation” below for further detail.
Subsidiary | Jurisdiction of Incorporation | Formation Date | Percentage Owned | |||
GCL | Delaware | April 13, 2012 | 100% | |||
Subsidiaries below are referred to collectively, as the “Taxable Subsidiaries” | ||||||
GSVC AE Holdings, Inc. (“GAE”) | Delaware | November 28, 2012 | 100% | |||
GSVC AV Holdings, Inc. (“GAV”) | Delaware | November 28, 2012 | 100% | |||
GSVC NG Holdings, Inc. (“GNG”) | Delaware | November 28, 2012 | 100% | |||
GSVC SW Holdings, Inc. (“GSW”) | Delaware | November 28, 2012 | 100% | |||
GSVC WS Holdings, Inc. (“GWS”) | Delaware | November 28, 2012 | 100% | |||
GSVC SVDS Holdings, Inc. (“SVDS”) | Delaware | August 13, 2013 | 100% | |||
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 may acquire its investments in these portfolio companies through: offerings of the prospective portfolio companies, transactions on secondary marketplaces for private companies, or 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, subject to any applicable limitations under the 1940 Act.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 2—SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The 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-K and Regulation S-X under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company is an investment company following the specialized accounting and reporting guidance specified in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 946, Financial Services—Investment Companies. In the opinion of management, all adjustments, all of which were of a normal recurring nature, considered necessary for the fair presentation of consolidated financial statements for the period have been included.
Basis of Consolidation
Under Article 6 of Regulation S-X and the American Institute of Certified Public Accountants’ (“AICPA”) Audit and Accounting Guide for Investment Companies, the Company is precluded from consolidating any entity other than another investment company, a controlled operating company that provides substantially all of its services and benefits to the Company, and certain entities established for tax purposes where the Company holds a 100% interest. Accordingly, the Company’s consolidated financial statements include its accounts and the accounts of the Taxable Subsidiaries and GCL, its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in accordance with GAAP requires the Company’s management 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 consolidated financial statements and the reported amounts of certain revenues and expenses during the reporting 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.
Uncertainties and Risk Factors
The Company is subject to a number of risks and uncertainties in the nature of its operations, as well as vulnerability due to certain concentrations. Refer to "Risk Factors” in Part I, Item 1A of this Form 10-K for a detailed discussion of the risks and uncertainties inherent in the nature of the Company’s operations. Refer to “Note 4—Investments at Fair Value” for an overview of the Company’s industry and geographic concentrations.
Investments at Fair Value
The Company applies fair value accounting in accordance with GAAP and the AICPA’s Audit and Accounting Guide for Investment Companies. The Company 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 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
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. The majority of the Company’s investments are Level 3 investments and are subject to a high degree of judgment and uncertainty in determining fair value.
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 4—Investments at Fair Value” 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 measurement period in which the reclassifications occur. Refer to “Levelling Policy” below for a detailed discussion of the levelling of the Company’s financial assets or liabilities and events that may cause a reclassification within the fair value hierarchy.
Securities for which market quotations are readily available on an exchange are valued at the most recently available closing price of such security as of the valuation date, unless there are legal or contractual restrictions on the sale or use of such security that under ASC 820-10-35 should be incorporated into the security’s fair value measurement as a characteristic of the security that would transfer to market participants who would buy the security. 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 management, our Board of Directors or the valuation committee of the Company’s Board of Directors (the “Valuation Committee”), does not reliably represent fair value, shall each be valued as follows:
1. | The quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals responsible for the portfolio investment; |
2. | Preliminary valuation conclusions are then documented and discussed with senior management; |
3. | An independent third-party valuation firm is engaged by the Valuation Committee to conduct independent appraisals and review management’s preliminary valuations and make its own independent assessment, for all investments for which there are no readily available market quotations; |
4. | The Valuation Committee discusses the valuations and recommends to the Company’s Board of Directors a fair value for each investment in the portfolio based on the input of management and the independent third-party valuation firm; and |
5. | The Company’s Board of Directors then discusses the valuations recommended by the Valuation Committee and determines in good faith the fair value of each investment in the portfolio. |
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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
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.
For investments that are not publicly traded or that do not have readily available market quotations, the Valuation Committee generally engages an independent valuation firm to provide an independent valuation, which the Company’s Board of Directors considers, among other factors, in making its fair value determinations for these investments. For the current and prior fiscal year, the Valuation Committee engaged an independent valuation firm to perform valuations of 100% of the Company’s investments for which there were no readily available market quotations.
Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments may fluctuate from period to period. Because of the inherent uncertainty of valuation, these estimated values may differ significantly from the values that would have been reported had a ready market for the investments existed, and it is reasonably possible that the difference could be material.
In addition, changes in the market environment and other events that may occur over the life of the investments may cause the realized gains or losses on investments to be different from the net change in unrealized appreciation or depreciation currently reflected in the consolidated financial statements.
Equity Investments
Equity investments for which market quotations are readily available in an active market are generally valued at the most recently available closing market prices and are classified as Level 1 assets. Equity investments with readily available market quotations that are subject to sales restrictions due to an initial public offering (“IPO”) by the portfolio company will be classified as Level 1. Any other equity investments with readily available market quotations that are subject to sales restrictions that would transfer to market participants who would buy the security 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, and mergers or acquisitions affecting 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.
In determining the value of equity or equity-linked securities (including warrants to purchase common or preferred stock) in a portfolio company, the Company considers the rights, preferences and limitations of such securities. In cases where a portfolio company’s capital structure includes multiple classes of preferred and common stock and equity-linked securities with different rights and preferences, the Company may use an option pricing model 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 Consolidated Statements of Operations and 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 Consolidated Statements of Cash Flows.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
Debt Investments
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 classified as 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’s debt investments are valued at estimated fair value as determined by the Company’s Board of Directors.
Options
The Company’s Board of Directors will ascribe value to options based on fair value analyses that can include discounted cash flow analyses, option pricing models, comparable analyses and other techniques as deemed appropriate. These investments are classified as 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’s options are valued at estimated fair value as determined by the Company’s Board of Directors.
Portfolio Company Investment Classification
The Company is a non-diversified company within the meaning of the 1940 Act. The Company 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 a portfolio company. Refer to the Consolidated Schedules of Investments as of December 31, 2019 and December 31, 2018, for details regarding the nature and composition of the Company’s investment portfolio.
Levelling Policy
The portfolio companies in which the Company invests may offer their shares in IPOs. The Company’s shares in such 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 1 due to the presence of an active market, or Level 2 if limited by the lock-up agreement. The Company prices the investment at the closing price on a public exchange as of the measurement date. In situations where there are lock-up restrictions, as well as legal or contractual restrictions on the sale or use of such security that under ASC 820-10-35 should be incorporated into the security’s fair value measurement as a characteristic of the security that would transfer to market participants who would buy the security, the Company will classify the investment as Level 2 subject to an appropriate DLOM to reflect the restrictions upon sale. The Company transfers investments between levels based on the fair value at the beginning of the measurement period in accordance with FASB ASC 820. For investments transferred out of Level 3 due to an IPO, the Company transfers these investments based on their fair value at the IPO date.
Securities Transactions
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.
Valuation of Other Financial Instruments
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.
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SUTTER ROCK CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
Cash
The Company places its cash with U.S. Bank, N.A., Bridge Bank (a subsidiary of Western Alliance Bank), and Silicon Valley Bank, and at times, cash held in these accounts may exceed the Federal Deposit Insurance Corporation insured limit. The Company believes that U.S. Bank, N.A., Western Alliance Bank, and Silicon Valley Bank are high-quality financial institutions and that the risk of loss associated with any uninsured balance is remote.
Escrow Proceeds Receivable
During the year ended December 31, 2019, the Company completed the sale of its investment in Knewton, Inc. During the year ended December 31, 2018, the Company completed the sale of its investments in General Assembly Space, Inc., Lytro, Inc., SugarCRM, Inc., and DreamBox Learning, Inc. A portion of the proceeds from the sale of these portfolio investments and those sold in prior years are held in escrow as a recourse for indemnity claims that may arise under the sale agreement. Amounts held in escrow are held at estimated realizable value and included in net realized gains (losses) on investments in the Consolidated Statements of Operations for the period in which they occurred. Any remaining escrow proceeds balances from these transactions reasonably expected to be received are reflected on the Consolidated Statement of Assets and Liabilities as escrow proceeds receivable. As of December 31, 2019 and December 31, 2018, the Company had $265,303 and $2,494,582, respectively, in escrow proceeds receivable. During the year ended December 31, 2019, the Company received escrow proceeds from the prior year sales of SugarCRM, Inc., DreamBox Learning, Inc., Gilt Groupe Holdings, Inc., Lytro, Inc., General Assembly Space, Inc., and JAMF Holdings, Inc.
Deferred Financing Costs
The Company records origination costs related to lines of credit as deferred financing costs. These costs are deferred and amortized as part of interest expense using the straight-line method over the respective life of the line of credit. For modifications to a line of credit, any unamortized origination costs are expensed. Included within deferred financing costs are offering costs incurred relating to the Company’s shelf registration statement on Form N-2. The Company defers these offering costs until capital is raised pursuant to the shelf registration statement or until the shelf registration statement expires. For equity capital raised, the offering costs reduce paid-in capital resulting from the offering. For debt capital raised, the associated offering costs are amortized over the life of the debt instrument. As of December 31, 2019 and December 31, 2018, the Company had deferred financing costs of $11,382 and $267,541, respectively, on the Consolidated Statements of Assets and Liabilities.
| December 31, 2019 | December 31, 2018 | |||||
Deferred credit facility costs | $ | 11,382 | $ | — | |||
Deferred offering costs | — | 267,541 | |||||
Deferred Financing Costs | $ | 11,382 | $ | 267,541 | |||
Operating Leases & Related Deposits
The Company accounts for its operating leases as prescribed by ASC 842, Leases, which requires lessees to recognize a right of use asset on the balance sheet, representing its right to use the underlying asset for the lease term, and a corresponding lease liability for all leases with terms greater than 12 months. The lease expense is presented as a single lease cost that is amortized on a straight-line basis over the life of the lease. Non-lease components (maintenance, property tax, insurance and parking) are not included in the lease cost. On June 3, 2019, the Company entered a 5-year operating lease for primary office space for which the Company has recorded a right-of-use asset and a corresponding lease liability for the operating lease obligation. These amounts have been discounted using the rate implicit in the lease. Refer to “Note 7—Commitments and Contingencies—Operating Leases and Related Deposits” for further detail.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
Stock-based Compensation
Using the fair value recognition provisions as prescribed by ASC 718, Stock Compensation, stock-based compensation cost is measured at the grant date based on the estimated fair value of the award and is recognized as expense over the appropriate service period. Determining the fair value of stock-based awards requires considerable judgment, including estimating the expected term of stock options and the expected volatility of our stock price. Differences between actual results and these estimates could have a material effect on our financial results. Forfeitures are accounted for as they occur. Refer to “Note 11—Stock-Based Compensation” for further detail.
Revenue Recognition
The Company recognizes gains or losses on the sale of investments using the specific identification method. The Company recognizes interest income, adjusted for amortization of premium and accretion of discount, on an accrual basis. The Company recognizes dividend income on the ex-dividend date.
Investment Transaction Costs and Escrow Deposits
Commissions and other costs associated with an investment transaction, including legal expenses not reimbursed by the portfolio company, are included in the cost basis of purchases and deducted from the proceeds of sales. The Company makes certain acquisitions on 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. Such transactions would be reflected on the Consolidated Statement of Assets and Liabilities as escrow deposits. As of December 31, 2019 and December 31, 2018, the Company had no material escrow deposits.
Unrealized Appreciation or Depreciation of Investments
Unrealized appreciation or depreciation is calculated as the difference between the fair value of the investment and the cost basis of such investment.
U.S. Federal and State Income Taxes
The Company elected to be treated as a regulated investment company (a “RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), beginning with its taxable year ended December 31, 2014, has qualified to be treated as a RIC for subsequent taxable years and intends to continue to operate in a manner so as to qualify for the tax treatment applicable to RICs. To qualify for tax treatment as a RIC, among other things, the Company is required to meet certain source of income and asset diversification requirements and timely distribute to its stockholders at least 90% of the sum of investment company taxable income (“ICTI”) including payment-in-kind interest income, as defined by the Code, and net tax-exempt interest income (which is the excess of its gross tax-exempt interest income over certain disallowed deductions) for each taxable year (the "Annual Distribution Requirement"). Depending on the level of ICTI earned in a tax year, the Company may choose to carry forward into the next tax year ICTI in excess of current year dividend distributions. Any such carryforward ICTI must be distributed on or before December 31 of the subsequent tax year to which it was carried forward.
If the Company meets the Annual Distribution Requirement, but does not distribute (or is not deemed to have distributed) each calendar year a sum of (1) 98% of its net ordinary income for each calendar year, (2) 98.2% of its capital gain net income for the one-year period ending October 31 in that calendar year and (3) any income recognized, but not distributed, in preceding years (the “Excise Tax Avoidance Requirement”), it generally will be required to pay an excise tax equal to 4% of the amount by which the Excise Tax Avoidance Requirement exceeds the distributions for the year. To the extent that the Company determines that its estimated current year annual taxable income will exceed estimated current year dividend distributions from such taxable income, the Company will accrue excise taxes, if any, on estimated excess taxable income as taxable income is earned using an annual effective excise tax rate. The annual effective excise tax rate is determined by dividing the estimated annual excise tax by the estimated annual taxable income.
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SUTTER ROCK CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
So long as the Company qualifies and maintains its tax treatment 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 consolidated financial statements of the Company. Included in the Company’s consolidated financial statements, the Taxable Subsidiaries 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 consolidated financial statements.
If it is not treated as a RIC, the Company will be taxed as a regular corporation (a “C corporation”) under Subchapter C of the Code for such taxable year. If the Company has previously qualified as a RIC but is subsequently unable to qualify for treatment as a RIC, and certain amelioration provisions are not applicable, the Company would be subject to tax on all of its taxable income (including its net capital gains) at regular corporate rates. The Company would not be able to deduct distributions to stockholders, nor would it be required to make distributions. Distributions, including distributions of net long-term capital gain, would generally be taxable to its stockholders as ordinary dividend income to the extent of the Company’s current and accumulated earnings and profits. Subject to certain limitations under the Code, corporate stockholders would be eligible to claim a dividend received deduction with respect to such dividend; non-corporate stockholders would generally be able to treat such dividends as “qualified dividend income,” which is subject to reduced rates of U.S. federal income tax. Distributions in excess of the Company’s current and accumulated earnings and profits would be treated first as a return of capital to the extent of the stockholder’s tax basis, and any remaining distributions would be treated as a capital gain. In order to requalify as a RIC, in addition to the other requirements discussed above, the Company would be required to distribute all of its previously undistributed earnings attributable to the period it failed to qualify as a RIC by the end of the first year that it intends to requalify for tax treatment as a RIC. If the Company fails to requalify for tax treatment as a RIC for a period greater than two taxable years, it may be subject to regular corporate tax on any net built-in gains with respect to certain of its assets (i.e., the excess of the aggregate gains, including items of income, over aggregate losses that would have been realized with respect to such assets if the Company had been liquidated) that it elects to recognize on requalification or when recognized over the next five years. The Company was taxed as a C Corporation for its 2012 and 2013 taxable years. Refer to “Note 9—Income Taxes” for further details.
The Company elected to be treated as a RIC for the taxable year ended December 31, 2014 in connection with the filing of its 2014 tax return. As a result, the Company was required to pay a corporate-level U.S. federal income tax on the amount of the net built-in gains 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) either (1) as of the date it converted to a RIC (i.e., the beginning of the first taxable year that the Company qualifies as a RIC, which would be January 1, 2014), or (2) to the extent that the Company recognized such net built-in gains during the five-year recognition period beginning on the date of conversion. As of January 1, 2014, the Company had net unrealized built-in gains, but did not incur a built-in-gains tax for the 2014 tax year due to the fact that there were sufficient net capital loss carryforwards to completely offset recognized built-in gains as well as available net operating losses. The five-year recognition period ended on December 31, 2018.
Per Share Information
Net change in net assets resulting from operations per basic common share is computed using the weighted-average number of shares outstanding for the period presented. Diluted net change in net assets resulting from operations per common share is computed by dividing net increase/(decrease) in net assets resulting from operations 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 FASB ASC 260, Earnings Per Share (“ASC 260”) to determine the number of potentially dilutive shares outstanding. Refer to “Note 6—Net Increase in Net Assets Resulting from Operations per Common Share—Basic and Diluted” for further detail.
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SUTTER ROCK CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
Recently Adopted Accounting Standards
In February 2019, the FASB issued ASU 2019-07, Codification Updates to SEC Sections, which amends various SEC paragraphs pursuant to the issuance of recent SEC Final Rule Releases. The guidance requires interim financial statements to provide the information required by SEC for the current and comparative year-to-date periods, with subtotals for each interim period. The guidance in ASU 2019-07, and the related amendments, are effective upon issuance. The Company adopted ASU 2019-07 and amended the presentation of the Consolidated Statements of Changes in Net Assets beginning June 30, 2019.
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This amendment expands the scope of Topic 718, Compensation—Stock Compensation (which only included share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. ASU 2018-07 supersedes Subtopic 505-50, Equity—Equity-Based Payments to Non-Employees, and is effective for annual reporting periods, and the interim periods within those periods, beginning after December 15, 2018. The Company adopted ASU 2018-07 in connection with the equity awards granted to our executive officers and employees beginning July 17, 2019.
In February 2016, the FASB issued ASU 2016-02, Leases, which requires lessees to recognize on the balance sheet a right-of-use asset, representing its right to use the underlying asset for the lease term, and a lease liability for all leases with terms greater than 12 months. The guidance is effective for annual periods beginning after December 15, 2018, and interim periods therein. The Company adopted ASU 2016-02 in connection with its operating lease beginning June 3, 2019.
Recently Issued Accounting Standards
In August 2018, the FASB issued ASU 2018-13, which changes the fair value measurement disclosure requirements of FASB ASC 820, Fair Value Measurement. The guidance is effective for all entities for interim and annual periods beginning after December 15, 2019. Early adoption is permitted for any eliminated or modified disclosure requirements upon issuance of the guidance. The Company did not early adopt the eliminated and modified disclosure requirements during the year ended December 31, 2019, but is evaluating the guidance for our adoption upon its effective date.
In August 2018, the SEC issued Final Rule Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements intended to eliminate redundant, duplicative, overlapping, outdated or superseded, in light of other SEC disclosure requirements, U.S. GAAP requirements, or changes in the information environment. In part, this final rule requires an investment company to present distributable earnings in total on the consolidated balance sheet, rather than showing the three components of distributable earnings as previously required. The Company decided not to adopt the changes as the current more detailed and expanded disclosure presentation was deemed to be most helpful, useful, and transparent for users of our consolidated financial statements.
NOTE 3—RELATED-PARTY ARRANGEMENTS
Internalization of Company’s Operating Structure
On and effective March 12, 2019 (the "Effective Date"), our Board of Directors approved internalizing our operating structure and we began operating as an internally managed non-diversified closed-end management investment company that has elected to be regulated as a BDC under the 1940 Act. Prior to the Effective Date, we were externally managed by our former investment adviser, GSV Asset Management, pursuant to the Investment Advisory Agreement, and our former administrator, GSV Capital Service Company, provided the administrative services necessary for our operations pursuant to the Administration Agreement.
The accounting implications and related controls associated with the Internalization were analyzed and updated for fiscal year 2019.
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SUTTER ROCK CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
Termination of Investment Advisory Agreement
On and effective March 12, 2019, the Investment Advisory Agreement was terminated by mutual agreement of GSV Asset Management and us in connection with our Internalization.
Prior to our Internalization, GSV Asset Management served as our external investment adviser pursuant to the Investment Advisory Agreement. Pursuant to the terms of the Investment Advisory Agreement, we paid GSV Asset Management a fee for its services consisting of two components - a base management fee and an incentive fee. The base management fee was calculated at an annual rate of 2.00% of our gross assets (our total assets as reflected on our balance sheet with no deduction for liabilities). The incentive fee was determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement, as of the termination date), and equaled the lesser of (i) 20% of our realized capital gains during such calendar year, if any, calculated on an investment-by-investment basis, subject to a non-compounded preferred return, or “hurdle” of 8.00% per year, 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. See “—Investment Advisory Agreement” below.
As the Investment Advisory Agreement has been terminated, there will be no base management fees or incentives fees payable to GSV Asset Management going forward.
Termination of Administration Agreement
On and effective March 12, 2019, the Administration Agreement was terminated by mutual agreement of GSV Capital Service Company and us in connection with our Internalization.
Prior to our Internalization, GSV Capital Service Company served as our external administrator and provided administrative services necessary for our operations, including but not limited to, furnishing us with office facilities, equipment and clerical, bookkeeping and record keeping services at such facilities, as well as providing us with certain other administrative services, including, but not limited to, assisting us with determining and publishing our net asset value, overseeing the preparation and filing of our tax returns and the printing and dissemination of reports to our stockholders.
Under the Administration Agreement, we did not pay any fees to GSV Capital Service Company but reimbursed GSV Capital Service Company for our allocable portion of overhead and other expenses incurred by GSV Capital Service Company in performing its services under the Administration Agreement, including, but not limited to, fees and expenses associated with performing compliance functions and our allocable portion of rent and compensation of our President, Chief Financial Officer, Chief Compliance Officer and other staff providing administrative services. See “—Administration Agreement” below.
As the Administration Agreement has been terminated, there will be no costs incurred by GSV Capital Service Company going forward.
Departure of Director and Reduction of Number of Directors
On and effective March 12, 2019, Michael T. Moe resigned from our Board of Directors in connection with our Internalization. As a result of Mr. Moe’s resignation, our Board of Directors reduced the number of directors that constitute our full Board of Directors to five directors from six directors in accordance with our bylaws. Mr. Moe will continue to provide services to us pursuant to the Consulting Agreement (as defined below). See “—Consulting Agreement.”
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SUTTER ROCK CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
Consulting Agreement
On and effective March 12, 2019, we entered into a Consulting Agreement (the “Consulting Agreement”) with Michael T. Moe, the former Chairman of our Board of Directors and the Chief Executive Officer and Chief Investment Officer of GSV Asset Management, for the purpose of assisting us with certain transition services following the termination of the Investment Advisory Agreement and our Internalization. Pursuant to the Consulting Agreement, Mr. Moe will provide certain transition services to us related to our existing portfolio investments for which Mr. Moe previously had oversight in his role as the Chief Executive Officer and Chief Investment Officer of GSV Asset Management. Such transition services will include providing information to us regarding such portfolio companies, including as a member of a portfolio company’s board of directors, assisting with the transition of portfolio company board seats as requested by us, making appropriate introductions to representatives of portfolio companies, and providing other similar types of services that we may reasonably request.
The term of the Consulting Agreement commenced on March 12, 2019 and will continue for eighteen months, unless the parties thereto mutually agree to extend the Consulting Agreement for an additional period. Pursuant to the Consulting Agreement, we will pay Mr. Moe a total amount equal to $1,250,000.
For the years ended December 31, 2019, 2018, and 2017, the Company incurred $667,563, $0, and $0 respectively, of consulting expense related to the Consulting Agreement, as included in "professional fees" on the Consolidated Statements of Operations. As of December 31, 2019 and 2018, the Company recorded $332,437 and $0 of prepaid expense related to the Consulting Agreement on the Consolidated Statements of Assets and Liabilities.
Amended and Restated Trademark License Agreement
On and effective March 12, 2019, we entered into an Amended and Restated Trademark License Agreement (the “Amended and Restated License Agreement”) with GSV Asset Management in connection with termination of the Investment Advisory Agreement. See “—Termination of Investment Advisory Agreement.”
GSV Asset Management is the owner of the trade name “GSV”, and other state or unregistered “GSV” marks, including the trading symbol “GSVC” (collectively, the “Licensed Marks”). Pursuant to the Amended and Restated License Agreement, GSV Asset Management granted us a non-transferable, non-sublicensable, and non-exclusive right and license to use the Licensed Marks, solely in connection with the operation of our existing business.
The term of the Amended and Restated License Agreement commenced on March 12, 2019 and will continue for eighteen months, unless the parties thereto mutually agree to extend the Amended and Restated License Agreement for an additional period. Pursuant to the Amended and Restated License Agreement, we will pay GSV Asset Management a total amount equal to $1,250,000.
For the years ended December 31, 2019, 2018, and 2017, the Company incurred $667,563, $0, and $0, respectively, of licensing expense, as included in "other expenses" on the Consolidated Statements of Operations. As of December 31, 2019 and 2018, the Company recorded $332,437 and $0 of prepaid expense related to the Amended and Restated Trademark License Agreement on the Consolidated Statements of Assets and Liabilities.
Investment Advisory Agreement
On March 12, 2019, in connection with the Company's Internalization, the Investment Advisory Agreement was terminated in accordance with its terms.
Prior to our Internalization on March 12, 2019, the Company had entered into the Investment Advisory Agreement with GSV Asset Management. Under the terms of the Investment Advisory Agreement, GSV Asset Management was paid a quarterly management fee and an annual incentive fee. GSV Asset Management is controlled by Michael T. Moe, the former Chairman of the Company’s Board of Directors. Mr. Moe, through his ownership interest in GSV Asset Management, was entitled to a portion of any profits earned by GSV Asset Management in performing its services under the Investment Advisory Agreement. Mr. Moe serves as the principal of GSV Asset Management and manages the business and internal affairs of GSV Asset Management. Mark Klein, the Company’s Chief Executive Officer, President, and a member of the Company’s Board of Directors, or entities with
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SUTTER ROCK CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
which he is affiliated, received consulting fees from GSV Asset Management equal to a percentage of each of the base management fee and the incentive fee paid by the Company to GSV Asset Management pursuant to a consulting agreement with GSV Asset Management. As the Investment Advisory Agreement has been terminated, Mr. Klein no longer has a consulting agreement or any other affiliation with GSV Asset Management.
Under the Investment Advisory Agreement, there were no restrictions on the right of any manager, partner, officer or employee of GSV Asset Management to engage in any other business or to devote his or her time and attention in part to any other business, whether of a similar or dissimilar nature, or to receive any fees or compensation in connection therewith (including fees for serving as a director of, or providing consulting services to, one or more of the Company’s portfolio companies). GSV Asset Management had, however, adopted an internal policy whereby any fees or compensation received by a manager, partner, officer or employee of GSV Asset Management in exchange for serving as a director of, or providing consulting services to, any of the Company’s portfolio companies would be transferred to the Company, net of any personal taxes incurred, upon such receipt for the benefit of the Company and its stockholders.
Management Fees
Under the terms of the Investment Advisory Agreement, GSV Asset Management was paid a base management fee of 2.00% of gross assets, which is the Company’s total assets reflected on its Consolidated Statements of Assets and Liabilities (with no deduction for liabilities) reduced by any non-portfolio investments. During the month of January 2018, pursuant to a voluntary waiver by GSV Asset Management, the Company paid GSV Asset Management a base management fee of 1.75%, a 0.25% reduction from the 2.00% base management fee payable under the Investment Advisory Agreement. On February 2, 2018 GSV Asset Management voluntarily agreed to reduce fees payable under the Investment Advisory Agreement (the “Waiver Agreement”). Pursuant to the Waiver Agreement, effective February 1, 2018, the base management fee is reduced to 1.75% of the Company’s gross assets, as further described below. The waiver of a portion of the base management fee is not subject to recourse against or reimbursement by the Company.
GSV Asset Management earned $848,723, $5,199,900, and $5,666,176 in management fees for the years ended December 31, 2019, 2018, and 2017, respectively, and waived $0, $892,421, and $708,272 in management fees for the years ended December 31, 2019, 2018, and 2017, respectively.
As the Investment Advisory Agreement has been terminated, there will be no base management fee payable to GSV Asset Management going forward.
Incentive Fees
Under the terms of the Investment Advisory Agreement, GSV Asset Management was paid 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. Effective February 1, 2018, the incentive fee paid by the Company to GSV Asset Management under the Investment Advisory Agreement was modified pursuant to the terms of the Waiver Agreement, as further described below.
The Company was required to accrue incentive fees for all periods as if the Company had fully liquidated its entire investment portfolio at the fair value stated on the Consolidated Statements of Assets and Liabilities as of December 31, 2018 or prior to the termination of the Investment Advisory Agreement. The accrual considered 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, as well any previously paid incentive fees.
For the year ended December 31, 2019, the Company reversed previously accrued incentive fees of $4,660,472 due to the termination of the Investment Advisory Agreement. For the year ended December 31, 2018, the Company accrued incentive fees of $382,387. Pursuant to the Waiver Agreement, on February 2, 2018, GSV Asset Management forfeited $5.0 million of the accrued
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SUTTER ROCK CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
incentive fees. For the year ended December 31, 2017, the Company accrued incentive fees of $7,151,641. As the Investment Advisory Agreement has been terminated, there will be no incentive fee payable to GSV Asset Management going forward.
Management and Incentive Fee Waiver Agreement
On February 2, 2018, GSV Asset Management voluntarily agreed to reduce the fees payable under the Investment Advisory Agreement pursuant to the Waiver Agreement. The Waiver Agreement was effective beginning February 1, 2018 and changed the fee structure set forth in the Investment Advisory Agreement by: (i) reducing the Company’s base management fee from 2.00% to 1.75%; and (ii) creating certain high-water marks that must be reached before any incentive fee is paid to GSV Asset Management. In addition to the changes to the fee structure, GSV Asset Management also agreed to a one-time forfeiture of $5.0 million of previously accrued but unpaid incentive fees.
Pursuant to the Waiver Agreement, effective February 1, 2018, the base management fee was reduced to 1.75% of the Company’s gross assets. The base management fee was calculated based on the average value of the Company’s gross assets at the end of the two most recently completed calendar quarters, and appropriately adjusted for any equity or debt capital raises, repurchases or redemptions during the current calendar quarter. The base management fee for any partial month or quarter will be appropriately prorated. In addition, because the Company's 5.25% Convertible Senior Notes matured on September 15, 2018 (the "5.25% Convertible Senior Notes due 2018"), the Company was previously carrying a larger cash balance than it would in the ordinary course of its business. As a result, under the Waiver Agreement, GSV Asset Management agreed to waive its base management fee on any cash balances effective February 1, 2018 until the 5.25% Convertible Senior Notes due 2018 matured on September 15, 2018, at which time the Company repaid the remaining outstanding aggregate principal amount of the 5.25% Convertible Senior Notes due 2018, including accrued but unpaid interest. As a result, as of and after September 15, 2018, the Company paid GSV Asset Management a 1.75% base management fee on its cash balances.
Pursuant to the Waiver Agreement, in addition to the “hurdle” feature in the incentive fee, GSV Asset Management had agreed to additional conditions on its ability to receive an incentive fee. Specifically, the Waiver Agreement provided that an incentive fee earned by GSV Asset Management under the Investment Advisory Agreement would be payable to GSV Asset Management only if, at the time that such incentive fee becomes payable under the Investment Advisory Agreement, both the Company’s stock price and its last reported net asset value per share were equal to, or greater than, $12.55 (the “High-Water Mark”). The High-Water Mark was based upon the volume weighted average price (VWAP) of all the Company’s equity offerings since its initial public offering, less the dollar amount of all dividends paid by the Company since inception. Upon such time that the High-Water Mark was achieved, and GSV Asset Management was paid an incentive fee, a new High-Water Mark would have been established. Each new High-Water Mark would have been equal to the most recent High-Water Mark, plus 10%. Any High-Water Mark then in effect would have been adjusted to reflect any dividends paid by the Company or any stock split effected by the Company.
For the avoidance of doubt, after the effective date of the Waiver Agreement, under no circumstances would the aggregate fees earned by GSV Asset Management in any quarterly period have been higher than those aggregate fees that would have been earned prior to the effectiveness of the Waiver Agreement.
As of each of December 31, 2019 and December 31, 2018, there were no receivables owed to the Company by GSV Asset Management. As the Investment Advisory Agreement has been terminated, there will be no receivables owed to the Company by GSV Asset Management going forward.
Administration Agreement
On March 12, 2019, in connection with the Company's Internalization, the Administration Agreement was terminated in accordance with its terms.
Prior to the Internalization, the Company had entered into the Administration Agreement with GSV Capital Service Company to provide administrative services, including furnishing the Company with office facilities, equipment, clerical, bookkeeping, record keeping services, and other administrative services. The Company reimbursed GSV Capital Service Company an allocable portion of overhead and other expenses in performing its obligations under the Administration Agreement, including a portion of the rent and the compensation of the Company’s President, Chief Financial Officer, Chief Compliance Officer and other staff
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
providing administrative services. While there was no limit on the total amount of expenses the Company may have been required to reimburse to GSV Capital Service Company, GSV Capital Service Company would only charge the Company for the actual expenses GSV Capital Service Company incurred on the Company’s behalf, or the Company’s allocable portion thereof, without any profit to GSV Capital Service Company. There were $306,084, $1,702,047, and $1,874,839 in such costs incurred under the Administration Agreement for the years ended December 31, 2019, 2018, and 2017, respectively. As the Administration Agreement has been terminated, there will be no costs incurred by GSV Capital Service Company on behalf of the Company going forward.
License Agreement
On March 12, 2019, in connection with the Company's Internalization, as of the Effective Date, the Company entered into the Amended and Restated Trademark License Agreement to use the trade name “GSV”, and other state or unregistered “GSV” marks, including the trading symbol “GSVC.” for a period of up to eighteen months and a predetermined fee of $1,250,000. Other than with respect to this limited license, the Company has no legal right to the “GSV” name.
Prior to the Internalization on March 12, 2019, the Company entered into a license agreement with GSV Asset Management pursuant to which GSV Asset Management had agreed to grant the Company a non-exclusive, royalty-free license to use the name “GSV.” Under this agreement, the Company had the right to use the GSV name for so long as the Investment Advisory Agreement with GSV Asset Management is in effect.
Other Arrangements
Mark Moe, who is the brother of Michael Moe, the former Chairman of the Company’s Board of Directors, serves as Vice President of Business Development, Global Expansion for NestGSV, Inc. (d/b/a GSV Labs, Inc.), one of the Company’s portfolio companies.
In addition, the Company’s executive officers and directors, and the principals of the Company’s former investment adviser, GSV Asset Management, serve or may serve as officers, directors, or managers of entities that operate in a line of business similar to the Company’s, 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 the Company or the Company’s stockholders.
The 1940 Act prohibits the Company from participating in certain negotiated co-investments with certain affiliates unless it receives an order from the SEC permitting it to do so. As a BDC, the Company is prohibited under the 1940 Act from participating in certain transactions with certain of its affiliates without the prior approval of the Board of Directors, including its independent directors, and, in some cases, the SEC. The affiliates with which the Company may be prohibited from transacting include its officers, directors, and employees and any person controlling or under common control with the Company, subject to certain exceptions.
In the ordinary course of business, the Company may enter into transactions with portfolio companies that may be considered related-party transactions. To ensure that the Company does not engage in any prohibited transactions with any persons affiliated with the Company, the Company has implemented certain written policies and procedures whereby the Company’s executive officers screen each of the Company’s transactions for any possible affiliations between the proposed portfolio investment, the Company, companies controlled by the Company, and the Company’s executive officers and directors.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 4—INVESTMENTS AT FAIR VALUE
Investment Portfolio Composition
The Company’s investments in portfolio companies consist primarily of equity securities (such as common stock, preferred stock and options to purchase common and preferred stock) and to a lesser extent, debt securities, issued by private and publicly traded companies. The Company may also, from time to time, invest in U.S. Treasury securities. Non-portfolio investments represent investments in U.S. Treasury securities. As of December 31, 2019, the Company had 46 positions in 23 portfolio companies. As of December 31, 2018, the Company had 55 positions in 26 portfolio companies.
The following tables summarize the composition of the Company’s investment portfolio by security type at cost and fair value as of December 31, 2019 and December 31, 2018:
| December 31, 2019 | December 31, 2018 | |||||||||||||||||||
| Cost | Fair Value | Percentage of Net Assets | Cost | Fair Value | Percentage of Net Assets | |||||||||||||||
Private Portfolio Companies | | | | | | | |||||||||||||||
Common Stock | $ | 63,425,065 | $ | 59,209,559 | 29.6 | % | $ | 48,424,535 | $ | 48,517,824 | 24.9 | % | |||||||||
Preferred Stock | 73,557,331 | 125,448,358 | 62.8 | % | 89,715,085 | 99,856,159 | 51.1 | % | |||||||||||||
Debt Investments | 4,838,415 | 1,644,155 | 0.8 | % | 9,156,012 | 5,584,994 | 2.9 | % | |||||||||||||
Options | 8,764,885 | 5,283,506 | 2.6 | % | 209,761 | 267,446 | 0.1 | % | |||||||||||||
Private Portfolio Companies | 150,585,696 | 191,585,578 | 95.8 | % | 147,505,393 | 154,226,423 | 79.0 | % | |||||||||||||
Publicly Traded Portfolio Companies | |||||||||||||||||||||
Common Stock | — | — | — | % | 23,659,010 | 44,589,406 | 22.8 | % | |||||||||||||
Total Portfolio Investments | 150,585,696 | 191,585,578 | 95.8 | % | 171,164,403 | 198,815,829 | 101.8 | % | |||||||||||||
Non-Portfolio Investments | |||||||||||||||||||||
U.S. Treasury bill | 49,996,667 | 50,000,000 | 25.0 | % | 99,982,067 | 99,994,000 | 51.1 | % | |||||||||||||
Total Investments | $ | 200,582,363 | $ | 241,585,578 | 120.8 | % | $ | 271,146,470 | $ | 298,809,829 | 152.9 | % | |||||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
The geographic and industrial compositions of the Company’s portfolio at fair value as of December 31, 2019 and December 31, 2018 were as follows:
| As of December 31, 2019 | As of December 31, 2018 | |||||||||||||||||
| Fair Value | Percentage of Portfolio | Percentage of Net Assets | Fair Value | Percentage of Portfolio | Percentage of Net Assets | |||||||||||||
Geographic Region | | | | | | | |||||||||||||
West | $ | 176,331,572 | 92.0 | % | 88.2 | % | $ | 167,687,933 | 84.4 | % | 85.8 | % | |||||||
Mid-west | 7,406,237 | 3.9 | % | 3.7 | % | — | — | % | — | % | |||||||||
Northeast | 7,847,769 | 4.1 | % | 3.9 | % | 4,414,536 | 2.2 | % | 2.3 | % | |||||||||
International | — | — | % | — | % | 26,713,360 | 13.4 | % | 13.7 | % | |||||||||
Total | $ | 191,585,578 | 100.0 | % | 95.8 | % | $ | 198,815,829 | 100.0 | % | 101.8 | % | |||||||
| As of December 31, 2019 | As of December 31, 2018 | |||||||||||||||||
| Fair Value | Percentage of Portfolio | Percentage of Net Assets | Fair Value | Percentage of Portfolio | Percentage of Net Assets | |||||||||||||
Industry | | | | | | | |||||||||||||
Education Technology | $ | 82,578,640 | 43.1 | % | 41.3 | % | $ | 64,480,375 | 32.4 | % | 33.0 | % | |||||||
Marketplaces(1) | 23,321,809 | 12.2 | % | 11.6 | % | 33,892,561 | 17.1 | % | 17.3 | % | |||||||||
Financial Technology(1) | 26,754,801 | 14.0 | % | 13.4 | % | 7,798,878 | 3.9 | % | 4.0 | % | |||||||||
Big Data/Cloud | 31,582,084 | 16.5 | % | 15.8 | % | 51,929,440 | 26.1 | % | 26.6 | % | |||||||||
Social/Mobile | 26,573,046 | 13.8 | % | 13.3 | % | 39,964,377 | 20.1 | % | 20.5 | % | |||||||||
Sustainability | 775,198 | 0.4 | % | 0.4 | % | 750,198 | 0.4 | % | 0.4 | % | |||||||||
Total | $ | 191,585,578 | 100.0 | % | 95.8 | % | $ | 198,815,829 | 100.0 | % | 101.8 | % | |||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
The table below details the composition of the Company’s industrial themes presented above:
Industry Theme | Industry | |
Education Technology | Business Education | |
Computer Software | ||
Corporate Education | ||
Education Media Platform | ||
Education Software | ||
E-Transcript Exchange | ||
Interactive Learning | ||
Online Education | ||
Big Data/Cloud | Cloud Computing Services | |
Data Analysis | ||
Social Cognitive Learning | ||
Marketplaces(1) | Global Innovation Platform | |
Knowledge Networks | ||
On-Demand Commerce | ||
On-Demand Transportation | ||
Micromobility | ||
Peer-to-Peer Pet Services | ||
Financial Technology | Online Marketplace Finance(1) | |
Financial Services(1) | ||
Cannabis REIT | ||
Social/Mobile | Digital Media Platform | |
| Social Networking | |
| On-Demand Music Streaming | |
| Social Data Platform | |
Sustainability | Clean Technology | |
________________________
(1) | During the quarter ended June 30, 2019, the Company reclassified the industry theme for "Online Marketplace Finance" and "Financial Services" industries from "Marketplaces" to "Financial Technology". The industrial classifications as of December 31, 2018 were also updated to reflect this change. |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
Investment Valuation Inputs
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 December 31, 2019 and December 31, 2018 are as follows:
| As of December 31, 2019 | ||||||||||||||
| Quoted Prices in Active Markets for Identical Securities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||
Investments at Fair Value | | | | ||||||||||||
Private Portfolio Companies | | | | ||||||||||||
Common Stock | $ | — | $ | — | $ | 59,209,559 | $ | 59,209,559 | |||||||
Preferred Stock | — | — | 125,448,358 | 125,448,358 | |||||||||||
Debt Investments | — | — | 1,644,155 | 1,644,155 | |||||||||||
Options | — | — | 5,283,506 | 5,283,506 | |||||||||||
Private Portfolio Companies | — | — | 191,585,578 | 191,585,578 | |||||||||||
Publicly Traded Portfolio Companies | |||||||||||||||
Common Stock | — | — | — | — | |||||||||||
Total Portfolio Investments | — | — | 191,585,578 | 191,585,578 | |||||||||||
Non-Portfolio Investments | |||||||||||||||
U.S. Treasury bills | 50,000,000 | — | — | 50,000,000 | |||||||||||
Total Investments at Fair Value | $ | 50,000,000 | $ | — | $ | 191,585,578 | $ | 241,585,578 | |||||||
| As of December 31, 2018 | ||||||||||||||
| Quoted Prices in Active Markets for Identical Securities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||
Investments at Fair Value | | | | | |||||||||||
Private Portfolio Companies | | | | | |||||||||||
Common Stock | $ | — | $ | — | $ | 48,517,824 | $ | 48,517,824 | |||||||
Preferred Stock | — | — | 99,856,159 | 99,856,159 | |||||||||||
Debt Investments | — | — | 5,584,994 | 5,584,994 | |||||||||||
Options | — | — | 267,446 | 267,446 | |||||||||||
Private Portfolio Companies | — | — | 154,226,423 | 154,226,423 | |||||||||||
Publicly Traded Portfolio Companies | | | | | |||||||||||
Common Stock | 44,589,406 | — | — | 44,589,406 | |||||||||||
Total Portfolio Investments | 44,589,406 | — | 154,226,423 | 198,815,829 | |||||||||||
Non-Portfolio Investments | | | | | |||||||||||
U.S. Treasury bills | 99,994,000 | — | — | 99,994,000 | |||||||||||
Total Investments at Fair Value | $ | 144,583,406 | $ | — | $ | 154,226,423 | $ | 298,809,829 | |||||||
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SUTTER ROCK CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
Significant Unobservable Inputs for Level 3 Assets and Liabilities
In accordance with FASB ASC 820, the tables below provide quantitative information about the Company’s fair value measurements of its Level 3 assets as of December 31, 2019 and December 31, 2018. In addition to the techniques and inputs noted in the tables below, according to the Company’s valuation policy, the Company may also use other valuation techniques and methodologies when determining the Company’s fair value measurements. The tables below are not intended to be all-inclusive, but rather provide information on the significant Level 3 inputs as they relate to the Company’s fair value measurements. To the extent an unobservable input is not reflected in the tables below, such input is deemed insignificant with respect to the Company’s Level 3 fair value measurements as of December 31, 2019 and December 31, 2018. 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. Refer to “Note 2—Significant Accounting Policies—Investments at Fair Value” for more detail.
As of December 31, 2019 | ||||
Asset | Fair Value | Valuation Approach/ Technique(1) | Unobservable Inputs(2) | Range (Weighted Average) |
Common stock in private companies | $59,209,559 | Market approach | AFFO multiple | 16.67x - 37.32 (25.09x) |
Revenue multiples | 1.45x - 3.23x (2.86x) | |||
Liquidation value | N/A | |||
Discounted cash flow | Discount rate | 12.0% (12.0%) | ||
Preferred stock in private companies | $125,448,358 | Market approach | Revenue multiples | 1.89x - 5.43x (3.77x) |
Precedent transactions | N/A | |||
Discounted cash flow | Discount rate | 12.0% (12.0%) | ||
PWERM | Revenue multiples | 1.23x - 2.05x (1.83x) | ||
Precedent transactions | 2.97x - 3.23x (3.10x) | |||
Debt investments | $1,644,155 | Market approach | Revenue multiples | 1.45x - 1.57x (1.51x) |
PWERM | Revenue multiples | N/A | ||
Liquidation value | N/A | |||
Options | $5,283,506 | Option pricing model | Term to expiration (Years) | 0.13 - 8.30 (5.35) |
Volatility | 30.0%-48.0% (36.0%) | |||
Discounted cash flow | Discount Rate | 12.0% (12.0%) | ||
________________________
(1) | As of December 31, 2019, the Company used a hybrid market and income approach to value certain common and preferred stock investments as the Company felt this approach better reflected the fair value of these investments. By considering multiple valuation approaches (and consequently, multiple valuation techniques), the valuation approaches and techniques are not likely to change from one period of measurement to the next; however, the weighting of each in determining the final fair value of a Level 3 investment may |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
change based on recent events or transactions. The hybrid approach may also consider certain risk weightings to account for the uncertainty of future events. Refer to “Note 2—Significant Accounting Policies—Investments at Fair Value” for more detail.
(2) | The Company considers all relevant information that can reasonably be obtained when determining the fair value of Level 3 investments. Due to any given portfolio company’s information rights, changes in capital structure, recent events, transactions, or liquidity events, the type and availability of unobservable inputs may change. Increases/(decreases) in revenue multiples, earnings before interest and taxes (“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 market approach utilizes market value (revenue and EBIT) multiples of publicly traded comparable companies and available precedent sales transactions of comparable companies. The Company carefully considers numerous factors when selecting the appropriate companies whose multiples are used to value its portfolio companies. These factors include, but are not limited to, the type of organization, similarity to the business being valued, relevant risk factors, as well as size, profitability and growth expectations. In general, precedent transactions include recent rounds of financing, recent purchases made by the Company, and tender offers. Refer to “Note 2—Significant Accounting Policies—Investments at Fair Value” for more detail. |
As of December 31, 2018 | ||||
Asset | Fair Value | Valuation Approach/ Technique(1) | Unobservable Inputs(2) | Range (Weighted Average) |
Common stock in private companies | $48,517,824 | Market approach | Revenue multiples | 1.26x - 4.95x (4.04x) |
Liquidation value | N/A | |||
Discounted Cash Flow(2) | Discount rate | 12.0% (12.0)% | ||
Preferred stock in private companies | $99,856,159 | Market approach | Precedent transactions | 2.60x - 3.07x (2.69x) |
Revenue multiples | 2.20x - 4.15x (3.39x) | |||
Discounted Cash Flow(2) | Discount rate | 12.0% (12.0)% | ||
PWERM | Revenue multiples | 1.09x - 5.40x (3.18x) | ||
Liquidation value | N/A | |||
Debt investments | $5,584,994 | Market approach | Revenue multiples | 1.26x - 2.40x (2.30x) |
PWERM | Revenue multiples | 1.31x - 5.40x (1.91x) | ||
Liquidation value | N/A | |||
Options | $267,446 | Option pricing model | Term to expiration (Years) | 1.1-9.3 (2.6) |
Volatility | 28.1%-37.1% (29.0%) | |||
________________________
(1) | As of December 31, 2018, the Company used a hybrid market and income approach to value certain common and preferred stock investments as the Company felt this approach better reflected the fair value of these investments. By considering multiple valuation approaches (and consequently, multiple valuation techniques), the valuation approaches and techniques are not likely to change from one period of measurement to the next; however, the weighting of each in determining the final fair value of a Level 3 investment may change based on recent events or transactions. Refer to “Note 2—Significant Accounting Policies—Investments at Fair Value” for more detail. |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
(2) | The Company considers all relevant information that can reasonably be obtained when determining the fair value of Level 3 investments. Due to any given portfolio company’s information rights, changes in capital structure, recent events, transactions, or liquidity events, the type and availability of unobservable inputs may change. Increases/(decreases) in revenue multiples, earnings before interest and taxes (“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 market approach utilizes market value (revenue and EBIT) multiples of publicly traded comparable companies and available precedent sales transactions of comparable companies. The Company carefully considers numerous factors when selecting the appropriate companies whose multiples are used to value its portfolio companies. These factors include, but are not limited to, the type of organization, similarity to the business being valued, relevant risk factors, as well as size, profitability and growth expectations. In general, precedent transactions include recent rounds of financing, recent purchases made by the Company, and tender offers. Refer to “Note 2—Significant Accounting Policies—Investments at Fair Value” for more detail. |
The aggregate values of Level 3 assets and liabilities changed during the year ended December 31, 2019 as follows:
| Year Ended December 31, 2019 | ||||||||||||||||||
| Common Stock | Preferred Stock | Debt Investments | Options | Total | ||||||||||||||
Assets: | | | | | | ||||||||||||||
Fair Value as of December 31, 2018 | $ | 48,517,824 | $ | 99,856,159 | $ | 5,584,994 | $ | 267,446 | $ | 154,226,423 | |||||||||
Transfers out of Level 3(1) | — | (21,947,688 | ) | — | — | (21,947,688 | ) | ||||||||||||
Purchases, capitalized fees and interest | 15,001,530 | 10,576,421 | 359,095 | 16,618 | 25,953,664 | ||||||||||||||
Sales/Maturity of investments | — | — | (51,511 | ) | — | (51,511 | ) | ||||||||||||
Exercises and conversions(1) | (1,000 | ) | (6,435,123 | ) | (2,102,384 | ) | 8,538,507 | — | |||||||||||
Amortization of fixed income security premiums and discounts | — | — | 5,065 | — | 5,065 | ||||||||||||||
Realized losses | — | (16,002,159 | ) | (2,527,865 | ) | — | (18,530,024 | ) | |||||||||||
Net change in unrealized appreciation/(depreciation) included in earnings | (4,308,795 | ) | 59,400,748 | 376,761 | (3,539,065 | ) | 51,929,649 | ||||||||||||
Fair Value as of December 31, 2019 | $ | 59,209,559 | $ | 125,448,358 | $ | 1,644,155 | $ | 5,283,506 | $ | 191,585,578 | |||||||||
Net change in unrealized appreciation/ (depreciation) of Level 3 investments still held as of December 31, 2019 | $ | (4,309,794 | ) | $ | 38,560,931 | $ | (907,009 | ) | $ | (3,539,066 | ) | $ | 29,805,062 | ||||||
________________________
(1) | During the year ended December 31, 2019, the Company’s portfolio investments had the following corporate actions which are reflected above: |
Portfolio Company | Conversion from | Conversion to | ||
Lyft, Inc. | Preferred shares, Series D Preferred shares, Series E | Public Common Shares (Level 2) | ||
Ozy Media, Inc. | Convertible Promissory Note | Preferred shares, Series C-2 | ||
NestGSV, Inc (d/b/a GSV Labs, Inc.) | Common shares Preferred shares, Series A-1 Preferred shares, Series A-2 Preferred shares, Series A-3 Preferred shares, Series A-4 | Derivative Security | ||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
The aggregate values of Level 3 assets and liabilities changed during the year ended December 31, 2018 as follows:
| For the Year Ended December 31, 2018 | ||||||||||||||||||
| Common Stock | Preferred Stock | Debt Investments | Warrants | Total | ||||||||||||||
Assets: | | | | | | ||||||||||||||
Fair Value as of December 31, 2017 | $ | 86,824,096 | $ | 120,253,822 | $ | 4,916,578 | $ | 433,997 | $ | 212,428,493 | |||||||||
Transfers out of Level 3 (1) | (41,707,506 | ) | (7,734,804 | ) | — | — | (49,442,310 | ) | |||||||||||
Purchases, capitalized fees and interest | 10,108,434 | 2,177 | 1,044,531 | 30,647 | 11,185,789 | ||||||||||||||
Sales/Maturity of investments (2) | (6,910,798 | ) | (16,958,428 | ) | (722,776 | ) | — | (24,592,002 | ) | ||||||||||
Realized losses | (1,567,122 | ) | (10,458,567 | ) | (680 | ) | — | (12,026,369 | ) | ||||||||||
Exercises and conversions(1) | 5,537,205 | (5,514,077 | ) | (5,080 | ) | (18,048 | ) | — | |||||||||||
Amortization of fixed income security premiums and discounts | — | — | 30,660 | — | 30,660 | ||||||||||||||
Net change in unrealized depreciation included in earnings | (3,766,485 | ) | 20,266,036 | 321,761 | (179,150 | ) | 16,642,162 | ||||||||||||
Fair Value as of December 31, 2018 | $ | 48,517,824 | $ | 99,856,159 | $ | 5,584,994 | $ | 267,446 | $ | 154,226,423 | |||||||||
Net change in unrealized appreciation/ (depreciation) of Level 3 investments still held as of December 31, 2018 | $ | (12,412,555 | ) | $ | 10,061,576 | $ | 317,201 | $ | (156,021 | ) | $ | (2,189,799 | ) | ||||||
________________________
(1) | During year ended December 31, 2018, the Company’s portfolio investments had the following corporate actions which are reflected above: |
Portfolio Company | Transfer from | Transfer to | ||
Dropbox, Inc. | Preferred shares, Series A-1 & Common shares | Public Common Shares (Level 2) | ||
Spotify Technology S.A. | Common shares | Public Common Shares (Level 1) | ||
Curious.com, Inc. | Preferred shares, Series B | Common shares | ||
SharesPost, Inc. | Common warrants | Common shares | ||
(2) | Sales of investments includes escrow proceeds receivable of approximately $2.5 million from the sale of the Company’s investments in |
General Assembly Space, Inc., Lytro, Inc., SugarCRM, Inc., and DreamBox Learning, Inc.
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SUTTER ROCK CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
Schedule of Investments In, and Advances to, Affiliates
Transactions during the year ended December 31, 2019 involving the Company’s controlled investments and non-controlled/affiliate investments were as follows:
Schedule of Investments In, and Advances to, Affiliate | |||||||||||||||||||||||||||||||||||
Type/Industry/Portfolio Company/Investment | Principal/ Quantity | Interest, Fees, or Dividends Credited in Income | Fair Value at December 31, 2018 | Corporate Action | Purchases, Capitalized Fees, Interest and Amortization | Realized Gains/(Losses) | Unrealized Gains/(Losses) | Fair Value at December 31, 2019 | Percentage of Net Assets | ||||||||||||||||||||||||||
CONTROLLED INVESTMENTS*(2) | |||||||||||||||||||||||||||||||||||
Preferred Stock | |||||||||||||||||||||||||||||||||||
Clean Technology | |||||||||||||||||||||||||||||||||||
SPBRX, INC. (f/k/a GSV Sustainability Partners, Inc.)–Preferred shares, Class A***(3) | 14,300,000 | $ | 400,000 | $ | 750,198 | $ | — | $ | — | $ | — | $ | 25,000 | $ | 775,198 | 0.39 | % | ||||||||||||||||||
Global Innovation Platform | |||||||||||||||||||||||||||||||||||
NestGSV, Inc. (d/b/a GSV Labs, Inc.)–Preferred stock Series A-4 (7) | — | — | 4,960,553 | (4,904,498 | ) | — | — | (56,055 | ) | — | — | % | |||||||||||||||||||||||
NestGSV, Inc. (d/b/a GSV Labs, Inc.)–Preferred stock Series A-3 (7) | — | — | 1,735,134 | (2,005,730 | ) | — | — | 270,596 | — | — | % | ||||||||||||||||||||||||
NestGSV, Inc. (d/b/a GSV Labs, Inc.)–Preferred stock Series A-2 (7) | — | — | 300,000 | (605,500 | ) | — | — | 305,500 | — | — | % | ||||||||||||||||||||||||
NestGSV, Inc. (d/b/a GSV Labs, Inc.)–Preferred stock Series A-1 (7) | — | — | 499,999 | (1,021,778 | ) | — | — | 521,779 | — | — | % | ||||||||||||||||||||||||
Total Global Innovation Platform | — | 7,495,686 | (8,537,506 | ) | — | — | 1,041,820 | — | — | % | |||||||||||||||||||||||||
Total Preferred Stock | $ | 400,000 | $ | 8,245,884 | $ | (8,537,506 | ) | $ | — | $ | — | $ | 1,066,820 | $ | 775,198 | 0.39 | % | ||||||||||||||||||
Common Stock | |||||||||||||||||||||||||||||||||||
Clean Technology | |||||||||||||||||||||||||||||||||||
SPBRX, INC. (f/k/a GSV Sustainability Partners, Inc.)–Common shares | 100,000 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | — | % | ||||||||||||||||||
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SUTTER ROCK CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
Schedule of Investments In, and Advances to, Affiliate | |||||||||||||||||||||||||||||||||||
Type/Industry/Portfolio Company/Investment | Principal/ Quantity | Interest, Fees, or Dividends Credited in Income | Fair Value at December 31, 2018 | Corporate Action | Purchases, Capitalized Fees, Interest and Amortization | Realized Gains/(Losses) | Unrealized Gains/(Losses) | Fair Value at December 31, 2019 | Percentage of Net Assets | ||||||||||||||||||||||||||
Global Innovation Platform | |||||||||||||||||||||||||||||||||||
NestGSV, Inc. (d/b/a GSV Labs, Inc.)–Common shares (7) | — | — | — | (1,000 | ) | — | — | 1,000 | — | — | % | ||||||||||||||||||||||||
Total Common Stock | $ | — | $ | — | $ | (1,000 | ) | $ | — | $ | — | $ | 1,000 | $ | — | — | % | ||||||||||||||||||
TOTAL CONTROLLED INVESTMENTS*(2) | $ | 400,000 | $ | 8,245,884 | $ | (8,538,506 | ) | $ | — | $ | — | $ | 1,067,820 | $ | 775,198 | 0.39 | % | ||||||||||||||||||
NON-CONTROLLED/AFFILIATE INVESTMENTS*(1) | |||||||||||||||||||||||||||||||||||
Debt Investments | |||||||||||||||||||||||||||||||||||
Corporate Education | |||||||||||||||||||||||||||||||||||
CUX, Inc. (d/b/a CorpU)–Senior Subordinated Convertible Promissory Note 4% Due 2/14/2023(5) | $ | 1,251,158 | $ | (13,142 | ) | $ | 1,360,489 | $ | — | $ | 3,553 | $ | (109,331 | ) | $ | (941,922 | ) | $ | 312,789 | 0.16 | % | ||||||||||||||
Digital Media Platform | |||||||||||||||||||||||||||||||||||
Ozy Media, Inc.–Convertible Promissory Note 5% Due 12/31/2018***(6) | $ | — | 72,864 | 3,153,575 | (2,102,384 | ) | — | — | (1,051,191 | ) | — | — | % | ||||||||||||||||||||||
Social Cognitive Learning | |||||||||||||||||||||||||||||||||||
Declara, Inc.–Convertible Promissory Note 12% Due 4/30/2018 | $ | — | — | — | — | 680 | (2,334,832 | ) | 2,334,152 | — | — | % | |||||||||||||||||||||||
Global Innovation Platform | |||||||||||||||||||||||||||||||||||
NestGSV, Inc. (d/b/a GSV Labs, Inc.) –Convertible Promissory Note 8% Due 8/23/2024***(7) | $ | 1,010,198 | 107,611 | 936,525 | — | 78,739 | — | (5,066 | ) | 1,010,198 | 0.50 | % | |||||||||||||||||||||||
Total Global Innovation Platform | 107,611 | 936,525 | — | 78,739 | — | (5,066 | ) | 1,010,198 | 0.50 | % | |||||||||||||||||||||||||
Total Debt Investments | $ | 167,333 | $ | 5,450,589 | $ | (2,102,384 | ) | $ | 82,972 | $ | (2,444,163 | ) | $ | 335,973 | $ | 1,322,987 | 0.66 | % | |||||||||||||||||
Preferred Stock | |||||||||||||||||||||||||||||||||||
Corporate Education | |||||||||||||||||||||||||||||||||||
CUX, Inc. (d/b/a CorpU)–Convertible preferred shares, Series D 6% | 169,033 | $ | — | $ | 878,005 | $ | — | $ | — | $ | — | $ | (843,025 | ) | $ | 34,980 | 0.02 | % | |||||||||||||||||
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SUTTER ROCK CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
Schedule of Investments In, and Advances to, Affiliate | |||||||||||||||||||||||||||||||||||
Type/Industry/Portfolio Company/Investment | Principal/ Quantity | Interest, Fees, or Dividends Credited in Income | Fair Value at December 31, 2018 | Corporate Action | Purchases, Capitalized Fees, Interest and Amortization | Realized Gains/(Losses) | Unrealized Gains/(Losses) | Fair Value at December 31, 2019 | Percentage of Net Assets | ||||||||||||||||||||||||||
CUX, Inc. (d/b/a CorpU) -Convertible preferred shares, Series C 8% | 615,763 | — | — | — | — | — | — | — | — | % | |||||||||||||||||||||||||
Total Corporate Education | — | 878,005 | — | — | — | (843,025 | ) | 34,980 | 0.02 | % | |||||||||||||||||||||||||
Social Cognitive Learning | |||||||||||||||||||||||||||||||||||
Declara, Inc.–Preferred shares, Series A 8% | — | — | — | — | — | (9,999,999 | ) | 9,999,999 | — | — | % | ||||||||||||||||||||||||
Education Media Platform | |||||||||||||||||||||||||||||||||||
EdSurge, Inc.–Preferred shares, Series A-1 | — | — | 250,000 | — | — | (501,360 | ) | 251,360 | — | — | % | ||||||||||||||||||||||||
EdSurge, Inc.–Preferred shares, Series A | — | — | 269,848 | — | — | (500,801 | ) | 230,953 | — | — | % | ||||||||||||||||||||||||
Total Education Media Platform | — | 519,848 | — | — | (1,002,161 | ) | 482,313 | — | — | % | |||||||||||||||||||||||||
Knowledge Networks | |||||||||||||||||||||||||||||||||||
Maven Research, Inc.–Preferred shares, Series C | 318,979 | — | — | — | — | — | — | — | — | % | |||||||||||||||||||||||||
Maven Research, Inc.–Preferred shares, Series B | 49,505 | — | — | — | — | — | — | — | — | % | |||||||||||||||||||||||||
Total Knowledge Networks | — | — | — | — | — | — | — | — | % | ||||||||||||||||||||||||||
Digital Media Platform | |||||||||||||||||||||||||||||||||||
OzyMedia, Inc.–Preferred shares, Series C-2 6% (6) | 683,482 | — | — | 2,102,384 | 311,794 | — | 556,074 | 2,970,252 | 1.49 | % | |||||||||||||||||||||||||
OzyMedia, Inc.–Preferred shares, Series B 6% | 922,509 | — | — | — | — | — | 5,001,420 | 5,001,420 | 2.50 | % | |||||||||||||||||||||||||
OzyMedia, Inc.–Preferred shares, Series A 6% | 1,090,909 | — | — | — | — | — | 4,528,107 | 4,528,107 | 2.26 | % | |||||||||||||||||||||||||
OzyMedia, Inc.–Preferred shares, Series Seed 6% | 500,000 | — | — | — | — | — | 2,002,143 | 2,002,143 | 1.00 | % | |||||||||||||||||||||||||
Total Digital Media Platform | — | — | 2,102,384 | 311,794 | — | 12,087,744 | 14,501,922 | 7.25 | % | ||||||||||||||||||||||||||
Global Innovation Platform | |||||||||||||||||||||||||||||||||||
NestGSV, Inc. (d/b/a GSV Labs, Inc.)–Preferred stock Series A-4 (7) | — | — | — | — | — | — | — | — | — | % | |||||||||||||||||||||||||
NestGSV, Inc. (d/b/a GSV Labs, Inc.)–Preferred stock Series A-3 (7) | — | — | — | — | — | — | — | — | — | % | |||||||||||||||||||||||||
113
SUTTER ROCK CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
Schedule of Investments In, and Advances to, Affiliate | |||||||||||||||||||||||||||||||||||
Type/Industry/Portfolio Company/Investment | Principal/ Quantity | Interest, Fees, or Dividends Credited in Income | Fair Value at December 31, 2018 | Corporate Action | Purchases, Capitalized Fees, Interest and Amortization | Realized Gains/(Losses) | Unrealized Gains/(Losses) | Fair Value at December 31, 2019 | Percentage of Net Assets | ||||||||||||||||||||||||||
NestGSV, Inc. (d/b/a GSV Labs, Inc.)–Preferred stock Series A-2 (7) | — | — | — | — | — | — | — | — | — | % | |||||||||||||||||||||||||
NestGSV, Inc. (d/b/a GSV Labs, Inc.)–Preferred stock Series A-1 (7) | — | — | — | — | — | — | — | — | — | % | |||||||||||||||||||||||||
Total Global Innovation Platform | | — | — | — | — | — | — | — | — | % | |||||||||||||||||||||||||
Interactive Learning | |||||||||||||||||||||||||||||||||||
StormWind, LLC–Preferred shares, Series D 8%(4)(8) | 329,337 | $ | — | — | — | $ | 257,267 | $ | — | 245,853 | 503,120 | 0.25 | % | ||||||||||||||||||||||
StormWind, LLC–Preferred shares, Series C 8%(4) | 2,779,134 | — | 7,194,971 | — | — | — | (1,803,971 | ) | 5,391,000 | 2.70 | % | ||||||||||||||||||||||||
StormWind, LLC–Preferred shares, Series B 8%(4) | 3,279,629 | — | 5,770,328 | — | — | — | (2,521,524 | ) | 3,248,804 | 1.62 | % | ||||||||||||||||||||||||
StormWind, LLC–Preferred shares, Series A 8%(4) | 366,666 | — | 421,525 | — | — | — | (263,576 | ) | 157,949 | 0.08 | % | ||||||||||||||||||||||||
Total Interactive Learning | — | 13,386,824 | — | 257,267 | — | (4,343,218 | ) | 9,300,873 | 4.65 | % | |||||||||||||||||||||||||
Total Preferred Stock | $ | — | $ | 14,784,677 | $ | 2,102,384 | $ | 569,061 | $ | (11,002,160 | ) | $ | 17,383,813 | $ | 23,837,775 | 11.92 | % | ||||||||||||||||||
Options | |||||||||||||||||||||||||||||||||||
Corporate Education | |||||||||||||||||||||||||||||||||||
CUX, Inc. (d/b/a CorpU) –Preferred warrants, Series D, Strike Price $4.59, Expiration Date 2/14/2020 | 16,903 | $ | — | $ | 19,946 | $ | — | $ | — | $ | — | $ | (19,946 | ) | $ | — | — | % | |||||||||||||||||
Digital Media Platform | |||||||||||||||||||||||||||||||||||
OzyMedia, Inc.–Common Warrants, Strike Price $0.01, Expiration Date 4/9/2028 | 295,565 | — | — | — | — | — | 1,182,260 | 1,182,260 | 0.59 | % | |||||||||||||||||||||||||
Global Innovation Platform | |||||||||||||||||||||||||||||||||||
NestGSV, Inc. (d/b/a GSV Labs, Inc.)–Preferred Warrant Series A-3, Strike Price $1.33, Expiration Date 4/4/2021(7) | 187,500 | — | 26,250 | — | — | — | (5,625 | ) | 20,625 | 0.01 | % | ||||||||||||||||||||||||
NestGSV, Inc. (d/b/a GSV Labs, Inc.)–Preferred Warrant Series A-4, Strike Price $1.33, Expiration Date 10/6/2021(7) | 500,000 | — | 145,000 | — | — | — | (10,000 | ) | 135,000 | 0.07 | % | ||||||||||||||||||||||||
114
SUTTER ROCK CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
Schedule of Investments In, and Advances to, Affiliate | |||||||||||||||||||||||||||||||||||
Type/Industry/Portfolio Company/Investment | Principal/ Quantity | Interest, Fees, or Dividends Credited in Income | Fair Value at December 31, 2018 | Corporate Action | Purchases, Capitalized Fees, Interest and Amortization | Realized Gains/(Losses) | Unrealized Gains/(Losses) | Fair Value at December 31, 2019 | Percentage of Net Assets | ||||||||||||||||||||||||||
NestGSV, Inc. (d/b/a GSV Labs, Inc.)–Preferred Warrant Series A-4, Strike Price $1.33, Expiration Date 7/18/2021(7) | 250,000 | — | 70,000 | — | — | — | (7,500 | ) | 62,500 | 0.03 | % | ||||||||||||||||||||||||
NestGSV, Inc. (d/b/a GSV Labs, Inc.)–Preferred Warrant Series B, Strike Price $2.31, Expiration Date 11/29/2021 (7) | 100,000 | — | 556 | — | — | — | (556 | ) | — | — | % | ||||||||||||||||||||||||
NestGSV, Inc. (d/b/a GSV Labs, Inc.)–Preferred Warrant Series B, Strike Price $2.31, Expiration Date 5/29/2022(7) | 125,000 | — | 694 | — | — | — | (694 | ) | — | — | % | ||||||||||||||||||||||||
NestGSV, Inc. (d/b/a GSV Labs, Inc.)–Preferred Warrant Series B, Strike Price $2.31, Expiration Date 12/31/2023(7) | 250,000 | — | 5,000 | — | — | — | (2,500 | ) | 2,500 | 0.00 | % | ||||||||||||||||||||||||
Derivative Security, Expiration Date 8/23/2024(7) | 1 | — | — | 8,538,506 | 16,618 | — | (4,674,503 | ) | 3,880,621 | 1.94 | % | ||||||||||||||||||||||||
Total Global Innovation Platform | — | 247,500 | 8,538,506 | 16,618 | — | (4,701,378 | ) | 4,101,246 | 2.05 | % | |||||||||||||||||||||||||
Total Options | | $ | — | $ | 267,446 | $ | 8,538,506 | $ | 16,618 | $ | — | $ | (3,539,064 | ) | $ | 5,283,506 | 2.64 | % | |||||||||||||||||
Common Stock | |||||||||||||||||||||||||||||||||||
Online Education | |||||||||||||||||||||||||||||||||||
Curious.com, Inc.–Common shares | 1,135,944 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | — | % | ||||||||||||||||||
Cannabis REIT | |||||||||||||||||||||||||||||||||||
GreenAcreage Real Estate Corp. -Common shares | 375,000 | — | — | — | 7,501,530 | — | (1,530 | ) | 7,500,000 | 3.75 | % | ||||||||||||||||||||||||
Total Common Stock | $ | — | $ | — | $ | — | $ | 7,501,530 | $ | — | $ | (1,530 | ) | $ | 7,500,000 | 3.75 | % | ||||||||||||||||||
TOTAL NON-CONTROLLED/AFFILIATE INVESTMENTS*(1) | | $ | 167,333 | $ | 20,502,712 | $ | 8,538,506 | $ | 8,170,181 | $ | (13,446,323 | ) | $ | 14,179,192 | $ | 37,944,268 | 18.98 | % | |||||||||||||||||
115
SUTTER ROCK CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
____________________
* | All portfolio investments are non-income-producing, unless otherwise identified. Equity investments are subject to lock-up restrictions upon their IPO. Preferred dividends are generally only payable when declared and paid by the portfolio company's board of directors. Unless otherwise noted, all investments were pledged as collateral under the Credit Facility. The Company’s directors, officers, employees and staff, as applicable, may serve on the board of directors of the Company’s portfolio investments. (Refer to “Note 3—Related-Party Arrangements”). All portfolio investments are considered Level 3 and valued using significant unobservable inputs, unless otherwise noted. (Refer to “Note 4—Investments at Fair Value”). All portfolio investments are considered Level 3 and valued using unobservable inputs, unless otherwise noted. All of the Company's portfolio investments are restricted as to resale, unless otherwise noted, and were valued at fair value as determined in good faith by the Company’s Board of Directors. (Refer to "Note 2—Significant Accounting Policies—Investments at Fair Value"). |
** Indicates assets that Sutter Rock Capital Corp believes do not represent “qualifying assets” under Section 55(a) of the Investment Company Act of 1940, as amended (the “1940 Act”). Of the Company’s total investments as of December 31, 2019, 0.00% of its total investments are non-qualifying assets.
*** | Investment is income-producing. |
(1) | “Affiliate Investments” are investments in those companies that are “Affiliated Companies” of Sutter Rock Capital Corp., as defined in the 1940 Act. In general, a company is deemed to be an “Affiliate” of Sutter Rock Capital Corp. if Sutter Rock Capital Corp. owns 5% or more of the voting securities (i.e., securities with the right to elect directors) of such company. |
(2) | “Control Investments” are investments in those companies that are “Controlled Companies” of Sutter Rock Capital Corp., as defined in the 1940 Act. In general, under the 1940 Act, the Company would “Control” a portfolio company if the Company owned more than 25% of its outstanding voting securities (i.e., securities with the right to elect directors) and/or had the power to exercise control over the management or policies of such portfolio company. |
(3) | During the year ended December 31, 2019, SPBRX, INC. (f/k/a GSV Sustainability Partners, Inc.) declared, and Sutter Rock Capital Corp. received, an aggregate of $400,000 in dividend distributions. |
(4) | Sutter Rock Capital Corp.’s investments in StormWind, LLC are held through Sutter Rock Capital Corp.'s wholly owned subsidiary, GSVC SW Holdings, Inc. |
(5) | On October 24, 2019, CUX, Inc. (d/b/a CorpU) completed a recapitalization, which amended Sutter Rock Capital Corp.'s investment in the Senior Subordinated Convertible Promissory Note. As a result of the recapitalization, the principal amount of Sutter Rock Capital Corp.'s Senior Subordinated Convertible Promissory Note was reduced by $109,331, the interest rate was reduced to 4%, and the maturity was extended to February 14, 2023. |
(6) | On September 11, 2019, Sutter Rock Capital Corp. agreed to convert its 5% Convertible Promissory Note due 12/31/2018 to Ozy Media, Inc. and all related accrued interest, into 683,482 shares of Ozy Media, Inc.'s Series C-2 preferred shares. |
(7) | On August 23, 2019, Sutter Rock Capital Corp. amended the structure of its investment in NestGSV, Inc. (d/b/a GSV Labs, Inc.). As part of the agreement, Sutter Rock’s equity holdings (warrants notwithstanding) were restructured into a derivative security. NestGSV, Inc. (d/b/a GSV Labs,Inc.) has the right to call the position at any time over a five year period, while Sutter Rock Capital Corp. can put the shares to NestGSV, Inc. (d/b/a GSV Labs, Inc.) at the end of the five year period. As part of the agreement, previously accrued interest under Sutter Rock Capital Corp.’s 12% Convertible Promissory Note due 12/31/2019 will be capitalized into the principal of the extended note, and the interest on the note is reduced from 12% to 8%. The Convertible Promissory Note’s maturity was extended to August 23, 2024. Under the amended structure, Sutter Rock Capital Corp.’s fully diluted ownership of voting securities decreased from 50.0% to 8.5%. As such, Sutter Rock Capital Corp.'s investments in NestGSV, Inc. (d/b/a GSV Labs, Inc.) have been recategorized from controlled investments to non-controlled/affiliated investments. |
(8) | On November 26, 2019, Sutter Rock Capital Corp. invested $250,000 in StormWind, LLC's Series D financing round. As part of the round, Sutter Rock Capital Corp.'s fully diluted ownership of voting securities decreased from 25.6% to 23.4%. As such, Sutter Rock Capital Corp.'s investments in StormWind, LLC have been recategorized from controlled investments to non-controlled/affiliated investments. |
116
SUTTER ROCK CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
Schedule of Investments In, and Advances to, Affiliates
Transactions during the year ended December 31, 2018 involving the Company’s controlled investments and non-controlled/affiliate investments were as follows:
Type/Industry/Portfolio Company/Investment | Principal/ Quantity | Interest, Fees, or Dividends Credited in Income | Fair Value at December 31, 2017 | Purchases, Capitalized Fees, Interest and Amortization | Sales | Realized Gains/(Losses) | Unrealized Gains/(Losses) | Fair Value at December 31, 2018 | Percentage of Net Assets | ||||||||||||||||||||||||||
CONTROLLED INVESTMENTS*(2) | |||||||||||||||||||||||||||||||||||
Debt Investments | |||||||||||||||||||||||||||||||||||
Global Innovation Platform | |||||||||||||||||||||||||||||||||||
NestGSV, Inc. (d/b/a GSV Labs, Inc.)–Convertible Promissory Note 12% Due 12/31/2019***(10) | $ | 936,525 | $ | 57,466 | $ | 560,199 | $ | 392,437 | $ | — | $ | — | $ | (16,111 | ) | $ | 936,525 | 0.48 | % | ||||||||||||||||
NestGSV, Inc. (d/b/a GSV Labs, Inc.)–Unsecured Promissory Note 12% Due 1/15/2018***(8) | $ | — | 2,369 | 592,129 | — | (592,129 | ) | (680 | ) | 680 | — | — | % | ||||||||||||||||||||||
Total Global Innovation Platform | 59,835 | 1,152,328 | 392,437 | (592,129 | ) | (680 | ) | (15,431 | ) | 936,525 | 0.48 | % | |||||||||||||||||||||||
Total Debt Investments | $ | 59,835 | $ | 1,152,328 | $ | 392,437 | $ | (592,129 | ) | $ | (680 | ) | $ | (15,431 | ) | $ | 936,525 | 0.48 | % | ||||||||||||||||
Preferred Stock | |||||||||||||||||||||||||||||||||||
Clean Technology | |||||||||||||||||||||||||||||||||||
SPBRX, INC. (f/k/a GSV Sustainability Partners, Inc.)–Preferred shares, Class A***(12) | 14,300,000 | $ | 625,000 | $ | 1,069,862 | $ | — | $ | — | $ | — | $ | (319,664 | ) | $ | 750,198 | 0.38 | % | |||||||||||||||||
Global Innovation Platform | |||||||||||||||||||||||||||||||||||
NestGSV, Inc. (d/b/a GSV Labs, Inc.)–Preferred stock Series A-4 | 3,720,424 | — | 5,390,842 | — | — | — | (430,289 | ) | 4,960,553 | 2.54 | % | ||||||||||||||||||||||||
NestGSV, Inc. (d/b/a GSV Labs, Inc.)–Preferred stock Series A-3 | 1,561,625 | — | 1,885,644 | — | — | — | (150,510 | ) | 1,735,134 | 0.89 | % | ||||||||||||||||||||||||
NestGSV, Inc. (d/b/a GSV Labs, Inc.)–Preferred stock Series A-2 | 450,001 | — | 326,022 | — | — | — | (26,022 | ) | 300,000 | 0.15 | % | ||||||||||||||||||||||||
NestGSV, Inc. (d/b/a GSV Labs, Inc.)–Preferred stock Series A-1 | 1,000,000 | — | 543,370 | — | — | — | (43,371 | ) | 499,999 | 0.26 | % | ||||||||||||||||||||||||
Total Global Innovation Platform | — | 8,145,878 | — | — | — | (650,192 | ) | 7,495,686 | 3.84 | % | |||||||||||||||||||||||||
Interactive Learning | |||||||||||||||||||||||||||||||||||
StormWind, LLC–Preferred shares, Series C 8%(3) | 2,779,134 | — | 7,223,904 | — | — | — | (28,933 | ) | 7,194,971 | 3.68 | % | ||||||||||||||||||||||||
StormWind, LLC–Preferred shares, Series B 8%(3) | 3,279,629 | — | 5,804,472 | — | — | — | (34,144 | ) | 5,770,328 | 2.95 | % | ||||||||||||||||||||||||
StormWind, LLC–Preferred shares, Series A 8%(3) | 366,666 | — | 425,342 | — | — | — | (3,817 | ) | 421,525 | 0.22 | % | ||||||||||||||||||||||||
Total Interactive Learning | — | 13,453,718 | — | — | — | (66,894 | ) | 13,386,824 | 6.85 | % | |||||||||||||||||||||||||
Total Preferred Stock | 625,000 | 22,669,458 | — | — | — | (1,036,750 | ) | 21,632,708 | 11.07 | % | |||||||||||||||||||||||||
117
SUTTER ROCK CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
Type/Industry/Portfolio Company/Investment | Principal/ Quantity | Interest, Fees, or Dividends Credited in Income | Fair Value at December 31, 2017 | Purchases, Capitalized Fees, Interest and Amortization | Sales | Realized Gains/(Losses) | Unrealized Gains/(Losses) | Fair Value at December 31, 2018 | Percentage of Net Assets | ||||||||||||||||||||||||||
Warrants | |||||||||||||||||||||||||||||||||||
Global Innovation Platform | |||||||||||||||||||||||||||||||||||
NestGSV, Inc. (d/b/a GSV Labs, Inc.)–Preferred Warrant Series A-3, Strike Price $1.33, Expiration Date 4/4/2021(10) | 187,500 | $ | — | $ | 1,875 | $ | — | $ | — | $ | — | $ | 24,375 | $ | 26,250 | 0.01 | % | ||||||||||||||||||
NestGSV, Inc. (d/b/a GSV Labs, Inc.)–Preferred Warrant Series A-4, Strike Price $1.33, Expiration Date 10/6/2021(10) | 500,000 | — | 160,000 | — | — | — | (15,000 | ) | 145,000 | 0.07 | % | ||||||||||||||||||||||||
NestGSV, Inc. (d/b/a GSV Labs, Inc.)–Preferred Warrant Series A-4, Strike Price $1.33, Expiration Date 7/18/2021 | 250,000 | — | 102,500 | — | — | — | (32,500 | ) | 70,000 | 0.04 | % | ||||||||||||||||||||||||
NestGSV, Inc. (d/b/a GSV Labs, Inc.)–Preferred Warrant Series B, Strike Price $2.31, Expiration Date 11/29/2021 | 100,000 | — | 41,000 | — | — | — | (40,444 | ) | 556 | 0.00 | % | ||||||||||||||||||||||||
NestGSV, Inc. (d/b/a GSV Labs, Inc.)–Preferred Warrant Series B, Strike Price $2.31, Expiration Date 5/29/2022 | 125,000 | — | 80,000 | — | — | — | (79,306 | ) | 694 | 0.00 | % | ||||||||||||||||||||||||
NestGSV, Inc. (d/b/a GSV Labs, Inc.)–Preferred Warrant Series B, Strike Price $2.31, Expiration Date 12/31/2023(10) | 250,000 | — | — | 5,080 | — | — | (80 | ) | 5,000 | 0.00 | % | ||||||||||||||||||||||||
Total Global Innovation Platform | — | 385,375 | 5,080 | — | — | (142,955 | ) | 247,500 | 0.12 | % | |||||||||||||||||||||||||
Total Warrants | $ | — | $ | 385,375 | $ | 5,080 | $ | — | $ | — | $ | (142,955 | ) | $ | 247,500 | 0.12 | % | ||||||||||||||||||
Common Stock | |||||||||||||||||||||||||||||||||||
Clean Technology | |||||||||||||||||||||||||||||||||||
SPBRX, INC. (f/k/a GSV Sustainability Partners, Inc.)–Common shares | 100,000 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | — | % | ||||||||||||||||||
Global Innovation Platform | |||||||||||||||||||||||||||||||||||
NestGSV, Inc. (d/b/a GSV Labs, Inc.)–Common shares | 200,000 | — | — | — | — | — | — | — | — | % | |||||||||||||||||||||||||
Total Common Stock | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | — | % | |||||||||||||||||||
TOTAL CONTROLLED INVESTMENTS*(2) | $ | 684,835 | $ | 24,207,161 | $ | 397,517 | $ | (592,129 | ) | $ | (680 | ) | $ | (1,195,135 | ) | $ | 22,816,733 | 11.68 | % | ||||||||||||||||
NON-CONTROLLED/AFFILIATE INVESTMENTS*(1) | |||||||||||||||||||||||||||||||||||
Debt Investments | |||||||||||||||||||||||||||||||||||
Corporate Education | |||||||||||||||||||||||||||||||||||
CUX, Inc. (d/b/a CorpU)–Senior Subordinated Convertible Promissory Note 10% Due 2/14/2020***(4) | $ | 1,360,489 | $ | 104,256 | $ | 1,259,712 | $ | 102,257 | $ | — | $ | — | $ | (1,480 | ) | $ | 1,360,489 | 0.70 | % | ||||||||||||||||
118
SUTTER ROCK CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
Type/Industry/Portfolio Company/Investment | Principal/ Quantity | Interest, Fees, or Dividends Credited in Income | Fair Value at December 31, 2017 | Purchases, Capitalized Fees, Interest and Amortization | Sales | Realized Gains/(Losses) | Unrealized Gains/(Losses) | Fair Value at December 31, 2018 | Percentage of Net Assets | ||||||||||||||||||||||||||
Digital Media Platform | |||||||||||||||||||||||||||||||||||
Ozy Media, Inc.–Convertible Promissory Note 5% Due 12/31/2018(7) | $ | 2,102,384 | 268,104 | 1,067,639 | 133,031 | (30,647 | ) | — | 1,983,552 | 3,153,575 | 1.61 | % | |||||||||||||||||||||||
Ozy Media, Inc.–Promissory Note 10% Due 2/12/2018***(7) | $ | — | 2,384 | — | 100,000 | (100,000 | ) | — | — | — | — | % | |||||||||||||||||||||||
Total Digital Media Platform | 270,488 | 1,067,639 | 233,031 | (130,647 | ) | — | 1,983,552 | 3,153,575 | 1.61 | % | |||||||||||||||||||||||||
Social Cognitive Learning | |||||||||||||||||||||||||||||||||||
Declara, Inc.–Convertible Promissory Note 12% Due 4/30/2018(6)(9) | $ | 2,327,727 | 207,069 | 1,120,329 | 212,254 | — | — | (1,332,583 | ) | — | — | % | |||||||||||||||||||||||
Total Debt Investments | $ | 581,813 | $ | 3,447,680 | $ | 547,542 | $ | (130,647 | ) | $ | — | $ | 649,489 | $ | 4,514,064 | 2.31 | % | ||||||||||||||||||
Preferred Stock | |||||||||||||||||||||||||||||||||||
Corporate Education | |||||||||||||||||||||||||||||||||||
CUX, Inc. (d/b/a CorpU)–Convertible preferred shares, Series D 6% | 169,033 | $ | — | $ | 989,489 | $ | — | $ | — | $ | — | $ | (111,484 | ) | $ | 878,005 | 0.45 | % | |||||||||||||||||
CUX, Inc. (d/b/a CorpU) -Convertible preferred shares, Series C 8% | 615,763 | — | 480,184 | — | — | — | (480,184 | ) | — | — | % | ||||||||||||||||||||||||
Total Corporate Education | — | 1,469,673 | — | — | — | (591,668 | ) | 878,005 | 0.45 | % | |||||||||||||||||||||||||
Social Cognitive Learning | |||||||||||||||||||||||||||||||||||
Declara, Inc.–Preferred shares, Series A 8% | 10,716,390 | — | 382,678 | — | — | — | (382,678 | ) | — | — | % | ||||||||||||||||||||||||
Education Media Platform | |||||||||||||||||||||||||||||||||||
EdSurge, Inc.–Preferred shares, Series A-1 | 378,788 | — | 500,000 | — | — | — | (250,000 | ) | 250,000 | 0.13 | % | ||||||||||||||||||||||||
EdSurge, Inc.–Preferred shares, Series A | 494,365 | — | 581,917 | — | — | — | (312,069 | ) | 269,848 | 0.14 | % | ||||||||||||||||||||||||
Total Education Media Platform | — | 1,081,917 | — | — | — | (562,069 | ) | 519,848 | 0.27 | % | |||||||||||||||||||||||||
Knowledge Networks | |||||||||||||||||||||||||||||||||||
Maven Research, Inc.–Preferred shares, Series C | 318,979 | — | 501,240 | — | — | — | (501,240 | ) | — | — | % | ||||||||||||||||||||||||
Maven Research, Inc.–Preferred shares, Series B | 49,505 | — | 50,000 | — | — | — | (50,000 | ) | — | — | % | ||||||||||||||||||||||||
Total Knowledge Networks | — | 551,240 | — | — | — | (551,240 | ) | — | — | % | |||||||||||||||||||||||||
Digital Media Platform | |||||||||||||||||||||||||||||||||||
OzyMedia, Inc.–Preferred shares, Series B 6% | 922,509 | — | 2,367,022 | — | — | — | (2,367,022 | ) | — | — | % | ||||||||||||||||||||||||
OzyMedia, Inc.–Preferred shares, Series A 6% | 1,090,909 | — | 1,419,810 | — | — | — | (1,419,810 | ) | — | — | % | ||||||||||||||||||||||||
OzyMedia, Inc.–Preferred shares, Series Seed 6% | 500,000 | — | 236,635 | — | — | — | (236,635 | ) | — | — | % | ||||||||||||||||||||||||
Total Digital Media Platform | — | 4,023,467 | — | — | — | (4,023,467 | ) | — | — | % | |||||||||||||||||||||||||
Total Preferred Stock | $ | — | $ | 7,508,975 | $ | — | $ | — | $ | — | $ | (6,111,122 | ) | $ | 1,397,854 | 0.72 | % | ||||||||||||||||||
119
SUTTER ROCK CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
Type/Industry/Portfolio Company/Investment | Principal/ Quantity | Interest, Fees, or Dividends Credited in Income | Fair Value at December 31, 2017 | Purchases, Capitalized Fees, Interest and Amortization | Sales | Realized Gains/(Losses) | Unrealized Gains/(Losses) | Fair Value at December 31, 2018 | Percentage of Net Assets | ||||||||||||||||||||||||||
Warrants | |||||||||||||||||||||||||||||||||||
Corporate Education | |||||||||||||||||||||||||||||||||||
CUX, Inc. (d/b/a CorpU) –Preferred warrants, Series D, Strike Price $4.59, Expiration Date 2/14/2020(5) | 16,903 | $ | — | $ | 2,366 | $ | — | $ | — | $ | — | $ | 17,580 | $ | 19,946 | 0.01 | % | ||||||||||||||||||
Digital Media Platform | |||||||||||||||||||||||||||||||||||
OzyMedia, Inc.–Common Warrants, Strike Price $0.01, Expiration Date 4/9/2028(7) | 295,565 | — | — | 30,647 | — | — | (30,647 | ) | — | — | % | ||||||||||||||||||||||||
Total Warrants | | $ | — | $ | 2,366 | $ | 30,647 | $ | — | $ | — | $ | (13,067 | ) | $ | 19,946 | 0.01 | % | |||||||||||||||||
Common Stock | |||||||||||||||||||||||||||||||||||
Online Education | |||||||||||||||||||||||||||||||||||
Curious.com, Inc.–Common shares(11) | 1,135,944 | $ | — | $ | 5,514,077 | $ | — | $ | — | $ | — | $ | (5,514,077 | ) | $ | — | — | % | |||||||||||||||||
Total Common Stock | $ | — | $ | 5,514,077 | $ | — | $ | — | $ | — | $ | (5,514,077 | ) | $ | — | — | % | ||||||||||||||||||
TOTAL NON-CONTROLLED/AFFILIATE INVESTMENTS*(1) | | $ | 581,813 | $ | 16,473,098 | $ | 578,189 | $ | (130,647 | ) | $ | — | $ | (10,988,777 | ) | $ | 5,931,863 | 3.04 | % | ||||||||||||||||
____________________
* | All portfolio investments are non-income-producing, unless otherwise identified. Equity investments are subject to lock-up restrictions upon their IPO. Preferred dividends are generally only payable when declared and paid by the portfolio company's board of directors. Unless otherwise noted, all investments were pledged as collateral under the Credit Facility. The Company’s and GSV Asset Management’s officers and staff, as applicable, may serve on the board of directors of the Company’s portfolio investments. (Refer to “Note 3—Related-Party Arrangements”). All portfolio investments are considered Level 3 and valued using significant unobservable inputs, unless otherwise noted. (Refer to “Note 4—Investments at Fair Value”). All portfolio investments are considered Level 3 and valued using unobservable inputs, unless otherwise noted. All of the Company's portfolio investments are restricted as to resale, unless otherwise noted, and were valued at fair value as determined in good faith by the Company’s Board of Directors. (Refer to "Note 2—Significant Accounting Policies—Investments at Fair Value"). |
** | Indicates assets that GSV Capital Corp. believes do not represent “qualifying assets” under Section 55(a) of the 1940 Act. |
*** | Investment is income-producing. |
(1) | “Affiliate Investments” are investments in those companies that are “Affiliated Companies” of GSV Capital Corp., as defined in the 1940 Act. In general, a company is deemed to be an “Affiliate” of GSV Capital Corp. if GSV Capital Corp. owns 5% or more of the voting securities (i.e., securities with the right to elect directors) of such company. |
(2) | “Control Investments” are investments in those companies that are “Controlled Companies” of GSV Capital Corp., as defined in the 1940 Act. In general, under the 1940 Act, the Company would “Control” a portfolio company if the Company owned more than 25% of its outstanding voting securities (i.e., securities with the right to elect directors) and/or had the power to exercise control over the management or policies of such portfolio company. |
(3) | GSV Capital Corp.’s investments in StormWind, LLC are held through GSV Capital Corp.'s wholly owned subsidiary, GSVC SW Holdings, Inc. |
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SUTTER ROCK CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
(4) | Interest will accrue daily on the unpaid principal balance of the note. Interest began compounding annually on November 26, 2015. Accrued interest is not payable until the earlier of (a) the closing of a subsequent equity offering by CUX, Inc. (d/b/a CorpU), or (b) the maturity of the note. On October 31, 2018, GSV Capital Corp. agreed to extend the maturity of the Senior Subordinated Convertible Promissory Note to CUX, Inc. (d/b/a CorpU) until February 14, 2020, with a new interest rate of 10%. Accrued interest will continue to be compounded annually on November 26 of the current and each subsequent year until repaid. |
(5) | On February 23, 2018, CUX, Inc. (d/b/a CorpU) agreed to extend the maturity of the GSV Capital Corp.'s Series D warrants until August 1, 2018. On July 31, 2018, CUX, Inc. (d/b/a CorpU) agreed to further extend the maturity of GSV Capital Corp.'s Series D warrants until November 26, 2018. On October 31, 2018, and in connection with the extension of the maturity date on the related debt investment, CUX, Inc. (d/b/a CorpU) agreed to further extend the maturity of GSV Capital Corp's Series D warrants until February 14, 2020. |
(6) | On January 31, 2018, the maturity date of the convertible promissory note to Declara, Inc. was extended an additional three months to April 30, 2018 and the interest rate on the convertible promissory note increased to 12% per annum (including 365 days for the purposes of accrual). On January 31, 2018 the convertible promissory note to Declara Inc. was placed on non-accrual status. On April 30, 2018, the Company deemed this investment to be in default based on Declara Inc.'s financial position. |
(7) | Effective April 9, 2018, the term of Ozy Media Inc.'s notes were extended through the issuance of a new convertible promissory note, which extended the maturity date of the existing notes to October 31, 2018 and then to December 31, 2018 once certain conditions were satisfied. Effective August 17, 2018, Ozy Media Inc. executed an additional debt amendment, which expanded its borrowing limit. In consideration for amending and restating the existing notes, the Company was issued warrants exercisable for 295,565 shares of Ozy Media Inc.'s common stock. Subsequent to the year-ended December 31, 2018, Ozy Media Inc.'s obligations under its financing arrangements with the Company became past due. |
(8) | On January 12, 2018, the unsecured promissory note to NestGSV, Inc. (d/b/a GSV Labs, Inc.) was repaid, with interest. |
(9) | As of December 31, 2018, the investments noted had been placed on non-accrual status. |
(10) | Effective July 31, 2018, GSV Capital Corp agreed to extend the Convertible Promissory Note to NestGSV, Inc. (d/b/a GSV Labs, Inc.) until December 31, 2018, with a new interest rate of 12%. Previously accrued interest will be capitalized into the principal of the extended note. On December 31, 2018, GSV Capital Corp extended the maturity of the Convertible Promissory Note to December 31, 2019, compounded the previously accrued and then-outstanding interest and invested an additional $300,000. The Convertible Promissory Note continues to accrue interest at 12%. In consideration for the extension and additional investment, the 500,000 Series A-3 Preferred Warrants due April 4, 2019 and the 187,500 Series A-4 Preferred Warrants due October 6, 2019, were extended to April 4, 2021 and October 6, 2021, respectively. The Company also received an additional 250,000 Series B Preferred Warrants due December 31, 2023. |
(11) | On June 8, 2018, Curious.com, Inc. completed a recapitalization and issued new Series C preferred shares. In connection with the offering, GSV Capital Corp.'s 3,407,834 Series B preferred shares were converted into common shares. Additionally, a 1:3 reverse stock split was declared on the now common shares. |
(12) | The SPBRX, INC. (f/k/a GSV Sustainability Partners, Inc.) preferred shares held by GSV Capital Corp. do not entitle GSV Capital Corp. to a preferred dividend rate. During the year ended December 31, 2018, SPBRX, INC. declared, and GSV Capital Corp. received, an aggregate of $625,000 in cash distributions. GSV Capital Corp. does not anticipate that SPBRX, INC. will pay distributions on a quarterly or regular basis or become a predictable distributor of distributions. |
121
SUTTER ROCK CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 5—SHARE REPURCHASE PROGRAM, EQUITY OFFERINGS AND RELATED EXPENSES
On August 8, 2017, the Company announced a $5.0 million discretionary open-market share repurchase program of shares of the Company’s common stock, $0.01 par value per share, of up to $5.0 million until the earlier of (i) August 6, 2018 or (ii) the repurchase of $5.0 million in aggregate amount of the Company’s common stock (the “Share Repurchase Program”). On November 7, 2017, the Company’s Board of Directors authorized an extension of, and an increase in the amount of shares of the Company’s common stock that may be repurchased under the discretionary Share Repurchase Program until the earlier of (i) November 6, 2018 or (ii) the repurchase of $10.0 million in aggregate amount of the Company’s common stock. On May 3, 2018, the Company’s Board of Directors authorized a $5.0 million increase in the amount of shares of the Company’s common stock that may be repurchased under the discretionary Share Repurchase Program until the earlier of (i) November 6, 2018 or (ii) the repurchase of $15.0 million in aggregate amount of the Company’s common stock. On November 1, 2018, our Board of Directors authorized a $5.0 million increase in the amount of shares of our common stock that may be repurchased under the discretionary Share Repurchase Program until the earlier of (i) October 31, 2019 or (ii) the repurchase of $20.0 million in aggregate amount of our common stock. On August 5, 2019, our Board of Directors authorized a $5.0 million increase in the amount of shares of our common stock that may be repurchased under the discretionary Share Repurchase Program until the earlier of (i) August 4, 2020 or (ii) the repurchase of $25.0 million in aggregate amount of our common stock.
The timing and number of shares to be repurchased will depend on a number of factors, including market conditions and alternative investment opportunities. The Share Repurchase Program may be suspended, terminated or modified at any time for any reason and does not obligate the Company to acquire any specific number of shares of its common stock. Under the Share Repurchase Program, we may repurchase our outstanding common stock in the open market provided that we comply with the prohibitions under our insider trading policies and procedures and the applicable provisions of the 1940 Act and the Securities Exchange Act of 1934, as amended.
Modified Dutch Auction Tender Offer
On October 21, 2019, the Company commenced a modified “Dutch Auction” tender offer (the “Modified Dutch Auction Tender Offer”) to purchase for cash up to $10.0 million in shares of its common stock from its stockholders, which expired on November 20, 2019. In accordance with the terms of the Modified Dutch Auction Tender Offer, the Company selected the lowest price per share of not less than $6.00 per share and not greater than $8.00 per share, less any applicable withholding taxes and without interest, that could allow the Company to purchase that number of shares having an aggregate purchase price of $10.0 million. Upon the terms and subject to the conditions of the Modified Dutch Auction Tender Offer, if shares having an aggregate purchase price of less than $10.0 million were properly tendered and not properly withdrawn, the Company would purchase all shares properly tendered and not properly withdrawn.
Pursuant to the Modified Dutch Auction Tender Offer, the Company repurchased 1,449,275 shares, representing 7.6% of its outstanding shares, on or about November 22, 2019, at a price of $6.90 per share on a pro rata basis, excluding fees and expenses relating to the self-tender offer. The Company has determined that the proration factor for the tender offer was 78.1%. The Company used available cash to fund the purchases of its shares of common stock in the Modified Dutch Auction Tender Offer and to pay for all related fees and expenses.
During the year ended December 31, 2019, the Company repurchased 749,128 shares of the Company’s common stock, including shares repurchased through the Modified Dutch Auction Tender Offer. As of December 31, 2019, the dollar value of shares that remained available to be purchased by the Company under the Share Repurchase Program was approximately $5.0 million.
No new shares of the Company’s common stock were issued during the year ended December 31, 2019.
122
SUTTER ROCK CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 6—NET CHANGE IN NET ASSETS RESULTING FROM OPERATIONS PER COMMON SHARE—BASIC AND DILUTED
The following information sets forth the computation of basic and diluted net increase in net assets resulting from operations per common share, pursuant to ASC 260, for the year ended December 31, 2019 and 2018.
| Year Ended December 31, | ||||||||||
| 2019 | 2018 | 2017 | ||||||||
Earnings per common share–basic: | |||||||||||
Net change in net assets resulting from operations | $ | 23,953,697 | $ | 891,743 | $ | 17,567,933 | |||||
Weighted-average common shares–basic | 19,328,414 | 20,617,890 | 21,924,490 | ||||||||
Earnings per common share–basic | $ | 1.24 | $ | 0.04 | $ | 0.80 | |||||
Earnings per common share–diluted: | |||||||||||
Net change in net assets resulting from operations | $ | 23,953,697 | $ | 891,743 | $ | 17,567,933 | |||||
Adjustment for interest and amortization on 5.25% Convertible Senior Notes due 2018(1) | — | — | — | ||||||||
Adjustment for interest and amortization on 4.75% Convertible Senior Notes due 2023(1) | 2,269,124 | — | — | ||||||||
Net change in net assets resulting from operations, as adjusted | $ | 26,222,821 | $ | 891,743 | $ | 17,567,933 | |||||
Adjustment for dilutive effect of 5.25% Convertible Senior Notes due 2018(1) | — | — | — | ||||||||
Adjustment for dilutive effect of 4.75% Convertible Senior Notes due 2023(1) | 3,741,208 | — | — | ||||||||
Weighted-average common shares outstanding–diluted | 23,069,622 | 20,617,890 | 21,924,490 | ||||||||
Earnings per common share–diluted | $ | 1.14 | $ | 0.04 | $ | 0.80 | |||||
(1) | For the years ended December 31, 2019, 2018, and 2017, 0, 6,079,068, and 5,751,815 potentially dilutive common shares, respectively, were excluded from the weighted-average common shares outstanding for diluted net change in net assets resulting from operations per common share because the effect of these shares would have been anti-dilutive. |
NOTE 7—COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company may enter into investment agreements under which it commits to make an investment in a portfolio company at some future date or over a specified period of time. As of December 31, 2019 and December 31, 2018, the Company had not entered into any investment agreements that required it to make a future investments in a portfolio company.
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. Except as described below, the Company is not currently a party to any material legal proceedings.
On March 12, 2020, a complaint was filed in the United States District Court in the Northern District of California, by Sutter Hill Ventures, captioned, Sutter Hill Ventures, a California limited partnership (Plaintiff) v. Sutter Rock Capital Corp, a Maryland corporation (Defendant). The complaint alleges that the Defendant infringed on the Plaintiff’s federally-registered service mark SUTTER HILL VENTURES; engaged in unfair competition and false designation of origin under Section 43(a) of the Latham Act; and related claims of unfair competition and trademark infringement under California common law. The Plaintiff is seeking an injunction on Defendant from using the SUTTER ROCK and SUTTER ROCK CAPITAL marks and trade names, or any other mark or name that it views as similar to SUTTER HILL and SUTTER HILL VENTURES; an unspecified amount of damages and disgorgement of Defendant’s profits; a determination that the alleged infringement was willful, intentional and deliberate,
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SUTTER ROCK CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
warranting an award to Plaintiff of three times Defendant’s profits and three times Plaintiff’s damages; an award of Plaintiff’s attorney’s fees and cost; and an award of prejudgment and post judgment interest. While the Company is unable to determine the ultimate outcome of this matter, the Company believes that the alleged claims in the complaint are frivolous and completely without merit and intend to defend this lawsuit vigorously.
Operating Leases & Related Deposits
The Company currently has one operating lease for office space for which the Company has recorded a right-of-use asset and lease liability for the operating lease obligation. The lease commenced June 3, 2019 and expires July 31, 2024. The lease expense is presented as a single lease cost that is amortized on a straight-line basis over the life of the lease.
As of December 31, 2019, the Company has booked a right of use asset and operating lease liability of $787,056 and $787,056, respectively, on the Consolidated Statements of Assets and Liabilities. As of December 31, 2019 and December 31, 2018, the Company recorded a security deposit of $16,574 and $0, respectively, on the Consolidated Statements of Assets and Liabilities. For the year ended December 31, 2019, the Company incurred $73,059 of operating lease expense. The amounts reflected on the Consolidated Statements of Assets and Liabilities have been discounted using the rate implicit in the lease. As of December 31, 2019, the remaining lease term was 4.6 years and the discount rate was 3.00%.
The following table shows future minimum payments under the Company's operating lease as of December 31, 2019:
For the Years Ended December 31, | Amount | ||
2020 | 174,563 | ||
2021 | 179,800 | ||
2022 | 185,194 | ||
2023 | 190,750 | ||
2024 | 113,604 | ||
$ | 843,911 | ||
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SUTTER ROCK CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 8—FINANCIAL HIGHLIGHTS
| Year Ended December 31, | ||||||||||||||||||
2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
Per Basic Share Data | |||||||||||||||||||
Net asset value at beginning of the year | $ | 9.89 | $ | 9.64 | $ | 8.66 | $ | 12.08 | $ | 14.80 | |||||||||
Net investment loss(1) | (0.49 | ) | (0.37 | ) | (0.95 | ) | (0.06 | ) | (2.52 | ) | |||||||||
Net realized gain/(loss) on investments(1) | 0.99 | (0.36 | ) | 0.04 | (0.12 | ) | 2.80 | ||||||||||||
Benefit from taxes on net realized loss of investments(1) | — | — | — | — | 0.02 | ||||||||||||||
Realized loss on partial repurchase of 5.25% Convertible Senior Notes due 2018(1) | — | (0.02 | ) | — | — | — | |||||||||||||
Net change in unrealized appreciation/(depreciation) of investments(1) | 0.69 | 0.47 | 1.59 | (3.30 | ) | (0.69 | ) | ||||||||||||
Benefit from taxes on unrealized depreciation of investments(1) | 0.05 | 0.33 | 0.13 | 0.10 | 0.83 | ||||||||||||||
Dividends declared | (0.32 | ) | — | — | (0.04 | ) | (2.76 | ) | |||||||||||
Repurchase of common stock | 0.52 | 0.20 | 0.18 | — | — | ||||||||||||||
Stock-based compensation(1) | 0.05 | — | — | — | — | ||||||||||||||
Net asset value at end of year | $ | 11.38 | $ | 9.89 | $ | 9.64 | $ | 8.66 | $ | 12.08 | |||||||||
Per share market value at end of year | $ | 6.55 | $ | 5.22 | $ | 5.45 | $ | 5.03 | $ | 9.37 | |||||||||
Total return based on market value(2) | 31.61 | % | (4.22 | )% | 8.35 | % | (23.29 | )% | 8.57 | % | |||||||||
Total return based on net asset value(2) | 15.08 | % | 2.59 | % | 11.32 | % | (27.74 | )% | (0.27 | )% | |||||||||
Shares outstanding at end of year | 17,564,244 | 19,762,647 | 21,246,345 | 22,181,003 | 22,181,003 | ||||||||||||||
Ratios/Supplemental Data: | | ||||||||||||||||||
Net assets at end of year | $199,917,289 | $195,378,159 | $204,762,866 | $192,128,810 | $268,010,945 | ||||||||||||||
Average net assets | $209,261,190 | $208,678,731 | $199,457,678 | $243,577,514 | $296,560,393 | ||||||||||||||
Ratio of gross operating expenses to average net assets(3) | 6.08 | % | 7.09 | % | 11.25 | % | 0.82 | % | 9.10 | % | |||||||||
Ratio of incentive fee waiver to average net assets | — | % | (2.40 | )% | — | % | — | % | — | % | |||||||||
Ratio of management fee waiver to average net assets | — | % | (0.43 | )% | (0.36 | )% | —% | —% | |||||||||||
Ratio of income tax provision to average net assets | (0.42 | )% | (3.22 | )% | (1.38 | )% | (0.87 | )% | (1.88 | )% | |||||||||
Ratio of net operating expenses to average net assets(3) | 5.66 | % | 1.04 | % | 9.51 | % | (0.05 | )% | 7.22 | % | |||||||||
Ratio of net investment loss to average net assets(3) | (4.52 | )% | (3.66 | )% | (10.47 | )% | (0.52 | )% | (16.41 | )% | |||||||||
Portfolio Turnover Ratio | 12.95 | % | 5.01 | % | 0.07 | % | 4.46 | % | 8.30 | % | |||||||||
__________________
(1) | Based on weighted-average number of shares outstanding for the relevant period. |
(2) | Total return based on market value is based on the change in market price per share between the opening and ending market values per share in the year. Total return based on net asset value is based upon the change in net asset value per share between the opening and ending net asset values per share. |
(3) | For the year ended December 31, 2019, the Company excluded $1,769,820 of non-recurring reduction in expenses. For year ended December 31, 2018, the Company excluded $352,667 of non-recurring expenses. Because the ratios are calculated for the Company’s common stock taken as a whole, an individual investor’s ratios may vary from these ratios. |
125
SUTTER ROCK CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 9—INCOME TAXES
The Company elected to be treated as a RIC under Subchapter M of the Code beginning with its taxable year ended December 31, 2014, has qualified to be treated as a RIC for subsequent taxable years and expects to continue to operate in a manner so as to qualify for the tax treatment applicable to RICs.
Due to the Company’s election to be treated as RIC, the associated previously accrued benefits from, and provisions for, taxes from prior periods were reversed for the year ended December 31, 2015. Typically for a taxable entity, a net investment loss would generate a benefit from taxes; however, as a result of our election to be treated as a RIC, we reversed the previously accrued benefits from taxes on net investment loss from prior periods. Typically for a taxable entity, net realized capital gains would generate a provision for taxes; however, as a result of our election to be treated as a RIC, we reversed the previously accrued provisions for taxes on net realized capital gains from prior periods. As a result of our election to be treated as a RIC, we reversed the previously accrued provisions for taxes on unrealized appreciation of investments from prior periods. This reversal resulted in a larger benefit for taxes on unrealized depreciation of investments than would have been accrued solely based on the unrealized depreciation of investments for the year ended December 31, 2015.
As a result of the Company electing to be treated as a RIC for the taxable year ended December 31, 2014 in connection with the filing of its 2014 tax return, it may be required to pay a corporate-level U.S. federal income tax on the 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 to a RIC (i.e., the beginning of the first taxable year that the Company qualifies as a RIC, which would be January 1, 2014) to the extent that such gains are recognized by the Company during the applicable recognition period, which is the five-year period beginning on the date of conversion.
Any corporate-level built-in-gains tax is payable at the time the built-in gains are recognized (which generally will be the years in which the assets with the built-in-gains 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 five-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 U.S. federal income tax on built-in gains 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 gains, 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, 2014, the Company had net unrealized built-in gains. It did not incur a built-in-gains tax for the 2014 tax year due to the fact that there were sufficient net capital loss carryforwards to completely offset recognized built-in gains as well as available net operating losses.
The Company elected to be treated as a RIC for the taxable year ended December 31, 2014 in connection with the filing of its 2014 tax return. As a result, the Company was required to pay a corporate-level U.S. federal income tax on the amount of the net built-in gains 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) either (1) as of the date it converted to a RIC (i.e., the beginning of the first taxable year that the Company qualifies as a RIC, which would be January 1, 2014), or (2) to the extent that the Company recognized such net built-in gains during the five-year recognition period beginning on the date of conversion. As of January 1, 2014, the Company had net unrealized built-in gains, but did not incur a built-in-gains tax for the 2014 tax year due to the fact that there were sufficient net capital loss carryforwards to completely offset recognized built-in gains as well as available net operating losses. The five-year recognition period ended on December 31, 2018.
As of December 31, 2019 and December 31, 2018, the Company recorded a deferred tax liability of approximately $0.0 million and $0.9 million, respectively, of which approximately $0.0 million and $0.9 million relate to the difference in the book and tax basis of certain equity investments and net tax operating losses held by the Taxable Subsidiaries. The Company is required to include net deferred tax provision/benefit in calculating its total expenses even though these net deferred taxes are not currently payable/receivable. Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation, as such gains or losses are not included in taxable income until they are realized.
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SUTTER ROCK CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
For U.S. federal and state income tax purposes, a portion of the Taxable Subsidiaries’ 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.
The Company and the Taxable Subsidiaries identified their major tax jurisdictions as U.S. federal and California and may be subject to the taxing authorities’ examination for the tax years 2016–2019 and 2015–2019, respectively. Further, the Company and the Taxable Subsidiaries accrue all interest and penalties related to uncertain tax positions as incurred. As of December 31, 2019, there were no material interest or penalties incurred related to uncertain tax positions.
Permanent differences between ICTI and net investment income for financial reporting purposes are reclassified among capital accounts in the consolidated financial statements to reflect their tax character. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes. During the years ended December 31, 2019 and 2018, the Company reclassified for book purposes amounts arising from permanent book/tax differences related as follows:
| Year Ended December 31, | ||||||
| 2019 | 2018 | |||||
Capital in excess of par value | $ | (14,113,460 | ) | $ | (7,254,108 | ) | |
Accumulated undistributed net investment loss | 14,113,460 | 7,254,108 | |||||
Accumulated net realized gains from investments | — | — | |||||
For income tax purposes, distributions paid to stockholders are reported as ordinary income, return of capital, long term capital gains or a combination thereof. The tax character of distributions declared in the years ended December 31, 2019, 2018, and 2017 was as follows:
| Year Ended December 31, | ||||||||||
| 2019 | 2018 | 2017 | ||||||||
Ordinary income | $ | — | $ | — | $ | — | |||||
Long-term capital gain | 5,620,558 | — | — | ||||||||
Return of capital | — | — | — | ||||||||
Distributions on a tax basis | — | — | — | ||||||||
For federal income tax purposes, the tax cost of investments owned at December 31, 2019 and 2018, was $194,194,622 and $265,015,996, respectively. The gross unrealized appreciation and gross unrealized depreciation on investments owned at December 31, 2019 was $87,999,577 and $40,608,621, respectively, and on investments owned at December 31, 2018, was $90,435,707 and $56,641,871, respectively. The net unrealized appreciation/(depreciation) on investments owned at December 31, 2019 and 2018, was $47,390,956 and $33,793,836, respectively.
At December 31, 2019 and 2018 the components of distributable earnings on a tax basis detailed below differ from the amounts reflected in the Company’s Consolidated Statements of Assets and Liabilities by temporary and other book/tax differences, primarily relating to the tax treatment of certain investments in partnerships and wholly-owned subsidiary corporations, and organizational expenses, as follows:
| Year Ended December 31, | ||||||
| 2019 | 2018 | |||||
Accumulated net realized losses on investments | $ | (330,522 | ) | $ | (13,821,840 | ) | |
Unrealized appreciation | 47,390,956 | 32,908,270 | |||||
Components of distributable earnings at year end | $ | 47,060,434 | $ | 19,086,430 | |||
127
SUTTER ROCK CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 10—DEBT CAPITAL ACTIVITIES
4.75% Convertible Senior Notes due 2023
On March 28, 2018, the Company issued $40.0 million aggregate principal amount of convertible senior notes, which bear interest at a fixed rate of 4.75% per year, payable semi-annually in arrears on March 31 and September 30 of each year, commencing on September 30, 2018. The 4.75% Convertible Senior Notes mature on March 28, 2023 (the "4.75% Convertible Senior Notes due 2023"), unless previously repurchased or converted in accordance with their terms. The Company does not have the right to redeem the 4.75% Convertible Senior Notes due 2023 prior to March 27, 2021. On or after March 27, 2021, the Company may redeem the 4.75% Convertible Senior Notes due 2023 for cash, in whole or from time to time in part, at the Company’s option if (i) the closing sale price of the Company’s common stock for at least 15 trading days (whether or not consecutive) during the period of any 20 consecutive trading days is greater than or equal to 150% of the conversion price on each applicable trading day, (ii) no public announcement of a pending, proposed or intended fundamental change has occurred which has not been abandoned, terminated or consummated, and (iii) no event of default under the indenture governing the 4.75% Convertible Senior Notes due 2023, and no event that with the passage of time or giving of notice would constitute an event of default under such indenture, has occurred or exists.
The initial conversion rate for the 4.75% Convertible Senior Notes due 2023 was 93.2836 shares of the Company’s common stock for each $1,000 principal amount of the 4.75% Convertible Senior Notes due 2023, which represented an initial conversion price of approximately $10.72 per share. As a result of the Company’s Modified Dutch Auction Tender Offer and cash dividends, the conversion rate for the 4.75% Convertible Senior Notes due 2023 changed to 97.9448 shares of the Company’s common stock for each $1,000 principal amount of the 4.75% Convertible Senior Notes due 2023, which represents a current conversion price of approximately $10.21 per share. Following certain corporate transactions that occur on or prior to the stated maturity date, the Company will, in certain circumstances, increase the conversion rate for a holder that elects to convert its 4.75% Convertible Senior Notes due 2023 in connection with such a corporate transaction. If a fundamental change, as defined in the indenture governing the 4.75% Convertible Senior Notes due 2023, occurs prior to the stated maturity date, holders may require the Company to purchase for cash all or any portion of their 4.75% Convertible Senior Notes due 2023 at a fundamental change purchase price equal to 100% of the principal amount of the Notes to be purchased, plus accrued and unpaid interest to, but excluding, the fundamental change purchase date.
The indenture governing the 4.75% Convertible Senior Notes due 2023 contains customary financial reporting requirements and contains certain restrictions on mergers, consolidations, and asset sales. The indenture also contains certain events of default, the occurrence of which may lead to the 4.75% Convertible Senior Notes due 2023 being due and payable before their maturity or immediately.
The table below shows a reconciliation from the aggregate principal amount of 4.75% Convertible Senior Notes due 2023 to the balance shown on the Consolidated Statements of Assets and Liabilities.
| December 31, 2019 | December 31, 2018 | |||||
Aggregate principal amount of 4.75% Convertible Senior Notes due 2023 | $ | 40,000,000 | $ | 40,000,000 | |||
Direct deduction of deferred debt issuance costs | $ | (1,196,365 | ) | $ | (1,565,489 | ) | |
4.75% Convertible Senior Notes due 2023 Payable | $ | 38,803,635 | $ | 38,434,511 | |||
As of December 31, 2019 the principal amount of the 4.75% Convertible Senior Notes due 2023 exceeded the value of the underlying shares multiplied by the per share closing price of the Company’s common stock.
The 4.75% Convertible Senior Notes due 2023 are the Company’s general, unsecured, senior obligations and rank senior in right of payment to any future indebtedness that is expressly subordinated in right of payment to the 4.75% Convertible Senior Notes due 2023, equal in right of payment to any existing and future unsecured indebtedness that is not so subordinated to the 4.75% Convertible Senior Notes due 2023, including, without limitation, the 5.25% Convertible Senior Notes due 2018, effectively junior to any future secured indebtedness to the extent of the value of the assets securing such indebtedness, including, without
128
SUTTER ROCK CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
limitation, any borrowings under the Credit Facility (defined below), and structurally junior to all future indebtedness (including trade payables) incurred by the Company’s subsidiaries. For the period from the initial issuance of the 4.75% Convertible Senior Notes due 2023 to, and including, March 27, 2019, in accordance to the agreement, the Company did not to incur any indebtedness other than certain permitted debt, including, without limitation, up to $12.0 million in borrowings under the then current Credit Facility.
In connection with the issuance of the 4.75% Convertible Senior Notes due 2023, the Company was required under the terms of the Credit Facility to deposit any proceeds from the 4.75% Convertible Senior Notes due 2023 offering into an account at Western Alliance Bank and was required to maintain at least $65.0 million (or such lesser amount to the extent such funds are used to repay or repurchase a portion of the outstanding 5.25% Convertible Senior Notes due 2018 prior to their maturity and repayment in full) in an account at Western Alliance Bank until such time as the 5.25% Convertible Senior Notes due 2018 were repaid in full. The 5.25% Convertible Senior Notes due 2018 matured on September 15, 2018, at which time the Company repaid the remaining outstanding aggregate principal amount of the 5.25% Convertible Senior Notes due 2018, including accrued but unpaid interest. In addition, the Credit Facility matured on May 31, 2019. As a result, the company is no longer subject to such requirements.
5.25% Convertible Senior Notes due 2018
On September 17, 2013, the Company issued $69.0 million aggregate principal amount of convertible senior notes, which 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. The 5.25% Convertible Senior Notes matured on September 15, 2018 (the "5.25% Convertible Senior Notes due 2018"), unless previously repurchased or converted in accordance with their terms. The Company does not have the right to redeem the 5.25% Convertible Senior Notes due 2018 prior to maturity. The 5.25% Convertible Senior Notes due 2018 are convertible into shares of the Company’s common stock based on a conversion rate of 83.3596 shares of the Company’s common stock per $1,000 of principal amount of the 5.25% Convertible Senior Notes due 2018, which is equivalent to a conversion price of approximately $12.00 per share of common stock.
On December 15, 2017, the Company announced the commencement of a cash tender offer (the “Tender Offer”) to purchase any and all of its $69.0 million aggregate principal amount of outstanding 5.25% Convertible Senior Notes due 2018. As of the expiration of the Tender Offer on January 17, 2018, approximately $4.8 million aggregate principal amount of the 5.25% Convertible Senior Notes due 2018 were validly tendered and not validly withdrawn pursuant to the Tender Offer. On March 27, 2018, the Company repurchased an additional $14.2 million aggregate principal amount of the outstanding 5.25% Convertible Senior Notes due 2018. On September 15, 2018, we repaid the remaining outstanding aggregate principal amount of the 5.25% Convertible Senior Notes due 2018, including accrued but unpaid interest, and the 5.25% Convertible Senior Notes were no longer outstanding as of such date.
Western Alliance Bank Credit Facility
The Credit Facility (defined below) matured on May 31, 2019. There were no borrowings by the Company from the Credit Facility during the year ended December 31, 2019.
The Company entered into a Loan and Security Agreement, effective May 31, 2017 and amended on March 22, 2018 (the “Loan Agreement”), with Western Alliance Bank, pursuant to which Western Alliance Bank agreed to provide the Company with a $12.0 million senior secured revolving credit facility (the “Credit Facility”).
The Credit Facility, among other things, matured on May 31, 2019 and bore interest at a per annum rate equal to the prime rate plus 3.50%. In addition, a facility fee of $60,000 was charged upon closing of the Credit Facility, and the Loan Agreement required payment of a fee for unused amounts during the revolving period in an amount equal to 0.50% per annum of the average unused portion of the Credit Facility payable quarterly in arrears.
Under the Loan Agreement, the Company made certain customary representations and warranties and was required to comply with various affirmative and negative covenants, reporting requirements, and other customary requirements for similar credit facilities, including, without limitation, restrictions on incurring additional indebtedness (with unsecured longer-term indebtedness limited to $111.0 million in the aggregate through maturity of the 5.25% Convertible Senior Notes due 2018 on September 15,
129
SUTTER ROCK CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
2018, and $70.0 million in the aggregate thereafter), compliance with the asset coverage requirements under the 1940 Act, a minimum net asset value requirement of at least the greater of $60.0 million or five times the amount of the Credit Facility, a limitation on the Company’s net asset value being reduced by more than 15% of its net asset value at December 31, 2016, and maintenance of RIC and BDC status. The Loan Agreement included 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, the cessation of the Investment Advisory Agreement, and the occurrence of a material adverse effect.
The Credit Facility was secured by substantially all of the Company’s property and assets. As of December 31, 2019, the Company had no borrowings outstanding under the Credit Facility, as the Credit Facility matured on May 31, 2019.
For the years ended December 31, 2019 and 2018, the Company had no borrowings under the Credit Facility.
NOTE 11—STOCK-BASED COMPENSATION
On June 5, 2019, our Board of Directors adopted, and our stockholders approved, an equity-based incentive plan (“the 2019 Plan”), which authorizes equity awards to be granted for up to 1,976,264 shares of our common stock. Under the 2019 Plan, the exercise price of awards is set on the grant date and may not be less than the fair market value per share on such date, however, that in the case of an incentive stock option granted to an employee who, at the time of the grant of such option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or the Company’s present or future parent or subsidiary corporations, as defined in Section 424(e) or (f) of the Code, or other Affiliates the employees of which are eligible to receive incentive stock options under the Code (the “10% Shareholders”), the exercise price per share shall be no less than one hundred ten percent (110%) of the fair market value per share on the date of grant. The fair market value shall be the closing price of the shares on the Nasdaq Capital Market on the date of grant.
On July 17, 2019, stock options providing the right to purchase up to 1,165,000 shares were granted under the 2019 Plan with an exercise price equal to the market price of our common stock at the grant date. These stock options have a vesting period of 3 years with 1/3 vesting immediately on the grant date, 1/3 vesting on July 17, 2020, and the remaining 1/3 vesting on July 17, 2021.
Number of Shares | Weighted-Average Exercise Price | Weighted-Average Grant Date Fair Value | ||||||
Balance as of December 31, 2018 | — | $ | — | $ | — | |||
Granted | 1,165,000 | 6.57 | 2.57 | |||||
Vested | 388,333 | 6.57 | 2.57 | |||||
Exercised | — | — | — | |||||
Forfeited | 6,667 | 6.57 | 2.57 | |||||
Expired | 3,333 | 6.57 | 2.57 | |||||
Exercisable as of December 31, 2019 | 385,000 | 6.57 | 2.57 | |||||
The time-based options granted on July 17, 2019 have a weighted-average fair value of $2.57 per share. For the time-based options valued using the Black-Scholes option-pricing model, we used the following assumption inputs:
Assumption Inputs | Amount as of July 17, 2019 | |
Term to exercise (years) | 5.55 | |
Volatility | 39.47 | % |
Risk-free interest rate | 1.86 | % |
Dividend yield | — | % |
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SUTTER ROCK CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
For the year ended December 31, 2019, we recognized the stock-based compensation expense of $998,355, and amount of cash received from the exercise of stock options was $0. As of December 31, 2019, there was $1,979,570 of total unrecognized compensation cost related to non-vested stock options granted under the 2019 Plan. The remaining cost is expected to be recognized over the remaining weighted-average vesting period of 1.05 years.
NOTE 12—SUBSEQUENT EVENTS
Portfolio Activity
From January 1, 2020 through March 13, 2020, the Company sold investments of $10,786,346 as shown in the following table:
Portfolio Company | Transaction Date | Shares Sold | Average Net Share Price | Net Proceeds(1) | Realized Gain | |||||
Parchment, Inc. | 1/31/2020 | 3,200,512 | $3.37 | 10,786,346 | 6,785,364 | |||||
__________________
(1) | On January 31, 2020, Parchment, Inc. closed a merger with Credentials Solutions. As a result of the transaction, we have received $10,786,346 in net proceeds and expect to receive approximately $110,000 in additional proceeds held in escrow. |
From January 1, 2020 through March 13, 2020, the Company did not purchase any investments.
The Company is frequently in negotiations with various private companies with respect to investments in such companies. Investments in private companies are generally 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.
Share Repurchase Program
On March 9, 2020, our Board of Directors authorized a $5.0 million increase in the amount of shares of our common stock that may be repurchased under the discretionary Share Repurchase Program until the earlier of (i) March 8, 2021 or (ii) the repurchase of $30.0 million in aggregate amount of our common stock. Under the Share Repurchase Program, we may repurchase our outstanding common stock in the open market provided that we comply with the prohibitions under our insider trading policies and procedures and the applicable provisions of the 1940 Act and the Securities Exchange Act of 1934, as amended. Please refer to "Note 5—Share Repurchase Program, Equity Offerings and Related Expenses” for additional information on the Share Repurchase Program.
From January 1, 2020 through March 13, 2020, we repurchased an additional 237,612 shares under the Share Repurchase Program for an aggregate purchase price of $1.5 million.
Appointment of CCO
On March 9, 2020, our Board of Directors appointed Allison Green, our Chief Financial Officer, Treasurer and Secretary, to serve as our Chief Compliance Officer effective March 15, 2020. Carl Rizzo served as our Chief Compliance Officer pursuant to an agreement between us and Alaric Compliance Services LLC until March 15, 2020.
131
SUTTER ROCK CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
NOTE 13—SELECTED QUARTERLY FINANCIAL DATA
| Quarter Ended | ||||||||||||||
| December 31, 2019 | September 30, 2019 | June 30, 2019 | March 31, 2019 | |||||||||||
Total Investment Income | $ | 400,296 | $ | 380,226 | $ | 487,952 | $ | 227,250 | |||||||
Total Operating Expenses | 2,963,631 | 5,082,430 | 3,293,183 | (392,452 | ) | ||||||||||
Net Investment Gain/(Loss) | (2,563,335 | ) | (4,702,204 | ) | (2,805,231 | ) | 619,702 | ||||||||
Net Realized Gain/(Loss) on Investments | 7,881,839 | 1,772,961 | 13,590,233 | (4,065,693 | ) | ||||||||||
Net Change in Unrealized Appreciation/(Depreciation) of Investments | (3,110,267 | ) | 8,190,695 | (12,440,320 | ) | 20,699,751 | |||||||||
Benefit from/(Provision for) Taxes on Unrealized Depreciation/(Appreciation) of Investments | — | — | 979,713 | (94,147 | ) | ||||||||||
Net Increase/(Decrease) in Net Assets Resulting from Operations | $ | 2,208,237 | $ | 5,261,452 | $ | (675,605 | ) | $ | 17,159,613 | ||||||
Net Increase/(Decrease) in Net Assets from Operations per Common Share: | |||||||||||||||
Basic | $ | 0.12 | $ | 0.27 | $ | (0.03 | ) | $ | 0.87 | ||||||
Diluted | $ | 0.12 | $ | 0.25 | $ | (0.03 | ) | $ | 0.75 | ||||||
Weighted Average Common Shares Outstanding–Basic | 18,372,212 | 19,472,785 | 19,719,706 | 19,762,647 | |||||||||||
Weighted Average Common Shares Outstanding–Diluted | 18,372,212 | 23,204,129 | 19,719,706 | 23,493,991 | |||||||||||
| Quarter Ended | ||||||||||||||
| December 31, 2018 | September 30, 2018 | June 30, 2018 | March 31, 2018 | |||||||||||
Total Investment Income | $ | 530,076 | $ | 246,352 | $ | 592,073 | $ | 249,335 | |||||||
Total Operating Expenses | (1,152,869 | ) | 4,556,625 | 6,344,272 | 5,396,806 | ||||||||||
Management Fee Waiver | — | (402,074 | ) | (335,403 | ) | (154,944 | ) | ||||||||
Incentive Fee Waiver | — | — | — | (5,000,000 | ) | ||||||||||
Net Investment Gain/(Loss) | 1,682,945 | (3,908,199 | ) | (5,416,796 | ) | 7,473 | |||||||||
Net Realized Gain/(Loss) on Investments | 99,544 | (10,119,771 | ) | 3,363,333 | (776,725 | ) | |||||||||
Loss on Extinguishment of Debt | — | — | — | (397,846 | ) | ||||||||||
Net Change in Unrealized Appreciation/(Depreciation) of Investments | (22,507,314 | ) | 14,142,375 | 9,872,595 | 8,133,394 | ||||||||||
Benefit from Taxes on Unrealized Depreciation of Investments | 5,491,460 | 214,404 | 1,010,871 | — | |||||||||||
Net Increase/(Decrease) in Net Assets Resulting from Operations | $ | (15,233,365 | ) | $ | 328,809 | $ | 8,830,003 | $ | 6,966,296 | ||||||
Net Increase/(Decrease) in Net Assets from Operations per Common Share: | |||||||||||||||
Basic | $ | (0.77 | ) | $ | 0.02 | $ | 0.42 | $ | 0.33 | ||||||
Diluted | $ | (0.77 | ) | $ | 0.02 | $ | 0.35 | $ | 0.30 | ||||||
Weighted Average Common Shares Outstanding–Basic | 19,904,807 | 20,462,626 | 20,968,850 | 21,150,662 | |||||||||||
Weighted Average Common Shares Outstanding–Diluted | 19,904,807 | 20,462,626 | 28,866,674 | 26,713,656 | |||||||||||
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SUTTER ROCK CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
| Quarter Ended | ||||||||||||||
| December 31, 2017 | September 30, 2017 | June 30, 2017 | March 31, 2017 | |||||||||||
Total Investment Income/(Reversal of Investment Income) | $ | (31,196 | ) | $ | 174,912 | $ | 370,593 | $ | 338,459 | ||||||
Total Operating Expenses | 3,712,391 | 6,975,539 | 6,423,452 | 5,328,473 | |||||||||||
Management Fee Waiver | (181,906 | ) | (174,666 | ) | (169,898 | ) | (181,802 | ) | |||||||
Net Investment Loss | (3,561,681 | ) | (6,625,961 | ) | (5,882,961 | ) | (4,808,212 | ) | |||||||
Net Realized Gain/(Loss) on Investments | 25,241,064 | 1,033,577 | (671,492 | ) | (24,689,167 | ) | |||||||||
Net Change in Unrealized Appreciation/(Depreciation) of Investments | (26,893,780 | ) | 15,636,683 | 12,752,528 | 33,280,265 | ||||||||||
Benefit from Taxes on Unrealized Depreciation of Investments | 2,730,365 | 26,705 | — | — | |||||||||||
Net Increase/(Decrease) in Net Assets Resulting from Operations | $ | (2,484,032 | ) | $ | 10,071,004 | $ | 6,198,075 | $ | 3,782,886 | ||||||
Net Increase/(Decrease) in Net Assets from Operations per Common Share: | |||||||||||||||
Basic | $ | (0.11 | ) | $ | 0.46 | $ | 0.28 | $ | 0.17 | ||||||
Diluted | $ | (0.11 | ) | $ | 0.40 | $ | 0.26 | $ | 0.17 | ||||||
Weighted Average Common Shares Outstanding–Basic | 21,343,746 | 22,000,571 | 22,181,003 | 22,181,003 | |||||||||||
Weighted Average Common Shares Outstanding–Diluted | 21,343,746 | 27,752,386 | 27,932,818 | 22,181,003 | |||||||||||
NOTE 14—SUPPLEMENTAL FINANCIAL DATA
Summarized Financial Information of Unconsolidated Subsidiaries
In accordance with the SEC’s Regulation S-X and GAAP, the Company is not permitted to consolidate any subsidiary or other entity that is not an investment company, including those in which the Company has a controlling interest; however, the Company must disclose certain financial information related to any subsidiaries or other entities that are considered to be “significant subsidiaries” under the applicable rules of Regulation S-X. As of December 31, 2019, the Company had investments in at least one portfolio company considered to be a significant subsidiary under SEC Regulation S-X Rule 10-01(b)(1) and Regulation S-X Rule 4-08(g). Below is summarized, unaudited, comparative financial information for the Company’s unconsolidated significant subsidiaries.
Balance Sheet Data as of: (1)(2) | December 31, 2019 | December 31, 2018 | ||||||
Current assets | $ | 124,780 | $ | 9,343,138 | ||||
Noncurrent assets | 1,466,808 | 6,411,138 | ||||||
Current liabilities | 55 | 21,748,571 | ||||||
Noncurrent liabilities | — | 7,685,923 | ||||||
Non-controlling interest | — | — | ||||||
Income Statement Data for the Year Ended: (1)(2) | December 31, 2019 | December 31, 2018 | December 31, 2017 | |||||||||
Revenue | $ | 16,658,581 | $ | 21,143,859 | $ | 23,668,762 | ||||||
Gross profit | 11,782,727 | 15,323,694 | 19,176,169 | |||||||||
Loss from operations | (2,873,964 | ) | (7,958,029 | ) | (4,258,110 | ) | ||||||
Total net loss including net loss attributable to non-controlling interest | (2,873,964 | ) | (7,958,029 | ) | (4,258,110 | ) | ||||||
Net loss attributable to non-controlling interest | — | — | — | |||||||||
133
SUTTER ROCK CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
__________________
(1) | On August 23, 2019, Sutter Rock Capital Corp. amended the structure of its investment in NestGSV, Inc. (d/b/a GSV Labs, Inc.). Under the amended structure, Sutter Rock Capital Corp.’s fully diluted ownership of voting securities decreased from 50.0% to 8.5%. As such, Sutter Rock Capital Corp.'s investments in NestGSV, Inc. (d/b/a GSV Labs, Inc.) have been recategorized from controlled investments to non-controlled/affiliated investments and NestGSV, Inc. (d/b/a GSV Labs, Inc.) is no longer considered a significant subsidiary. |
(2) | On November 26, 2019, Sutter Rock Capital Corp. invested $250,000 in StormWind, LLC's Series D financing round. As part of the round, Sutter Rock Capital Corp.'s fully diluted ownership of voting securities decreased from 25.6% to 23.4%. As such, Sutter Rock Capital Corp.'s investments in StormWind, LLC have been recategorized from controlled investments to non-controlled/affiliated investments and StormWind, LLC is no longer considered a significant subsidiary. |
134
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
Not applicable.
Item 9A. | Controls and Procedures |
(a) | Evaluation of Disclosure Controls and Procedures |
As of December 31, 2019, our management, 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 Rules 13a-15(e) and 15d-15(e) under 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 by the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. However, in evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of such possible controls and procedures.
(b) | Management’s Report on Internal Control Over Financial Reporting |
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act, and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2019. Internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officers, or persons performing similar functions, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors, as applicable; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management performed an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2019 based upon criteria in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management determined that our internal control over financial reporting was effective as of December 31, 2019.
The effectiveness of our internal control over financial reporting as of December 31, 2019 has been audited by Marcum LLP, an independent registered public accounting firm, as stated in their report which appears herein.
(c) | Report of the Independent Registered Public Accounting Firm |
Marcum LLP, our independent registered public accounting firm, has issued a report on the effectiveness of our internal control over financial reporting, which appears on page 72 of this annual report on Form 10-K.
(d) | Changes in Internal Control Over Financial Reporting |
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Item 9B. Other Information
Appointment of Chief Compliance Officer
On March 9, 2020, our Board of Directors appointed Allison Green, age 34, our Chief Financial Officer, Treasurer and Secretary, to serve as our Chief Compliance Officer effective March 15, 2020. Carl Rizzo served as our Chief Compliance Officer pursuant to an agreement between us and Alaric Compliance Services LLC until March 15, 2020.
Ms. Green has served as our Chief Financial Officer since April 2019, as our Treasurer and Corporate Secretary since June 2018 and as our Controller from July 2017 to April 2019. Ms. Green served as our Senior Vice President of Finance from May 2018 to April 2019 and as the Vice President of GSV Asset Management, LLC from July 2017 to March 2019. Prior to joining Sutter Rock Capital Corp. and GSV Asset Management, LLC, the Company’s former investment adviser, she was the Controller and an accounting and financial consultant at Rise Companies Corp., the parent company of Fundrise, a Washington DC-based crowdfunded real estate investment platform, from April 2016 to April 2017. Prior to Rise Companies Corp., Ms. Green was the Controller at the Girl Scout Council of the Nation’s Capital and a ProInspire Fellow at the Council from September 2013 to April 2016. Ms. Green was a member of the Fund Management and Coinvestment teams at The Carlyle Group, focusing on Europe and US Real Estate and Energy Funds from June 2009 to August 2013 and began her career at Deloitte & Touche LLP in Los Angeles as an audit associate focused on financial services clients. Ms. Green is a Certified Public Accountant (CPA) (currently inactive) and graduated with degrees in Accounting and Finance from the University of Southern California. There are no family relationships between Ms. Green and any of the directors or executive officers of the Company, and there are no transactions in which Ms. Green has an interest requiring disclosure under Item 404(a) of Regulation S-K. There is no arrangement or understanding between Ms. Green and any other person pursuant to which Ms. Green was appointed as an officer of the Company.
136
PART II
OTHER INFORMATION
Item 10. Directors, Executive Officers and Corporate Governance
The information required by Item 10 will be contained in the 2020 Proxy Statement, to be filed with the SEC within 120 days after December 31, 2019, and is incorporated herein by reference. There have been no material changes to the procedures by which stockholders may recommend nominees to our Board of Directors.
We have adopted a Code of Business Conduct and Ethics for our employees and directors, including, specifically, our Chief Executive Officer, our Chief Financial Officer, and our other executive officers. Our Code of Business Conduct and Ethics satisfies the requirements for a “code of ethics” within the meaning of SEC rules. A copy of the Code of Business Conduct and Ethics is posted on our website at http://investors.sutterrock.com/committee-details/code-business-conduct-and-ethics. We intend to disclose any changes in, or waivers from, the Code of Business Conduct and Ethics by posting such information on the same website or by filing a Form 8-K, in each case to the extent such disclosure is required by rules of the SEC or NASDAQ.
137
Item 11. | Executive Compensation |
The information required by Item 11 will be contained in the 2020 Proxy Statement, to be filed with the SEC within 120 days after December 31, 2019, and is incorporated herein by reference.
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required by Item 12 will be contained in the 2020 Proxy Statement, to be filed with the SEC within 120 days after December 31, 2019, and is incorporated herein by reference.
Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information required by Item 13 will be contained in the 2020 Proxy Statement, to be filed with the SEC within 120 days after December 31, 2019, and is incorporated herein by reference.
Item 14. | Principal Accountant Fees and Services |
The information required by Item 14 will be contained in the 2020 Proxy Statement, to be filed with the SEC within 120 days after December 31, 2019, and is incorporated herein by reference.
138
PART IV
Item 15. | Exhibits and Financial Statement Schedules |
The following documents are filed or incorporated by reference as part of this annual report on Form 10-K:
(1) | Financial Statements—Refer to Part II, Item 8 of this Form 10-K, which are incorporated herein by reference. |
| Page |
(2) | Financial Statement Schedules—None. We have omitted financial statement schedules because they are not required or are not applicable, or the required information is shown in the financial statements or notes to the financial statements. |
(3) | Exhibits |
The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC:
3.1 | |
3.2 | |
3.3 | |
3.4 | |
4.1 | |
4.2 | |
4.3 | |
4.4 | |
10.1 | |
10.2 | |
10.3 | |
10.4 | |
10.5 | |
10.6 | |
10.7 | |
10.8 | |
10.9 | |
14.1 | |
14.2 | |
21.1 | List of Subsidiaries (Included in the notes to the consolidated financial statements contained in this report)* |
31.1 | |
139
31.2 | |
32.1 | |
32.2 | |
__________________
(1) | Previously filed in connection with Pre-Effective Amendment No. 2 to the Registrant’s Registration Statement on Form N-2 (File No. 333-171578) filed on March 30, 2011, and incorporated by reference herein. |
(2) | Previously filed in connection with the Registrant’s Current Report on Form 8-K (File No. 814-00852) filed on June 1, 2011, and incorporated by reference herein. |
(3) | Previously filed in connection with the Registrant’s Current Report on Form 8-K (File No. 814-00852) filed on August 1, 2019, and incorporated by reference herein. |
(4) | Previously filed in connection with Pre-Effective Amendment No. 3 to the Registrant’s Registration Statement on Form N-2 (File No. 333-175655) filed on September 20, 2011, and incorporated by reference herein. |
(5) | Previously filed in connection with Post-Effective Amendment No. 3 to the Registrant’s Registration Statement on Form N-2 (File No. 333-191307) filed on March 28, 2018, and incorporated herein by reference. |
(6) | Previously filed in connection with the Registrant's Quarterly Report on Form 10-Q (File No. 814-00852) filed on May 9, 2019, and incorporated by reference herein. |
(7) | Previously filed in connection with the Registrant’s Current Report on Form 8-K (File No. 814-00852) filed on March 14, 2019, and incorporated by reference herein. |
(8) | Previously filed in connection with the Registrant's Registration Statement on Form S-8 (File No. 333-233755) filed on September 13, 2019, and incorporated by reference herein. |
(9) | Previously filed in connection with Pre-Effective Amendment No. 3 to the Registrant’s Registration Statement on Form N-2 (File No. 333-171578) filed on April 15, 2011, and incorporated by reference herein. |
* | Filed herewith. |
140
SIGNATURES
Pursuant to the requirements 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.
SUTTER ROCK CAPITAL CORP. | |||
Date: | March 13, 2020 | By: | /s/ Mark D. Klein |
Mark D. Klein | |||
President and Chief Executive Officer | |||
(Principal Executive Officer) | |||
Date: | March 13, 2020 | By: | /s/ Allison Green |
Allison Green | |||
Chief Financial Officer, Treasurer, and Corporate Secretary | |||
(Principal Financial and Accounting Officer) | |||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: March 13, 2020 | By: | /s/ Mark D. Klein |
Mark D. Klein President and Chief Executive Officer (Principal Executive Officer) | ||
Date: March 13, 2020 | By: | /s/ Allison Green |
Allison Green Chief Financial Officer, Treasurer, and Corporate Secretary (Principal Financial and Accounting Officer) | ||
Date: March 13, 2020 | By: | /s/ Leonard A. Potter |
Leonard A. Potter Director | ||
Date: March 13, 2020 | By: | /s/ Ronald M. Lott |
Ronald M. Lott Director | ||
Date: March 13, 2020 | By: | /s/ Marc Mazur |
Marc Mazur Director | ||
Date: March 13, 2020 | By: | /s/ Lisa Westley |
Lisa Westley Director | ||
141
Exhibit 4.4
DESCRIPTION OF SECURITIES
The following is a brief description of the securities of Sutter Rock Capital Corp. a Maryland corporation (the “Company,” “we,” “our” or “us”), registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This description of our securities does not purport to be complete and is subject to and qualified in its entirety by reference to the applicable provisions of Maryland General Corporation Law (the “MGCL”) and the full text of our charter and bylaws. As of December 31, 2019 and the date hereof, our common stock is the only securities that we have registered under Section 12 of the Exchange Act.
Common Stock
As of December 31, 2019, our authorized stock consisted of 100,000,000 shares of stock, par value $0.01 per share, of which 17,564,244 shares were outstanding as of December 31, 2019. Our common stock is listed on the Nasdaq Capital Market under the ticker symbol “SSSS.” As of December 31, 2019, options issued under our 2019 Equity Incentive Plan allowing certain of our executive officers to purchase 1,125,000 shares of our common stock were outstanding. None of such options have been exercised. There are no outstanding warrants to purchase our common stock. Under Maryland law, our stockholders generally are not personally liable for our debts or obligations.
Under our charter our board of directors is authorized to classify and reclassify any unissued shares of stock into other classes or series of stock without obtaining stockholder approval. As permitted by the Maryland General Corporation Law, our charter provides that the board of directors, without any action by our stockholders, may amend the charter from time to time to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that we have authority to issue.
All shares of our common stock have equal rights as to earnings, assets, voting, and distributions and, when they are issued, will be duly authorized, validly issued, fully paid and nonassessable. Distributions may be paid to the holders of our common stock if, as and when authorized by our board of directors and declared by us out of assets legally available therefor. Shares of our common stock have no preemptive, conversion or redemption rights and are freely transferable, except where their transfer is restricted by federal and state securities laws or by contract. In the event of our liquidation, dissolution or winding up, each share of our common stock would be entitled to share ratably in all of our assets that are legally available for distribution after we pay all debts and other liabilities and subject to any preferential rights of holders of our preferred stock, if any preferred stock is outstanding at such time. Each share of our common stock is entitled to one vote on all matters submitted to a vote of stockholders, including the election of directors. Except as provided with respect to any other class or series of stock, the holders of our common stock will possess exclusive voting power. There is no cumulative voting in the election
of directors, which means that holders of a majority of the outstanding shares of common stock can elect all of our directors, and holders of less than a majority of such shares will be unable to elect any director.
Certain Provisions of the Maryland General Corporation Law and Our Charter and Bylaws
The Maryland General Corporation Law and our charter and bylaws contain provisions that could make it more difficult for a potential acquirer to acquire us by means of a tender offer, proxy contest or otherwise, the material ones of which are discussed below. These provisions are expected to discourage certain coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of us to negotiate first with our board of directors. We expect the benefits of these provisions outweigh the potential disadvantages of discouraging any such acquisition proposals because, among other things, the negotiation of such proposals may improve their terms.
Classified Board of Directors
Our board of directors is divided into three classes of directors serving staggered three-year terms. The current terms of the first, second and third classes expire in 2021, 2022, and 2020, respectively, and in each case, those directors will serve until their successors are elected and qualify. Upon expiration of their terms, directors of each class will be elected to serve for three-year terms and until their successors are duly elected and qualify and each year one class of directors will be elected by the stockholders. A classified Board may render a change in control of us or removal of our incumbent management more difficult. We believe, however, that the longer time required to elect a majority of a classified board of directors will help to ensure the continuity and stability of our management and policies.
Election of Directors
Our bylaws, as authorized by our charter, provide that a plurality of all the votes cast at a meeting of stockholders duly called and at which a quorum is present is required to elect a director. Pursuant to our charter our board of directors may amend the bylaws to alter the vote required to elect directors.
Number of Directors; Vacancies; Removal
Our charter provides that the number of directors will be set only by the board of directors in accordance with our bylaws. Our bylaws provide that a majority of our entire board of directors may at any time increase or decrease the number of directors. However, unless our bylaws are amended, the number of directors may never be less than one nor more than nine. Our charter provides that, at such time as we have at least three independent directors and our common stock is registered under the Exchange Act, as amended, we elect to be subject to the provision of Subtitle 8 of Title 3 of the Maryland General Corporation Law regarding the filling of vacancies on the board of directors. Accordingly, at such time, except as may be provided by the board of
directors in setting the terms of any class or series of preferred stock, any and all vacancies on the board of directors may be filled only by the affirmative vote of a majority of the remaining directors in office, even if the remaining directors do not constitute a quorum, and any director elected to fill a vacancy will serve for the remainder of the full term of the directorship in which the vacancy occurred and until a successor is elected and qualifies, subject to any applicable requirements of the Investment Company Act of 1940, as amended (the “1940 Act”).
Our charter provides that a director may be removed only for cause, as defined in our charter, and then only by the affirmative vote of at least two-thirds of the votes entitled to be cast in the election of directors.
Action by Stockholders
Under the Maryland General Corporation Law, stockholder action can be taken only at an annual or special meeting of stockholders or (unless the charter provides for stockholder action by less than unanimous written consent, which our charter does not) by unanimous written consent in lieu of a meeting. These provisions, combined with the requirements of our bylaws regarding the calling of a stockholder-requested special meeting of stockholders discussed below, may have the effect of delaying consideration of a stockholder proposal until the next annual meeting.
Advance Notice Provisions for Stockholder Nominations and Stockholder Proposals
Our bylaws provide that with respect to an annual meeting of stockholders, nominations of persons for election to the board of directors and the proposal of business to be considered by stockholders may be made only (1) pursuant to our notice of the meeting, (2) by the board of directors or (3) by a stockholder who is entitled to vote at the meeting and who has complied with the advance notice procedures of our bylaws. With respect to special meetings of stockholders, only the business specified in our notice of the meeting may be brought before the meeting. Nominations of persons for election to the board of directors at a special meeting may be made only (1) pursuant to our notice of the meeting, (2) by the board of directors or (3) provided that the board of directors has determined that directors will be elected at the meeting, by a stockholder who is entitled to vote at the meeting and who has complied with the advance notice provisions of the bylaws.
The purpose of requiring stockholders to give us advance notice of nominations and other business is to afford our board of directors a meaningful opportunity to consider the qualifications of the proposed nominees and the advisability of any other proposed business and, to the extent deemed necessary or desirable by our board of directors, to inform stockholders and make recommendations about such qualifications or business, as well as to provide a more orderly procedure for conducting meetings of stockholders. Although our bylaws do not give our board of directors any power to disapprove stockholder nominations for the election of directors or proposals recommending certain action, they may have the effect of precluding a contest for the election of directors or the consideration of stockholder proposals if proper procedures are not followed and of discouraging or deterring a third party from conducting a solicitation of proxies to elect its own slate of directors or to approve its own proposal without regard to
whether consideration of such nominees or proposals might be harmful or beneficial to us and our stockholders.
Calling of Special Meetings of Stockholders
Our bylaws provide that special meetings of stockholders may be called by our board of directors and certain of our officers. Additionally, our bylaws provide that, subject to the satisfaction of certain procedural and informational requirements by the stockholders requesting the meeting, a special meeting of stockholders will be called by the secretary of the corporation upon the written request of stockholders entitled to cast not less than a majority of all the votes entitled to be cast at such meeting.
Approval of Extraordinary Corporate Action; Amendment of Charter and Bylaws
Under Maryland law, a Maryland corporation generally cannot dissolve, amend its charter, merge, convert, sell all or substantially all of its assets, engage in a share exchange or engage in similar transactions outside the ordinary course of business, unless approved by the affirmative vote of stockholders entitled to cast at least two-thirds of the votes entitled to be cast on the matter. However, a Maryland corporation may provide in its charter for approval of these matters by a lesser percentage, but not less than a majority of all of the votes entitled to be cast on the matter. Our charter generally provides for approval of charter amendments and extraordinary transactions by the stockholders entitled to cast at least a majority of the votes entitled to be cast on the matter. Our charter also provides that the following matters require the approval of stockholders entitled to cast at least 80% of the votes entitled to be cast: (i) certain charter amendments; (ii) any proposal for our conversion, whether by merger or otherwise, from a closed-end company to an open-end company; (iii) any proposal for our liquidation or dissolution; or (iv) any proposal regarding a merger, consolidation, share exchange or sale or exchange of all or substantially all of our assets that the Maryland General Corporation Law requires to be approved by our stockholders. However, if such amendment or proposal is approved by a majority of our continuing directors (in addition to approval by our board of directors), such amendment or proposal may be approved by a majority of the votes entitled to be cast on such a matter. The “continuing directors” are defined in our charter as (1) our current directors, (2) those directors whose nomination for election by the stockholders or whose election by the directors to fill vacancies is approved by a majority of our current directors then on the board of directors or (3) any successor directors whose nomination for election by the stockholders or whose election by the directors to fill vacancies is approved by a majority of continuing directors or the successor continuing directors then in office. In any event, in accordance with the requirements of the 1940 Act, any amendment or proposal that would have the effect of changing the nature of our business so as to cause us to cease to be, or to withdraw our election as, a business development company would be required to be approved by a majority of our outstanding voting securities, as defined under the 1940 Act.
Our charter and bylaws provide that the board of directors will have the exclusive power to make, alter, amend or repeal any provision of our bylaws.
No Appraisal Rights
Except with respect to appraisal rights arising in connection with the Control Share Act discussed below, as permitted by the Maryland General Corporation Law, our charter provides that stockholders will not be entitled to exercise appraisal rights unless a majority of the board of directors shall determine such rights apply.
Control Share Acquisitions
The Maryland General Corporation Law, pursuant to the Control Share Act (the “Control Share Act”), provides that control shares of a Maryland corporation acquired in a control share acquisition have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter. Shares owned by the acquiror, by officers or by directors who are employees of the corporation are excluded from shares entitled to vote on the matter. Control shares are voting shares of stock which, if aggregated with all other shares of stock owned by the acquiror or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquiror to exercise voting power in electing directors within one of the increasing ranges of voting power listed in the Control Share Act. The requisite stockholder approval must be obtained each time an acquiror crosses one of the thresholds of voting power. Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. A control share acquisition means the acquisition of control shares, subject to certain exceptions.
Our bylaws contain a provision exempting from the Control Share Act any and all acquisitions by any person of our shares of stock. There can be no assurance that such provision will not be amended or eliminated at any time in the future. However, we will amend our bylaws to be subject to the Control Share Act only if our board of directors determines that it would be in our best interests and if the SEC staff does not object to our determination that our being subject to the Control Share Act does not conflict with the 1940 Act. The SEC staff has issued informal guidance setting forth its position that certain provisions of the Control Share Act would, if implemented, violate Section 18(i) of the 1940 Act.
Business Combinations
Under Maryland law, “business combinations” between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder (the “Business Combination Act”). These business combinations include a merger, consolidation, share exchange or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:
• | any person who beneficially owns 10% or more of the voting power of the corporation’s outstanding voting stock; or | |
A person is not an interested stockholder under this statute if the board of directors approved in advance the transaction by which the stockholder otherwise would have become an interested
stockholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board of directors.
• | an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding voting stock of the corporation. | |
After the five-year prohibition, any business combination between the Maryland corporation and an interested stockholder generally must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least:
• | 80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and | |
These super-majority vote requirements do not apply if the corporation’s common stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares.
• | two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder. | |
The statute permits various exemptions from its provisions, including business combinations that are exempted by the board of directors before the time that the interested stockholder becomes an interested stockholder. Our board of directors has adopted a resolution that any business combination between us and any other person is exempted from the provisions of the Business Combination Act, provided that the business combination is first approved by the board of directors, including a majority of the directors who are not interested persons as defined in the 1940 Act. This resolution may be altered or repealed in whole or in part at any time; however, our board of directors will adopt resolutions so as to make us subject to the provisions of the Business Combination Act only if the board of directors determines that it would be in our best interests and if the SEC staff does not object to our determination that our being subject to the Business Combination Act does not conflict with the 1940 Act. If this resolution is repealed, or the board of directors does not otherwise approve a business combination, the statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.
Conflict with 1940 Act
Our bylaws provide that, if and to the extent that any provision of the Maryland General Corporation Law, including the Control Share Act (if we amend our bylaws to be subject to such Act) and the Business Combination Act, or any provision of our charter or bylaws conflicts with any provision of the 1940 Act, the applicable provision of the 1940 Act will control.
Exhibit 14.1
CODE OF ETHICS
FOR
SUTTER ROCK CAPITAL CORP.
Section I. Statement of General Fiduciary Principles
This Code of Ethics (the “Code”) has been adopted by Sutter Rock Capital Corp. (the “Corporation” or “Sutter Rock”) in compliance with Rule 17j-1 under the Investment Company Act of 1940, as amended (the “Act”). The purpose of the Code is to establish standards and procedures for the detection and prevention of activities by which persons having knowledge of the investments and investment intentions of the Corporation may abuse their fiduciary duty to the Corporation, and otherwise to deal with the types of conflict of interest situations to which Rule 17j-1 under the Act (“Rule 17j-1”) are appropriately to be addressed.
The Code is based on the principle that the directors, officers and employees of the Corporation who provide services to the Corporation owe a fiduciary duty to the Corporation to conduct their personal securities transactions in a manner that does not interfere with the Corporation’s transactions or otherwise take unfair advantage of their relationship with the Corporation. All directors, officers and employees of the Corporation (“Covered Persons”) are expected to adhere to this general principle as well as to comply with all of the specific provisions of this Code applicable to them. In addition, all Covered Persons must comply with applicable federal securities laws and must report violations of the Code to the Corporation’s Chief Compliance Officer (“CCO”).
Technical compliance with the Code will not automatically insulate any Covered Person from scrutiny of transactions that show a pattern of compromise or abuse of the individual’s fiduciary duty to the Corporation. Accordingly, all Covered Persons must seek to avoid any actual or potential conflicts between their personal interests and the interests of the Corporation and its stockholders. In sum, all Covered Persons shall place the interests of the Corporation and its investors before their own personal interests.
All Covered Persons must read and retain this Code.
Section II. Definitions
(A) “Access Person” means any director, employee, officer or Advisory Person (as defined below) of the Corporation.
(B) An “Advisory Person” of the Corporation means: (i) any director, officer or employee of the Corporation or any company in a Control (as defined below) relationship to the Corporation who, in connection with his or her regular functions or duties makes, participates in, or obtains information regarding the purchase or sale of any Covered Security (as defined below) by the Corporation, or whose functions relate to the making of any recommendation with respect to such purchases or sales; and (ii) any natural person in a Control relationship to the Corporation who obtains information concerning recommendations made to the Corporation with regard to the purchase or sale of any Covered Security by the Corporation.
Last Approved: March 5, 2020
(C) “Beneficial Ownership” is interpreted in the same manner as it would be under Rule 16a-1(a)(2) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), in determining whether a person is a beneficial owner of a security for purposes of Section 16 of the Exchange Act and the rules and regulations thereunder.
(D) “CCO” means the Chief Compliance Officer of the Corporation.
(E) “Control” shall have the same meaning as that set forth in Section 2(a)(9) of the Act, and generally means the power to exercise a controlling influence over the management or policies of a company, unless such power is solely the result of an official position with such company.
(F) “Covered Person” means any director, officer or employee (including a temporary employee) of the Corporation, or of any of the Corporation’s affiliates or subsidiaries, and any other persons so designated by the CCO.
(G) “Covered Security” means a security as defined in Section 2(a)(36) of the Act, including: any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security (including a certificate of deposit) or on any group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security,” or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.
“Covered Security” does not include: (i) direct obligations of the Government of the United States; (ii) bankers’ acceptances, bank certificates of deposit, commercial paper and high quality short-term debt instruments, including repurchase agreements; and (iii) shares issued by open-end investment companies registered under the Act. References to a Covered Security in this Code (e.g., a prohibition or requirement applicable to the purchase or sale of a Covered Security) shall be deemed to refer to and to include any warrant for, option in, or security immediately convertible into that Covered Security, and shall also include any instrument that has an investment return or value that is based, in whole or in part, on that Covered Security (collectively, “Derivatives”). Therefore, except as otherwise specifically provided by this Code: (i) any prohibition or requirement of this Code applicable to the purchase or sale of a Covered Security shall also be applicable to the purchase or sale of a Derivative relating to that Covered Security; and (ii) any prohibition or requirement of this Code applicable to the purchase or sale of a Derivative shall also be applicable to the purchase or sale of a Covered Security relating to that Derivative.
(H) “Independent Director” means a director of the Corporation who is not an “interested person” of the Corporation within the meaning of Section 2(a)(19) of the Act.
(I) “Initial Public Offering” means an offering of securities registered under the Securities Act of 1933, as amended (the “1933 Act”), the issuer of which, immediately before the registration, was not subject to the reporting requirements of Sections 13 or 15(d) of the Exchange Act.
Last Approved: March 5, 2020
(J) “Investment Persons” of the Corporation means: (i) any employee of the Corporation (or of any company in a Control relationship to the Corporation) who, in connection with his or her regular functions or duties, makes or participates in making recommendations regarding the purchase or sale of securities by the Corporation; and (ii) any natural person who controls the Corporation and who obtains information concerning recommendations made to the Corporation regarding the purchase or sale of securities by the Corporation.
(K) “Limited Offering” means an offering that is exempt from registration under the 1933 Act pursuant to Section 4(2) or Section 4(6) thereof or pursuant to Rule 504, Rule 505, or Rule 506 thereunder.
(L) “Security Held or to be Acquired” by the Corporation means: (i) any Covered Security which, within the most recent 15 days: (A) is or has been held by the Corporation; or (B) is being or has been considered by the Corporation for purchase by the Corporation; and (ii) any option to purchase or sell, and any security convertible into or exchangeable for, a Covered Security described in Section II(L)(i) above.
(M) “Restricted List” means the list promulgated and periodically updated by the CCO, in consultation with the Corporation’s Chief Investment Officer or his/her designee, which lists all of the Covered Securities that (1) the Corporation has purchased or sold within the last 15 calendar days, or is purchasing or selling or intends to purchase or sell within the next 15 calendar days; or that (2) the Corporation has within the last 15 calendar days considered purchasing or selling. or within the next 15 calendar days intends to consider purchasing or selling.
Section III. Objective and General Prohibitions
Covered Persons may not engage in any investment transaction under circumstances in which the Covered Person benefits from or interferes with the purchase or sale of investments by the Corporation. In addition, Covered Persons may not use information concerning the investments or investment intentions of the Corporation, or their ability to influence such investment intentions, for personal gain or in a manner detrimental to the interests of the Corporation.
Covered Persons may not engage in conduct that is deceitful, fraudulent or manipulative, or that involves false or misleading statements, in connection with the purchase or sale of investments by the Corporation. In this regard, Covered Persons should recognize that Rule 17j-1 makes it unlawful for any affiliated person of the Corporation in connection with the purchase or sale, directly or indirectly, by the person of a Security Held or to be Acquired by the Corporation to:
(i) | employ any device, scheme or artifice to defraud the Corporation or its investors; |
(ii) | make any untrue statement of a material fact to the Corporation or its investors or omit to state to the Corporation or its investors a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading; |
(iii) | engage in any act, practice or course of business that operates or would operate as a fraud or deceit upon the Corporation or its investors; or |
(iv) | engage in any manipulative practice with respect to the Corporation or its investors. |
Last Approved: March 5, 2020
Covered Persons should also recognize that a violation of this Code or of Rule 17j-1 may result in the imposition of: (1) sanctions as provided by Section VIII below; or (2) administrative, civil and, in certain cases, criminal fines, sanctions or penalties.
Covered Persons are required to comply with applicable federal securities laws.
Section IV. Prohibited Transactions
(A) | An Access Person may not, without first obtaining pre-clearance approval, either from the CCO directly in writing (using the “Pre-Clearance Request” form attached as Schedule A, or such similar form as the CCO may hereafter approve (hereinafter, the “Pre-Clearance Request Form”)) or through the online reporting system, which is monitored and overseen by the CCO or his/her designees (the “System”): |
(1) | purchase or otherwise acquire direct or indirect Beneficial Ownership of any security on the Restricted List, or of any Covered Security concerning which he or she has material non-public information, regardless of whether that security is on the Restricted List; or |
(2) | sell or otherwise dispose of direct or indirect Beneficial Ownership, of any security on the Restricted List, or of any Covered Security concerning which he or she has material non-public information, regardless of whether that security is on the Restricted List. |
(B) | An Access Person may not purchase or otherwise acquire or sell or otherwise dispose of any direct or indirect Beneficial Ownership of the Corporation’s securities without similarly first obtaining pre-clearance approval by the CCO directly in writing using the Pre-Clearance Request Form or online via the System. |
(C) | Investment Persons of the Corporation must obtain pre-approval from the CCO before directly or indirectly acquiring Beneficial Ownership in any Covered Securities in an Initial Public Offering or in a Limited Offering. Such approval must be obtained from the CCO, either directly in writing using the Pre-Clearance Request Form, unless the person seeking such approval is the CCO, in which case pre-approval must be obtained from the Corporation’s Chief Executive Officer using the Pre-Clearance Request Form. |
(D) | No Access Person shall recommend any transaction in any Covered Securities by the Corporation without having disclosed to the CCO his or her interest, if any, in such Covered Securities or the issuer thereof, including: the Access Person’s Beneficial Ownership of any Covered Securities of such issuer; any contemplated transaction by the Access Person in such Covered Securities; any position the Access Person (or any person to whom the Access Person is related, by blood or marriage, and is known) has with such issuer; and any present or proposed business relationship between such issuer and the Access Person (or a party in which the Access Person has a significant interest). |
Section V. Reports by Access Persons
(A) | Initial and Annual Personal Securities Accounts and Holdings Reports. |
Last Approved: March 5, 2020
All Access Persons shall within 10 days of the date on which they become Access Persons, and thereafter, within 30 days after the end of each calendar year, disclose the title and type of security, and as applicable the exchange ticker symbol or CUSIP number, number of shares, and principal amount of all Covered Securities in which they have a Beneficial Ownership as of the date the person became an Access Person, in the case of such person’s initial report, and as of the last day of the year, as to annual reports. A form of such report, which is hereinafter called an “Initial and Annual Personal Securities Accounts and Holdings Report,” is attached as Schedule B. Each Initial and Annual Personal Securities Accounts and Holdings Report must also disclose the name of any broker, dealer, or bank with whom the Access Person maintained an account in which any securities were held for the direct or indirect benefit of the Access Person as of the date the person became an Access Person or as of the last day of the year, as the case may be. Each Initial and Annual Personal Securities Accounts and Holdings Report shall state the date it is being submitted. In all cases, the information must be current as of a date no more than 45 days prior to the date the person becomes an Access Person, or the date the report was submitted, as applicable.
(B) | Quarterly Transaction Reports. |
Within 30 days after the end of each calendar quarter, each Access Person shall make a written report to the CCO (or designee) of all transactions occurring in the quarter in a Covered Security in which he or she had any Beneficial Ownership. A form of such report, which is hereinafter called a “Quarterly Securities Transaction Report,” is attached as Schedule C.
A Quarterly Securities Transaction Report shall be in the form of Schedule C or such other form approved by the CCO (or designee) and must contain the following information with respect to each reportable transaction:
(1) | Date and nature of the transaction (purchase, sale or any other type of acquisition or disposition); |
(2) | Title, interest rate and maturity date (if applicable), number of shares and principal amount of each Covered Security involved and the price of the Covered Security at which the transaction was effected; |
(3) | Name of the broker, dealer or bank with or through whom the transaction was effected; and |
(4) | The date the report is submitted by the Access Person. |
(C) Independent Directors.
Notwithstanding the reporting requirements set forth in this Section V, an Independent Director who would be required to make a report under this Section V solely by reason of being a director of the Corporation is not required to file an Initial and Annual Personal Securities Accounts and Holdings Report upon becoming a director of the Corporation or an annual Initial and Annual Personal Securities Accounts and Holdings Report.
Such an Independent Director also need not file a Quarterly Securities Transaction Report unless such director knew or, in the ordinary course of fulfilling his or her official duties as a director of the Corporation, should have known that during the 15-day period immediately preceding or after the date of the transaction in a Covered Security by the director, such Covered Security is or was purchased or sold by the Corporation or the Corporation considered purchasing or selling such Covered Security.
Last Approved: March 5, 2020
(D) Brokerage Accounts and Statements.
Access Persons, except Independent Directors, shall:
(1) | within 30 days after the end of each calendar quarter, identify the name of the broker, dealer or bank with whom the Access Person established an account in which any securities were held during the quarter for the direct or indirect benefit of the Access Person and identify any new account(s) and the date the account(s) were established. This information shall be included on the appropriate Quarterly Securities Transaction Report; |
(2) | instruct the brokers, dealers or banks with whom they maintain such an account to provide duplicate account statements to the CCO (or designee); and |
(3) | on an annual basis, certify that they have complied with the requirements of (1) and (2) above. |
(E) Form of Reports.
A Quarterly Securities Transaction Report may consist of broker statements or other statements that provide a list of all personal Covered Securities holdings and transactions in the time period covered by the report and contain the information required in a Quarterly Securities Transaction Report.
(F) Responsibility to Report.
It is the responsibility of each Access Person to take the initiative to comply with the requirements of this Section V. Any effort by the Corporation to facilitate the reporting process does not change or alter that responsibility. A person need not make a report hereunder with respect to transactions effected for, and Covered Securities held in, any account over which the person has no direct or indirect influence or control.
(G) Where to File Reports.
All Quarterly Securities Transaction Reports and Initial and Annual Personal Securities Accounts and Holdings Reports must be filed with the CCO, either (1) directly in writing using Schedules C or B, respectively (or such other forms as the CCO may prescribe for this purpose), or (2) online, via the System.
(H) Disclaimers.
Any report required by this Section V may contain a statement that the report will not be construed as an admission that the person making the report has any direct or indirect Beneficial Ownership in the Covered Security to which the report relates.
Section VI. Additional Prohibitions
(A) | Confidentiality of the Corporation’s Transactions. |
Last Approved: March 5, 2020
Until disclosed in a public report to stockholders or to the U.S. Securities and Exchange Commission in the normal course, all information concerning the securities “being considered for purchase or sale” by the Corporation shall be kept confidential by all Covered Persons and disclosed by them only on a “need to know” basis. It shall be the responsibility of the CCO to report to the directors of the Corporation any known violations found in this regard.
(B) Gifts and Entertainment Policy.
Covered Persons and their immediate families should not solicit, accept, retain or provide any gifts or favors which might influence decisions of the Covered Person or the recipient in making business transactions involving the Corporation, or which others might reasonably believe could influence those decisions. Even a nominal gift should not be accepted if, to a reasonable observer, it might appear that the gift would influence a business decision. No Covered Person may give or accept gifts of cash or cash equivalents.
The policy does not apply to gifts of de minimis value (e.g., pens, notepads, doughnuts, pizza, modest desk ornaments, etc.) or to promotional items of nominal value that display a firm logo (e.g., umbrellas, tote bags, shirts, etc.) and “personal” gifts received because of kinship, marriage or social relationships entirely beyond and apart from an organization in which membership or an official position is held. De minimis gifts and promotional items must be less than the $250 limit to fall within the exclusion.
These prohibitions do not apply to ordinary and usual business entertainment, so long as such entertainment is neither so frequent nor so lavish as to raise any questions of impropriety. For an item to be considered “business entertainment,” the vendor must be present at the event/meal and there must be an opportunity to discuss matters relating to Corporation business. For example, if a Covered Person receives theater tickets from a vendor, the tickets are “business entertainment” only if the vendor attends the event and there is an opportunity to discuss business matters. If not, the tickets should be treated as a “gift” for purposes of this policy and subject to the limitations.
All Covered Persons must report the receipt or giving of any Sutter Rock Entity business-related gift with an apparent value that exceeds $250 (other than personal gifts and gifts of de minimis or nominal value, as defined above) and the acceptance or furnishing of all similarly related business entertainment with an apparent value that exceeds $250. Both of these thresholds are on a “per individual” basis.
In addition, the extension by Covered Persons, on behalf of a Sutter Rock Entity, of all invitations for business entertainment that can reasonably be expected to be valued in excess of $500 must be pre-approved by the CCO prior to any such extension. This threshold is on a “per individual” basis.
Regardless of the dollar value, Covered Persons may not give a gift or provide entertainment that is inappropriate under the circumstances, or inconsistent with applicable law or regulations, to persons associated with securities or financial organizations, exchanges, member firms, commodity firms, news media or ERISA fiduciaries. In addition, Covered Persons must confer with the CCO, who may consult legal counsel, before making contact with state or local government plans, and comply with all applicable state or local laws regarding such communications.
The CCO shall maintain a log of all business-related gifts given or received by all Covered Persons in excess of $250, and of all similarly related business entertainment accepted by a Covered Person or furnished by a Covered Person on behalf of the Corporation, the value of either which exceeds $250. These thresholds are on a “per individual” basis.
Last Approved: March 5, 2020
Section VII. Annual Acknowledgement, Affirmation and Certification
(A) Access Persons.
Access Persons shall be required to acknowledge annually that they have read this Code, that they understand and recognize that they are subject to the Code, and affirm that they will fully comply with the Code on a going-forward basis. Further, Access Persons who have been subject to the Code at any time during the previous year shall be required to certify annually that they have complied with the requirements of this Code. A form of such acknowledgement, affirmation and certification is attached as Schedule D.
(B) Board Review.
No less frequently than annually, the Sutter Rock Entities must furnish to the Corporation’s board of directors, and the board must consider, a written report that: (A) describes any issues arising under this Code or procedures since the last report to the board, including, but not limited to, information about material violations of the Code or procedures and sanctions imposed in response to material violations; and (B) certifies that the Corporation has adopted procedures reasonably necessary to prevent Access Persons from violating the Code.
Section VIII. Sanctions
Any violation of this Code shall be subject to the imposition of such sanctions as may be deemed appropriate under the circumstances to achieve the purposes of Rule 17j-1 and this Code. The sanctions to be imposed shall be determined by the Corporation’s board of directors, including a majority of the Independent Directors. Sanctions may include, but are not limited to, suspension or termination of employment, a letter of censure and/or restitution of an amount equal to the difference between the price paid or received by the Corporation and the more advantageous price paid or received by the offending person.
Section IX. Administration and Construction
(A) | The administration of this Code shall be the responsibility of the CCO. |
(B) The duties of the CCO are as follows:
(1) | Maintain continuously a current list of the names of all Access Persons with an appropriate description of their title or employment, including a notation of any directorships held by Access Persons, and inform all Access Persons of their reporting obligations hereunder; |
(2) | On an annual basis, provide all Covered Persons a copy of this Code and inform such persons of their duties and obligations hereunder including making available any supplemental training that may be required from time to time. In addition, provide to all Covered Persons updated copies of the Code each time it is amended; |
(3) | Collect from all Covered Persons a signed “Acknowledgement, Affirmation and Certification of Compliance with Sutter Rock Compliance Program Documents” form (which is attached as Schedule D) annually and each time the Code is amended; |
Last Approved: March 5, 2020
(4) | Maintain or supervise the maintenance of all records (including pre-clearance and other approvals granted) and reports required by this Code; |
(5) | Review the contents of holdings reports submitted by Access Persons; |
(6) | Review reports of all transactions effected by Access Persons who are subject to the requirement to file Quarterly Securities Transaction Reports and review such transactions against a listing of all transactions effected by the Corporation and securities of any companies included on the Restricted List during the reporting period; |
(7) | Issue, either personally or with the assistance of counsel, as may be appropriate, any interpretation of this Code that may appear consistent with the objectives of Rule 17j-1 and this Code; |
(8) | Conduct such inspections or investigations as shall reasonably be required to detect and report, with recommendations, any apparent violations of this Code to the board of directors of the Corporation; and |
(9) | Submit a written report to the board of directors of the Corporation, no less frequently than annually, that describes any issues arising under the Code since the last such report, including but not limited to the information described in Section VII(B). |
(C) The CCO shall maintain and cause to be maintained in an easily accessible place at the principal place of business of the Corporation the following records:
(1) | A copy of all codes of ethics adopted by the Corporation pursuant to Rule 17j-1 that have been in effect at any time during the past five (5) years; |
(2) | A copy of all signed “Acknowledgement, Affirmation and Certification of Compliance with Sutter Rock Compliance Program Documents” forms (see Schedule D) for at least five (5) years after the end of the fiscal year in which the Acknowledgement, etc. is submitted; |
(3) | A record of each violation of such code of ethics and of any action taken as a result of such violation for at least five (5) years after the end of the fiscal year in which the violation occurs; |
(4) | A copy of each report made by an Access Person for at least two (2) years after the end of the fiscal year in which the report is made, and for an additional three (3) years in a place that need not be easily accessible; |
(5) | A copy of each report made by the CCO to the board of directors for two (2) years from the end of the fiscal year of the Corporation in which such report is made or issued and for an additional three (3) years in a place that need not be easily accessible; |
(6) | A list of all persons who are, or within the past five (5) years have been, required to make reports pursuant to Rule 17j-1 and this Code, or who are or were responsible for reviewing such reports; |
Last Approved: March 5, 2020
(7) | A copy of each report required by Section VII(B) for at least two (2) years after the end of the fiscal year in which it is made, and for an additional three (3) years in a place that need not be easily accessible; and |
(8) | A record of any decision, and the reasons supporting the decision, to approve the acquisition by Investment Persons of securities in an Initial Public Offering or Limited Offering for at least five (5) years after the end of the fiscal year in which the approval is granted. |
(D) This Code may not be amended or modified except in a written form that is specifically approved by majority vote of the Independent Directors.
This Code was adopted and approved by the Board of Directors of the Corporation, including a majority of the Independent Directors, on March 28, 2011, was revised on August 10, 2011, and again revised on August 6, 2012, September 9, 2012, March 5, 2015, July 30, 2015, March 2, 2016, March 1, 2017, February 28, 2018, and March 5, 2020.
Last Approved: March 5, 2020
SCHEDULE A
Sutter Rock Capital Corp.
Pre-Clearance Request
As described in Section IV of the Sutter Rock Capital Corp. Code of Ethics, this form must be submitted prior to an “Access Person” executing any transaction in Sutter Rock Capital Corp. securities, securities of any issuer included on the Restricted List, or effecting purchasing in a private placement or initial public offering of securities of any issuer.
Upon completion of this form, please submit to the CCO at: Compliance@sutterrock.com.
Date of Request: _________________ Intended Trade Date: ____________________
Name: __________________________________________________
Buy Sell Sell Short Cover Short
Issuer name / Security description & CUSIP #:
_________________________________________________________________________
Quantity: Market order: Limit Order:
Reason for trade:
Last trade in security (direction and date):
Broker: ______________________________________________________
Authorized by: _____________________________ Date: ________________________
(Chief Compliance Officer or Designee)
The Chief Compliance Officer or his designee has reviewed the proposed trade, contract, instruction or plan and confirms that Sutter Rock Capital Corp. does not intend to buy or sell the above security for any client accounts within the next fifteen (15) days and/or has completed all client transactions in this security at this time. Exceptions to this statement should be noted on this form and any exception must be authorized by the Chief Compliance Officer.
Upon completion of the transaction, you must notify Sutter Rock Compliance at Compliance@sutterrock.com of the final execution price and trade volume.
SCHEDULE B
INITIAL AND ANNUAL PERSONAL SECURITIES ACCOUNTS AND HOLDINGS REPORT
I certify that the following bank or broker-dealer accounts are the only accounts holding securities of any kind or nature whatsoever in which I have or share a “Beneficial Ownership” interest as such term is defined in the Sutter Rock Capital Corp. Code of Ethics.
Name of bank or broker custodian | Account Number | Name of beneficial owner of record with the account custodian |
I further certify that the following is a listing of all “Covered Securities” in which I had or shared a “Beneficial Ownership” interest as of the following date:
• | For an Initial Personal Securities Holdings Report: |
o | (the date indicated may not be more than 45 days prior to the date of submission, as indicated below, of this report) |
• | For an Annual Personal Securities Holdings Report: December 31, 20___ |
Note: For holdings report purposes, the term “Covered Securities” should be understood as including securities of all sorts, but not the following: (i) shares of open-end mutual funds; (ii) U.S. government or agency issued securities; and (iii) short-term debt instruments, bank CDs, bankers acceptances or repurchase agreements. Shares of exchange-traded funds (“ETFs”) are Covered Securities.
In lieu of indicating the following required information within this form, you may submit—under cover of a signed and dated copy of this form—legible copies of statements of accounts issued by the account custodian(s) wherein Covered Securities are held as of the date indicated above. Such statements should be either emailed or sent, by U.S. mail or courier service, to:
Compliance@sutterrock.com | Sutter Rock Capital Corp. |
Attn: Compliance Dept.
One Sansome Street, Suite 730
San Francisco, California 94104
Account Custodian and Number | Issuer | Security Type | Exchange Ticker Symbol or CUSIP Number | Total number of equity security shares | Aggregate principal amount of debt securities |
(Use a continuation sheet if necessary.)
Signature: Print Name:
Date Submitted:
• | For Initial Holdings Reports – Must be within 10 days of initial date of association with Sutter Rock Capital Corp. |
• | For Annual Holdings Reports – Must be on or before January 30 of the current year. |
SCHEDULE C
QUARTERLY SECURITIES TRANSACTION REPORT
The following lists all transactions in Covered Securities, in which I had any direct or indirect Beneficial Ownership interest, that were effected during the last calendar quarter and required to be reported by Section V(B) of the Sutter Rock Capital Corp. Code of Ethics. (If no such transactions took place write “NONE.”) Please sign and date this report and return it to the Chief Compliance Officer no later than the 30th day following the end of the quarter. Use reverse side if additional space is needed.
PURCHASES AND ACQUISITIONS
No. of Shares or | Interest Rate | Broker, | ||||
Trade | Principal | and Maturity | Name of | Dealer, or | ||
Date | Amount | Date | Security | Unit Price | Total Price | Bank |
SALES AND OTHER DISPOSITIONS
No. of Shares or | Interest Rate | Broker, | ||||
Trade | Principal | and Maturity | Name of | Dealer, or | ||
Date | Amount | Date | Security | Unit Price | Total Price | Bank |
NEW ACCOUNTS ESTABLISHED DURING THE QUARTER
Name of Broker, | Name of Account | |
Dealer or Bank | and Account Number | Date Established |
SCHEDULE D
ACKNOWLEDGEMENT, AFFIRMATION AND CERTIFICATION
OF COMPLIANCE WITH SUTTER ROCK COMPLIANCE PROGRAM DOCUMENTS
The undersigned, as a Covered Person of Sutter Rock Capital Corp, hereby acknowledges, affirms and/or certifies as follows:
(1) | I have received, read and understand the |
• | Sutter Rock Capital Corp. Code of Ethics; |
• | Code of Business Conduct and Ethics; and |
• | Insider Trading Policy and Procedures |
(collectively, the “Sutter Rock Compliance Program Documents”) and agree to comply in all respects with the policies and procedures stated therein.
(2) | If at any time during the past calendar year I was subject to any one, some or all of the Sutter Rock Compliance Program Documents, I further certify that I have complied in all respects with the requirements of each such Document as was then in effect or, in the event that I have not so complied, I have previously fully disclosed all such non-compliance to the Chief Compliance Officer. |
Signature:
Print Name:
Date Submitted:
Exhibit 14.2
SUTTER ROCK CAPITAL CORP.
CODE OF BUSINESS CONDUCT AND ETHICS
As approved, with revisions: March 5, 2020
32823638.7
CODE OF BUSINESS CONDUCT AND ETHICS
TABLE OF CONTENTS
Page
Introduction 1
Purpose of the Code 1
Conflicts of Interest 2
Corporate Opportunities 2
Confidentiality 2
Fair Dealing 3
Protection and Proper Use of Company Assets 3
Compliance with Applicable Laws, Rules and Regulations 3
Equal Opportunity, Harassment 4
Accuracy of Company Records 4
Retaining Business Communications 4
Political Contributions 5
Media Relations 5
Intellectual Property Information 5
Internet and E-mail Policy 5
Reporting Violations and Complaint Handling 6
Administration of the Code 7
Sanctions for Code Violations 7
Application/Waivers 7
Revisions and Amendments 7
Annex
Code Acknowledgment 1
ii
32823638.7
CODE OF BUSINESS CONDUCT AND ETHICS
Introduction
Section 406 of the Sarbanes-Oxley Act of 2002 (“SOX”) and Item 406 of Regulation S-K require that public companies disclose whether they have adopted a code of business conduct and ethics for certain officers and, if not, to explain why not. A code of business conduct and ethics for this purpose is defined as a document setting forth standards that are reasonably designed to deter wrongdoing and to promote, among other matters, honest and ethical conduct, full and accurate disclosures in SEC filings and other public communications, and compliance with applicable laws, rules and regulations.
Ethics are important to Sutter Rock Capital Corp. (“Sutter Rock,” “our,” “us,” or “we”) and to our management. Sutter Rock is committed to the highest ethical standards and to conducting our business with the highest level of integrity.
All officers, directors and employees of Sutter Rock (such individuals collectively referred to as the “Covered Persons,” and individually, “you”) are responsible for maintaining this level of integrity and for complying with the policies contained in this Code of Business Conduct and Ethics (the “Code”). If you have a question or concern about what is proper conduct for you or anyone else, please raise these concerns with any member of Sutter Rock’s management, or follow the procedures outlined in applicable sections of this Code.
Purpose of the Code
This Code is intended to:
• | help you recognize ethical issues and take the appropriate steps to resolve these issues; |
• | deter ethical violations; |
• | assist you in reporting any unethical or illegal conduct; and |
• | reaffirm and promote our commitment to a corporate culture that values honesty and accountability. |
All Covered Persons will acknowledge in writing that they have received a copy of this Code, read it, and understand that the Code contains our expectations regarding their conduct.
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Conflicts of Interest
You must avoid any conflict, or the appearance of a conflict, between your personal interests and our interests. A conflict exists when your personal interests in any way interfere—or even appear to interfere—with our interests, or when you take any action or have any interests that may make it difficult for you to perform your job objectively and effectively. For example, a conflict of interest probably exists if:
• | you cause us to enter into business relationships with you or a member of your family, or invest in companies affiliated with you or a member of your family; |
• | you, or a member of your family, receives improper personal benefits as a result of your position with us; |
• | you use any nonpublic information about us, our customers or our other business partners for your personal gain, or the gain of a member of your family; or |
• | you use or communicate confidential information obtained in the course of your work for your or another’s personal benefit. |
Corporate Opportunities
Each of us has a duty to advance the legitimate interests of Sutter Rock when the opportunity to do so presents itself. Therefore, you may not:
• | take for yourself personally opportunities, including investment opportunities, discovered through the use of your position with us or through the use of our property or information; |
• | use our property, information, or position for your personal gain or the gain of a family member; or |
• | compete, or prepare to compete, with us. |
Confidentiality
You must not disclose confidential information regarding us, our affiliates, our lenders, our clients or our other business partners, unless disclosure is authorized or required by law. Confidential information includes all non-public information that might be harmful to, or useful to the competitors of, Sutter Rock, our affiliates, our lenders, our clients or our other business partners. This obligation continues even after you leave Sutter Rock, until the information becomes publicly available.
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Fair Dealing
You must endeavor to deal fairly with our customers, suppliers and business partners, or any other companies or individuals with whom we do business or come into contact with, including fellow employees and our competitors. You must not take unfair advantage of these or other parties by means of:
• | manipulation; |
• | concealment; |
• | abuse of privileged information; |
• | misrepresentation of material facts; or |
• | any other unfair-dealing practice. |
Protection and Proper Use of Company Assets
Our assets are to be used only for legitimate business purposes. Theft, carelessness and waste have a direct impact on our profitability. You should protect our assets and ensure they are used efficiently.
Incidental personal use of telephones, fax machines, copy machines, personal computers and similar equipment is generally allowed if there is no significant added cost to us, if it does not interfere with your work duties and if such use is not related to an illegal activity or to any outside business.
Compliance with Applicable Laws, Rules and Regulations
All Covered Persons have a duty to comply with all laws, rules and regulations that apply to our business, including those relating to insider trading. Highlighted below are some of the key compliance guidelines that must be followed. Please talk to our Chief Compliance Officer if you have any questions about how to comply with these regulations and other laws, rules and regulations.
• | Insider trading. It is against the law to buy or sell securities using material information that is not available to the public. Individuals who give this “inside” information to others may be liable to the same extent as the individuals who trade while in possession of such information. You must not trade in our securities, or the securities of our affiliates, our lenders, our clients, or our other business partners while in the possession of “inside” information. |
• | “Whistleblower” protections. It is against the law to discharge, demote, suspend, threaten, harass, or discriminate in any manner against an employee who provides information or otherwise assists in investigations or proceedings relating to |
3
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violations of federal securities laws or other federal laws prohibiting fraud against shareholders. You must not discriminate in any way against an employee who engages in these “whistleblower” activities.
• | Investment Company Act requirements. A separate code of ethics has been established to comply with the Investment Company Act of 1940, as amended, and is applicable to those persons designated in such code. |
• | Document retention. You must adhere to appropriate procedures governing the retention and destruction of records consistent with applicable laws, regulations and our policies. You may not destroy, alter or falsify any document that may be relevant to a threatened or pending lawsuit or governmental investigation. |
In addition, we expect you to comply with all of our policies and procedures that apply to you. We may modify or update our policies and procedures in the future, and may adopt new company policies and procedures from time to time. You are also expected to observe the terms of any confidentiality agreement, employment agreement or other similar agreement that applies to you.
Equal Opportunity, Harassment
We are committed to providing equal opportunity in all of our employment practices including selection, hiring, promotion, transfer and compensation of all qualified applicants and employees without regard to race, color, sex or gender, sexual orientation, religion, age, national origin, handicap, disability, citizenship status, marital status or any other status protected by law. With this in mind, there are certain behaviors that will not be tolerated. These include harassment, violence, intimidation, and discrimination of any kind involving race, color, sex or gender, sexual orientation, religion, age, national origin, handicap, disability, citizenship status, marital status or any other status protected by law.
Accuracy of Company Records
We require honest and accurate recording and reporting of information in order to make responsible business decisions. This includes data such as quality, safety and personnel records, as well as financial records.
All financial books, records and accounts must accurately reflect transactions and events, and conform both to required accounting principles and to our system of internal controls.
Retaining Business Communications
The law requires us to maintain certain types of corporate records, usually for specified periods of time. Failure to retain those records for those minimum periods could subject us to penalties and fines, cause the loss of rights, obstruct justice, place us in contempt of court or seriously disadvantage us in litigation.
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As approved, with revisions: March 5, 2020
From time to time, we establish retention or destruction policies to ensure legal compliance. We expect you to fully comply with any published records retention or destruction policies, provided that you should note the following exception: If you believe, or we inform you, that our records are relevant to any litigation or governmental action, or any potential litigation or action, then you must preserve those records until we determine the records are no longer needed. This exception supersedes any previously or subsequently established destruction policies for those records. If you believe this exception may apply, or have any questions regarding the possible applicability of this exception, please contact our Chief Compliance Officer.
Political Contributions
No funds of Sutter Rock may be given directly to political candidates. You may, however, engage in political activity with your own resources on your own time, subject, however, to any other applicable restrictions.
Media Relations
We must speak with a unified voice in all dealings with the press and other media. As a result, our Chief Executive Officer or our Investor Relations personnel are the only contact for media seeking information about Sutter Rock. Any requests from the media must be referred to our Chief Executive Officer or our Investor Relations personnel.
Intellectual Property Information
Information generated in our business is a valuable asset. Protecting this information plays an important role in our growth and ability to compete. Such information includes business and research plans; objectives and strategies; trade secrets; unpublished financial information; salary and benefits data; lender and other business partner lists. Employees who have access to our intellectual property information are obligated to safeguard it from unauthorized access and:
• | not disclose this information to persons outside of Sutter Rock; |
• | not use this information for personal benefit or the benefit of persons outside of Sutter Rock; and |
• | not share this information with other employees except on a legitimate “need to know” basis. |
Internet and E-Mail Policy
We provide an e-mail system and Internet access to certain of our employees to help them do their work. You may use the e-mail system and the Internet only for legitimate business purposes
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in the course of your duties. Incidental and occasional personal use is permitted, but never for personal gain or any improper use. Further, you are prohibited from discussing or posting information regarding Sutter Rock in any external electronic forum, including Internet chat rooms or electronic bulletin boards.
Reporting Violations and Complaint Handling
You are responsible for compliance with the rules, standards and principles described in this Code. In addition, you should be alert to possible violations of the Code by Sutter Rock’s employees, officers and directors, and you are expected to report a violation promptly. Normally, reports should be made to one’s immediate supervisor. Under some circumstances, it may be impractical or you may feel uncomfortable raising a matter with your supervisor. In those instances, you are encouraged to contact our Chief Compliance Officer who will investigate and report the matter to our Chief Executive Officer and/or the Board of Directors, as the circumstance dictates. You will also be expected to cooperate in an investigation of a violation.
Anyone who has a concern about Sutter Rock’s conduct, the conduct of an officer, director or employee of Sutter Rock, or our accounting, internal accounting controls or auditing matters, may communicate that concern to the Audit Committee of the Board of Directors by direct communication with our Chief Compliance Officer or by email or in writing. All reported concerns shall be forwarded to the Audit Committee and will be simultaneously addressed by our Chief Compliance Officer in the same way that other concerns are addressed by us. The status of all outstanding concerns forwarded to the Audit Committee will be reported on a quarterly basis by our Chief Compliance Officer. The Audit Committee may direct that certain matters be presented to the full Board of Directors and may also direct special treatment, including the retention of outside advisers or counsel, for any concern reported to it.
All reports will be investigated and, whenever possible, requests for confidentiality shall be honored. Though, while anonymous reports will be accepted, please understand that anonymity may hinder or impede the investigation of a report. All cases of questionable activity or improper actions will be reviewed for appropriate action, discipline or corrective actions. Whenever possible, we will keep confidential the identity of employees, officers or directors who are accused of violations, unless or until it has been determined that a violation has occurred.
There will be no reprisal, retaliation, or adverse action taken against any employee who, in good faith, reports or assists in the investigation of a violation or suspected violation, or who makes an inquiry about the appropriateness of an anticipated or actual course of action.
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For reporting concerns about Sutter Rock’s conduct, the conduct of a director or officer of Sutter Rock, or about Sutter Rock’s accounting, internal accounting controls or auditing matters, you may use the following means of communication:
ADDRESS: Sutter Rock Capital Corp.
One Sansome Street, Suite 730
San Francisco, California 94104
In the case of a confidential, anonymous submission, employees should set forth their concerns in writing and forward them in a sealed envelope to the Chair of the Audit Committee, in care of our Chief Compliance Officer, such envelope to be labeled with a legend such as: “To be opened by the Audit Committee only.”
Administration of the Code
The Chief Compliance Officer has overall responsibility for administering the Code and reporting on the administration of and compliance with the Code and related matters to our Board of Directors.
Sanctions for Code Violations
All violations of the Code will result in appropriate corrective action, up to and including dismissal. If the violation involves potentially criminal activity, the individual or individuals in question will be reported, as warranted, to the appropriate authorities.
Application/Waivers
All directors, officers, and employees of Sutter Rock are subject to this Code.
Insofar as other policies or procedures of Sutter Rock govern or purport to govern the behavior or activities of all persons who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code.
Any amendment or waiver of the Code for an executive officer or member of our Board of Directors must be made by our Board of Directors and may be required to be disclosed on a current report on Form 8-K filed with the Securities and Exchange Commission within four business days following such amendment or waiver.
Revisions and Amendments
This Code may be revised, changed or amended at any time by our Board of Directors. Following any material revisions or updates, an updated version of this Code will be distributed to you, and will supersede the prior version of this Code effective upon distribution. We may ask you to sign an acknowledgement confirming that you have read and understood the revised version of the Code and that you agree to comply with the provisions.
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CODE OF BUSINESS CONDUCT AND ETHICS
ANNEX A
Sutter Rock Capital Corp.
Acknowledgment Regarding
Code of Business Conduct and Ethics
This acknowledgment is to be signed and returned to our Chief Compliance Officer and will be retained as part of your permanent personnel file. |
I have received a copy of Sutter Rock Capital Corp.’s Code of Business Conduct and Ethics (the “Code”), read it and understand that the Code contains the expectations of Sutter Rock Capital Corp. regarding conduct. I agree to observe the policies and procedures contained in the Code and have been advised and understand that, if I have any questions or concerns relating to such policies or procedures, I have an obligation to report to the Audit Committee, the Chief Compliance Officer or other such designated officer, any suspected violations of the Code of which I am aware. I also understand that the Code is issued for informational purposes and that it is not intended to create, nor does it represent, a contract of employment.
Name (Printed)
Signature
Date
The failure to read and/or sign this acknowledgment in no way relieves you of your responsibility to comply with the Code. |
A-1
Exhibit 31.1
Certification of Chief Executive Officer of Sutter Rock Capital Corp.
pursuant to Rule 13a-14(a) under the Exchange Act,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Mark D. Klein, certify that:
1. | I have reviewed this annual report on Form 10-K of Sutter Rock Capital Corp.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have: |
(a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions): |
(a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
(b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Dated this 13th day of March, 2020.
By: | /s/ Mark Klein |
Mark D. Klein | |
Chief Executive Officer | |
Exhibit 31.2
Certification of Chief Financial Officer of Sutter Rock Capital Corp.
pursuant to Rule 13a-14(a) under the Exchange Act,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Allison Green, certify that:
1. | I have reviewed this annual report on Form 10-K of Sutter Rock Capital Corp.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have: |
(a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions): |
(a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
(b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Dated this 13th day of March, 2020.
By: | /s/ Allison Green |
Allison Green | |
Chief Financial Officer | |
Exhibit 32.1
Certification of Chief Executive Officer
Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
In connection with the annual report on Form 10-K for the year ended December 31, 2019 (the “Report”) of Sutter Rock Capital Corp. (the “Registrant”), as filed with the Securities and Exchange Commission on the date hereof, I, Mark D. Klein, the Chief Executive Officer of the Registrant, hereby certify, to the best of my knowledge, that:
(1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. |
/s/ Mark D. Klein |
Name: Mark D. Klein |
Date: March 13, 2020 |
Exhibit 32.2
Certification of Chief Financial Officer
Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)
In connection with the annual report on Form 10-K for the year ended December 31, 2019 (the “Report”) of Sutter Rock Capital Corp. (the “Registrant”), as filed with the Securities and Exchange Commission on the date hereof, I, Allison Green, the Chief Financial Officer of the Registrant, hereby certify, to the best of my knowledge, that:
(1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. |
/s/ Allison Green |
Name: Allison Green |
Date: March 13, 2020 |