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GSV CAPITAL CORP. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements
This quarterly report on Form 10-Q contains forward-looking statements that
involve substantial risks and uncertainties. These forward-looking statements
are not historical facts, but rather are based on current expectations,
estimates and projections about GSV Capital, our current and prospective
portfolio investments, our industry, our beliefs, and our assumptions. Words
such as ''anticipates,'' ''expects,'' ''intends,'' ''plans,'' ''will,'' ''may,''
''continue,'' ''believes,'' ''seeks,'' ''estimates,'' ''would,'' ''could,''
''should,'' ''targets,'' ''projects,'' and variations of these words and similar
expressions are intended to identify forward-looking statements.
The forward looking statements contained in this quarterly report on Form 10-Q
involve risks and uncertainties, including statements as to:
· 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 equity
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,
· an inability to access the equity markets could impair our investment
activities,
· interest rate volatility could adversely affect our results, particularly if we
opt to use leverage as part of our investment strategy, and
· the risks, uncertainties and other factors we identify in ''Risk Factors'' and
elsewhere in this quarterly report on Form 10-Q and in our 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. In light of these and other uncertainties,
the inclusion of a projection or forward-looking statement in this quarterly
report on Form 10-Q should not be regarded as a representation by us that our
plans and objectives will be achieved. These risks and uncertainties include
those described or identified in ''Risk Factors'' and elsewhere in this
quarterly report on Form 10-Q. You should not place undue reliance on these
forward-looking statements, which apply only as of the date of this quarterly
report on Form 10-Q.
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 included in the annual report on Form 10-K for the year ended
December 31, 2011 and this quarterly report on Form 10-Q.
Overview
We are an externally managed, non-diversified closed-end management investment
company that has elected to be treated as a business development company under
the 1940 Act. Our investment objective is to maximize our portfolio's total
return, principally by seeking capital gains on our equity and equity-related
investments. We invest principally in the equity securities of rapidly growing
venture capital-backed emerging companies. We acquire our investments through
secondary marketplaces for private companies, negotiations with selling
stockholders and direct investments with prospective portfolio companies. 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 activities are managed by GSV Asset Management, and GSV
Capital Service Company provides the administrative services necessary for us to
operate.
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Our investment philosophy is premised on a disciplined approach of identifying
high-growth emerging companies across several key industry themes which may
include, among others, social media, mobility, cloud computing,
software-as-a-service, green technology and education technology. Our investment
adviser's investment decisions are based on a disciplined analysis of available
information regarding each potential portfolio company's business operations,
focusing on the company's growth potential, the quality of recurring revenues
and cash flow and cost structures, as well as an understanding of key market
fundamentals. Many of the companies that our investment adviser evaluates have
financial backing from top tier venture capital funds or other financial or
strategic sponsors.
We seek to deploy capital primarily in the form of non-controlling equity and
equity-related investments, including common stock, warrants, preferred stock
and similar forms of senior equity, which may or may not be convertible into a
portfolio company's common equity, and convertible debt securities with a
significant equity component. We anticipate that substantially all of the net
proceeds of our follow-on offerings, which closed in February and May 2012, will
be used for the above purposes within six to 12 months, depending on the
availability of investment opportunities that are consistent with our investment
objectives and market conditions.
We seek to create a low-turnover portfolio that includes investments in
companies representing a broad range of investment themes. As of September 30,
2012, we have completed investments in 44 companies for aggregate consideration
of approximately $224.1 million (exclusive of transaction fees and costs), or
80.6% of the net proceeds from our initial public offering and subsequent
follow-on offerings. We expect that the total number of portfolio companies in
which we are invested will increase as our equity capital base grows.
On April 28, 2011, we priced our initial public offering of 3,335,000 shares of
our common stock at the offering price of $15.00 per share. The initial public
offering closed on May 3, 2011, resulting in net proceeds to GSV Capital Corp.
of approximately $46.5 million. On September 26, 2011, we priced a follow-on
equity offering of 2,185,000 shares of our common stock at an offering price
$14.15 per share. The follow-on equity offering included the full exercise of
the underwriters' option to purchase an additional 285,000 shares of our common
stock, resulting in net proceeds to GSV Capital Corp. of approximately $29.6
million. On February 10, 2012, we priced a subsequent follow-on equity offering
of 6,900,000 shares of our common stock at an offering price of $15.00 per
share. The follow-on equity offering included the full exercise of the
underwriters' option to purchase an additional 900,000 shares of our common
stock, resulting in net proceeds to GSV Capital Corp. of approximately $96.2
million. On May 11, 2012, we priced an additional follow-on equity offering of
6,900,000 shares of our common stock at an offering price of $16.25 per share.
The follow-on offering included the full exercise of the underwriters' option to
purchase an additional 900,000 shares of our common stock, resulting in net
proceeds to GSV Capital Corp. of approximately $105.4 million. Our shares are
currently listed on the NASDAQ Capital Market under the symbol ''GSVC''.
Investments
The fair value of our investments can be expected to fluctuate in future periods
due to changes in our investments and changes in the fair value of the
investments. The investments made during the nine months ended September 30,
2012 include:
We closed on an investment of $100,000, plus transaction costs, in AlwaysOn,
LLC, a social media company, on January 10, 2012.
We closed on an investment of $200,000, plus transaction costs, in Maven
Research, Inc., a global knowledge marketplace, on February 28, 2012.
We closed on an investment of $500,000, plus transaction costs, in AltEgo, LLC,
an avatar technology and games developer, on February 29, 2012.
We closed on an investment of $4,000,000, plus transaction costs, in Chegg,
Inc., an online textbook rental company, on March 7, 2012.
We closed on an investment of $150,000, plus transaction costs, in AlwaysOn,
LLC, a social media company, on March 9, 2012.
We closed on an investment of $250,000, plus transaction costs, in The Echo
System Corp., a social analytics company, on March 21, 2012.
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We closed on an investment of $1,000,000, plus transaction costs, in StormWind,
LLC, an electronic marketing and business services platform, on March 23, 2012.
We closed on an investment of $855,000, plus transaction costs, in Bloom Energy
Corporation, a fuel cell energy company, on March 28, 2012.
We closed on an investment of $2,000,000, plus transaction costs, in CUX, Inc.,
a corporate education company, on March 29, 2012.
We closed on an investment of $750,000, plus transaction costs, in The Echo
System Corp., a social media company, on March 30, 2012.
We closed on an investment of $750,000, plus transaction costs, in The rSmart
Group, Inc., a higher education learning platform, on March 30, 2012.
We closed on an investment of $1,143,800, plus transaction costs, in Bloom
Energy Corporation, a fuel cell energy company, on April 4, 2012.
We closed on an investment of $9,999,996, plus transaction costs, in Violin
Memory, Inc., a flash memory company, on April 11, 2012.
We closed on an investment of $4,000,000, plus transaction costs, in Top Hat,
Inc., an internet commerce company, on April 13, 2012.
We closed on investments of $2,369,500, $1,277,500 and $350,000, plus
transaction costs, in Control4 Corporation, a smart home automation company, on
April 18, 20102, April 19, 2012 and April 20, 2012, respectively.
We closed on an investment of $2,999,998, plus transaction costs, in Global
Education Learning (Holdings) Ltd., an Asia-focused education technology
company, on April 19, 2012.
We closed on investments of $5,312,492, $4,875,010 and $7,312,498, plus
transaction costs, in Twitter, Inc., a social communication company, on April
25, 2012, April 27, 2012, and April 30, 2012, respectively.
We closed on an investment of $3,800,000, plus transaction costs, in Silver
Spring Networks, Inc., a smart grid company, on May 1, 2012.
We closed on an investment of $1,969,996, plus transaction costs, in Fullbridge,
Inc., a business education company, on May 4, 2012.
We closed on investments of $888,384 and $2,674,048, plus transaction costs, in
Palantir Technologies, Inc., a cyber-security company, on May 7, 2012 and May
11, 2012, respectively.
We closed on an investment of $10,000,000, plus transaction costs, in Avenues
World Holdings LLC, a globally-focused private school, on May 9, 2012.
We closed on an investment of $6,858,500, plus transaction costs, in Dropbox,
Inc., an online storage service, on May 11, 2012.
We closed on an investment of $200,000, plus transaction costs, in AltEgo, LLC,
an avatar technology and games developer, on May 11, 2012.
We closed on an investment of $280,005, plus transaction costs, in Fullbridge,
Inc., a business education company, on May 15, 2012.
We closed on investments of $40,500, $67,500 and $540,000, plus transaction
costs, in Palantir Technologies, Inc., a cyber-security company, on May 16,
2012, May 21, 2012 and May 22, 2012, respectively.
We closed on an investment of $4,800,000, plus transaction costs, in Violin
Memory, Inc., a flash memory company, on May 22, 2012.
We closed on an investment of $1,000,000, plus transaction costs, in NestGSV,
Inc., an entrepreneurial education company, on May 25, 2012.
We closed on an investment of $1,900,000, plus transaction costs, in Twitter,
Inc., a social communication company, on June 1, 2012.
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We closed on an investment of $300,000, plus transaction costs, in AltEgo, LLC,
an avatar technology and games developer, on June 15, 2012.
We closed on an investment of $10,000,000, plus transaction costs, in Solexel,
Inc., a solar power company, on June 18, 2012.
We closed on investments of $2,400,000 and $1,600,000, plus transaction costs,
in Chegg, Inc., an online textbook rental company, on June 20, 2012 and June 25,
2012, respectively.
We closed on an investment of $7,500,000, plus transaction costs, in Kno, Inc.,
an education software company, on June 27, 2012.
We closed on an investment of $2,000,000, plus transaction costs, in Dailybreak,
Inc., a social advertising company, on June 29, 2012.
We closed on an investment of $1,999,999, plus transaction costs, in Dataminr,
Inc., a social media analytics company, on July 2, 2012.
We closed on an investment of $1,999,998, plus transaction costs, in Maven
Research, Inc., a global knowledge marketplace, on July 2, 2012.
We closed on an investment of $500,000, plus transaction costs, in NestGSV
Silicon Valley, LLC, an entrepreneurial education company, on July 10, 2012.
We closed on an investment of $1,202,500, plus transaction costs, in Twitter,
Inc., a social communication company, on July 10, 2012.
We closed on an investment of $10,000,000, plus transaction costs, in 2tor,
Inc., an online education company, on July 16, 2012.
We closed on an investment of $5,000,000, plus transaction costs, in Totus
Solutions, Inc., an LED lighting company, on July 20, 2012.
We closed on investments of $999,999, $15,228,070 and $135,000, plus transaction
costs, in Palantir Technologies, Inc., a cyber-security company, on July 24,
2012, July 27, 2012 and July 31, 2012, respectively.
We closed on an investment of $1,001,000, plus transaction costs, in Gilt
Groupe, Inc., an eCommerce platform, on July 27, 2012.
We closed on an investment of $400,000, plus transaction costs, in AltEgo, LLC,
an avatar technology and games developer, on August 7, 2012.
We closed on an investment of $500,000, plus transaction costs, in SinoLending
Ltd, a Chinese P2P lending platform, on August 7, 2012.
We closed on an investment of $3,589,659, plus transaction costs, in Spotify
Technology S.A., a music streaming service, on August 7, 2012.
We closed on an investment of $250,000, plus transaction costs in Neuron Fuel,
Inc., a computer software company, on August 8, 2012.
We closed on an investment of $1,190,000, plus transaction costs, in Control4
Corporation, a smart home automation company, on August 15, 2012.
We closed on an investment of $174,000, plus transaction costs, in Palantir
Technologies, Inc., a cyber-security company, on August 24, 2012.
We closed on an investment of $500,000, plus transaction costs, in Strategic
Sports Solutions, LLC, a sports analytics company, on August 31, 2012.
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We closed on an investment of $1,760,000, plus transaction costs, in Dropbox,
Inc., an online storage service, on September 4, 2012.
We closed on an investment of $1,500,000, plus transaction costs, in Whittle
Schools, LLC, an affiliate of Avenues World Holdings LLC, on September 6, 2012.
We closed on an investment of $733,493, plus transaction costs, in AlwaysOn,
Inc., a social media company, on September 7, 2012.
We closed on an investment of $1,513,750, plus transaction costs, in SugarCRM
Inc., a customer relationship management company, on September 12, 2012.
The fair value, as of September 30, 2012, of all of our portfolio investments
was $217,441,538. In addition, we held $16,000,000 in two money market funds as
of September 30, 2012. We also held $26,331,482 in unrestricted cash on
September 30, 2012.
Results of Operations
Comparison of the three months ended September 30, 2012 and 2011
Investment Income
For the three months ended September 30, 2012, we had investment income of
$13,928, or $0.00 per share, which consisted of $7,063 of interest income from
our portfolio investments and $6,865 of dividend income from our money market
investments.
For the three months ended September 30, 2011, we had investment income of
$53,408, or $0.02 per share, which consisted of $52,222 of interest income from
our portfolio investments and $1,186 of dividend income from our money market
investments.
The decrease in investment income for the three months ended September 30, 2012
relative to the three months ended September 30, 2011 was primarily due to us no
longer carrying fixed income investments as of September 30, 2012.
Operating Expenses
For the three months ended September 30, 2012, we had $2,348,496 in total
operating expenses consisting primarily of investment management fees and
administration fees, in addition to legal, audit and consulting fees. The
investment advisory fee for the three months ended September 30, 2012, was
$1,351,169, representing the base management fee as provided in our investment
advisory agreement. Our base management fee was significantly higher than during
the same period in 2011 as a result of the increase in our gross assets. Costs
incurred under our administration agreement for the three months ended September
30, 2012, were $543,171. Professional fees, consisting of legal, valuation,
audit and consulting fees, were approximately $242,683 for the three months
ended September 30, 2012.
For the three months ended September 30, 2011, we had $733,496 in total
operating expenses consisting primarily of legal, audit and consulting fees, in
addition to organizational expenses, investment management fees and
administration fees. The investment advisory fee for the three months ended
September 30, 2011 was $233,961, representing the base management fee as
provided for in our investment advisory agreement. Costs incurred under our
administration agreement for the three months ended September 30, 2011, were
$192,031. Professional fees, consisting of legal, valuation, audit and
consulting fees, were approximately $152,916 for the three months ended
September 30, 2011.
Net Decrease in Net Assets
For the three months ended September 30, 2012, we had a net change in unrealized
depreciation of $4,665,272, or $0.24 per share. The change in unrealized
depreciation is primarily a result of our investment in Facebook, Inc. Net
investment loss was $2,334,568, or $0.12 per share, for the three months ended
September 30, 2012, resulting primarily from operating expenses incurred during
the quarter. Net decrease in net assets resulting from operations was
$6,999,840, or $0.36 per share, for the three months ended September 30, 2012.
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For the three months ended September 30, 2011, we had a net change in unrealized
depreciation of $494,170, or $0.14 per share. Net investment loss was $680,088,
or $0.20 per share, for the three months ended September 30, 2011. Net decrease
in net assets resulting from operations was $1,174,258, or $0.34 per share, for
the three months ended September 30, 2011.
The per share figures noted above are based on a weighted-average of 19,320,100
and 3,430,100 shares outstanding for the three months ended September 30, 2012
and 2011, respectively.
Comparison of the nine months ended September 30, 2012 and the period from
January 6, 2011 (date of inception) to September 30, 2011
As January 6, 2011 was our date of inception and April 28, 2011 was the date of
our initial public offering, the period from January 6, 2011 to September 30,
2011 is not a directly comparable period to the nine months ended September 30,
2012.
Investment Income
For the nine months ended September 30, 2012, we had investment income of
$242,087, or $0.02 per share, which consisted of $222,047 of interest income
from our portfolio investments and $20,040 of dividend income from our money
market investments.
For the period from January 6, 2011 (date of inception) to September 30, 2011,
we had investment income of $53,408, or $0.02 per share, which consisted of
$52,222 of interest income and $1,186 of dividend income.
Operating Expenses
For the nine months ended September 30, 2012, we had $5,750,776 in total
operating expenses consisting primarily of investment management fees and
administration fees, in addition to legal, audit and consulting fees. The
investment advisory fee for the nine months ended September 30, 2012, was
$3,099,186, representing the base management fee as provided in our investment
advisory agreement. Our base management fee was significantly higher than the
same period in 2011 as a result of the increase in our gross assets. Costs
incurred under our administration agreement for the nine months ended September
30, 2012, were $1,490,966. Professional fees, consisting of legal, valuation,
audit and consulting fees, were approximately $597,089 for the nine months ended
September 30, 2012.
For the period from January 6, 2011 (date of inception) to September 30, 2011,
we had $1,409,609 in total operating expenses primarily of investment management
fees and administration fees, in addition to legal, audit and consulting fees.
The investment advisory fee for the period from January 6, 2011 (inception) to
September 30, 2011 was $384,904, representing the base fee as provided for in
our investment advisory agreement. Costs incurred under our administration
agreement for the period from January 6, 2011 (inception) to September 30, 2011
were $305,066. Professional fees, consisting of legal, valuation, audit and
consulting fees, were approximately $271,548 for the period from January 6, 2011
(inception) to September 30, 2011.
Net Decrease in Net Assets
For the nine months ended September 30, 2012, we had a net change in unrealized
depreciation of $5,668,589, or $0.38 per share. The change in unrealized
depreciation is primarily a result of our investment in Facebook, Inc. We had a
net realized loss of $1,380,519, or $0.09 per share, resulting primarily from
our investment in PJB Fund LLC, which resulted from fluctuating share prices of
Zynga, Inc. Net investment loss was $5,508,689, or $0.37 per share, for the nine
months ended September 30, 2012, resulting primarily from operating expenses
incurred during the period. Net decrease in net assets resulting from operations
was $12,557,797, or $0.84 per share, for the nine months ended September 30,
2012.
For the period from January 6, 2011 (date of inception) to September 30, 2011,
we had a net change in unrealized depreciation of $553,804, or $0.23 per share.
Net investment loss was $1,356,201, or $0.55 per share, for the period from
January 6, 2011 (date of inception) to September 30, 2011. Net decrease in net
assets resulting from operations was $1,910,005, or $0.78 per share, for the
period from January 6, 2011 (date of inception) to September 30, 2011.
The per share figures noted above are based on a weighted-average of 15,013,896
and 2,460,565 shares outstanding for the nine months ended September 30, 2012
and for the period from January 6, 2011 (date of inception) to September 30,
2011, respectively.
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Liquidity and Capital Resources
At September 30, 2012, we had investments in 44 portfolio companies with costs
totaling $224,689,927, two money market funds totaling $16,000,000 and cash in
the amount of $26,331,482.
On February 10, 2012, we priced a follow-on equity offering of 6,900,000 shares
of our common stock at an offering price of $15.00 per share. The follow-on
equity offering included the full exercise of the underwriters' option to
purchase an additional 900,000 share of our common stock, resulting in net
proceeds to GSV Capital Corp. of approximately $96.2 million. On May 11, 2012,
we priced a subsequent follow-on equity offering of 6,900,000 shares of our
common stock at an offering price of $16.25 per share. The follow-on equity
offering included the full exercise of the underwriters' option to purchase an
additional 900,000 share of our common stock, resulting in net proceeds to GSV
Capital Corp. of approximately $105.4 million. Our shares are currently listed
on the NASDAQ Capital Market under the symbol ''GSVC''.
Our primary use of cash is to make investments and to pay our operating
expenses. We used substantially all of the proceeds of the offerings to invest
in portfolio companies as of September 30, 2012, except for amounts retained for
purposes of funding our ongoing expenses.
Our current policy is to maintain cash reserves in an amount sufficient to pay
our operating expenses, including investment management fees, incentive fees and
costs incurred under the administration agreement, for approximately two years.
For a description of the investment advisory and administration services we
receive, see ''Related Party Transactions and Certain Relationships''. We
incurred approximately $1,351,169 and $3,099,186 in investment management fees
and $543,171 and $1,490,966 in costs incurred under the administration agreement
for the three and nine months ended September 30, 2012, respectively.
As of September 30, 2012, the fair value of our portfolio investments was equal
to the cost of the investments, net of unrealized depreciation representing
transaction costs and any fair value adjustments. Fair value adjustments may
include subsequent financing rounds, discounts due to lack of marketability,
senior management changes or any other developments that factor into our
valuations. The fair value of our investments can be expected to fluctuate in
future periods due to changes in our investments and changes in the fair value
of the investments.
Off-Balance Sheet Arrangements
As of September 30, 2012, 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.
Distribution Policy
The timing and amount of our dividends, if any, will be determined by our board
of directors. Any dividends to our stockholders will be declared out of assets
legally available for distribution. We intend to focus on making capital
gains-based investments from which we will derive primarily capital gains. As a
consequence, we do not anticipate that we will pay dividends on a quarterly
basis or become a predictable distributor of dividends, and we expect that our
dividends, if any, will be much less consistent than the dividends of other
business development companies that primarily make debt investments. However, if
there are earnings or realized capital gains to be distributed, we intend to
declare and pay a dividend at least annually.
We intend to elect to be treated, and intend to qualify annually thereafter, as
a RIC under Subchapter M of the Code, beginning with our 2013 taxable year. To
obtain and 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, for each taxable year.
In addition, 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.
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 but designate the retained net capital gain as a "deemed
distribution". If this happens, you will be treated as if you received an actual
distribution of the capital gains we retain and reinvested the net after-tax
proceeds in us. You also may be eligible to claim a tax credit (or, in certain
circumstances, a tax refund) equal to your allocable share of the tax we paid on
the capital gains deemed distributed to you. See ''Material U.S. Federal Income
Tax Considerations.'' There is 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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Our current intention is to make any distributions out of assets legally
available therefrom in additional shares of our common stock under our dividend
reinvestment plan, unless you elect to receive your dividends and/or long-term
capital gains distributions in cash. Under the dividend reinvestment plan, if a
stockholder owns shares of common stock registered in its own name, the
stockholder will have all cash distributions (net of any withholding)
automatically reinvested in additional shares of common stock unless the
stockholder opts out of our dividend reinvestment plan by delivering a written
notice to our dividend paying agent prior to the record date of the next
dividend or distribution. See ''Dividend Reinvestment Plan.'' Any distributions
reinvested under the plan will nevertheless remain taxable to the U.S.
stockholder, although no cash distribution has been made. As a result, if you do
not elect to opt out of the dividend reinvestment plan, you will be required to
pay applicable federal, state and local taxes on any reinvested dividends even
though you will not receive a corresponding cash distribution. In addition,
reinvested dividends have the effect of increasing our gross assets, which may
correspondingly increase the management fee payable to our investment adviser.
If you hold shares in the name of a broker or financial intermediary, you should
contact the broker or financial intermediary regarding your election to receive
distributions in cash.
Borrowings
We had no borrowings outstanding as of September 30, 2012.
Related Party Transactions
We entered into an investment advisory agreement with GSV Asset Management (the
''Advisory Agreement'') in connection with our initial public offering. Pursuant
to the Advisory Agreement, GSV Asset Management will be paid a base annual fee
of 2.00% of gross assets, and an annual incentive fee equal to the lesser of (i)
20% of the GSV Capital'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 GSV Capital'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. GSV
Asset Management earned $1,351,169 and $3,099,186 in base management fees and $0
in incentive fees for the three and nine months ended September 30, 2012,
respectively.
As of September 30, 2012, we were owed $3,315 from GSV Asset Management for
reimbursement of expenses paid for by us that were the responsibility of GSV
Asset Management.
In addition as of September 30, 2012, we owed GSV Asset Management $41,197 for
reimbursement of travel-related and other expenses. We owed certain officers and
directors $917 in reimbursements for travel-related and other expenses.
We entered into an Administration Agreement with GSV Capital Service Company
(the ''Administration Agreement'') to provide administrative services, including
furnishing us with office facilities, equipment, clerical, bookkeeping services
and other administrative services, in connection with our initial public
offering. We reimburse GSV Capital Service Company an allocable portion of
overhead and other expenses in performing its obligations under the
Administration Agreement. There were $543,171 and $1,490,966 in such costs
incurred under the Administration Agreement for the three and nine months ended
September 30, 2012, respectively.
We also adopted a Code of Ethics which applies to, among others, our senior
officers, including our Chief Executive Officer and Chief Financial Officer, as
well as all of our officers, directors and employees. Our Code of Ethics
requires that all employees and directors avoid any conflict, or the appearance
of a conflict, between an individual's personal interests and our interests.
Pursuant to our Code of Ethics, each employee and director must disclose any
conflicts of interest, or actions or relationships that might give rise to a
conflict, to our Chief Compliance Officer. Our board of directors is charged
with approving any waivers under our Code of Ethics. As required by the NASDAQ
corporate governance listing standards, the Audit Committee of our board of
directors is also required to review and approve any transactions with related
parties (as such term is defined in Item 404 of Regulation S-K).
34
In April 2012, in connection with our investment in Top Hat, Inc., Cherry Tree &
Associates, LLC, an investment banking firm, received a fee of approximately
$259,000 for its representation of Top Hat, Inc. Mark Moe, who is the brother of
our Chief Executive Officer, Michael Moe, presently serves as a Managing
Director of Cherry Tree & Associates, LLC, and may therefore be deemed to have
an indirect material interest in such transaction.
Critical Accounting Policies
Valuation of Investments at Fair Value
We carry our investments at fair value, as determined in good faith by our board
of directors, in accordance with GAAP. Fair value is the price that one would
receive upon selling an investment or pay to transfer a liability in an orderly
transaction between market participants at the measurement date in the principal
or most advantageous market for the investment or liability. GAAP emphasizes
that valuation techniques should maximize the use of observable market inputs
and minimize the use of unobservable inputs. Observable inputs are based on
market data obtained from sources independent of the entity and should not be
limited to information that is only available to the entity making the fair
value determination, or to a small group of users. Observable market inputs
should be readily available to participants in that market. In addition,
observable market inputs should include a level of transparency that is reliable
and verifiable.
GAAP fair value measurement guidance classifies the inputs used to measure these
fair values into the following hierarchy:
Level 1. Financial assets and liabilities whose values are based on unadjusted
quoted prices for identical assets or liabilities in an active market that we
have the ability to access.
Level 2. Financial assets and liabilities whose values are based on quoted
prices in markets that are not active or model inputs that are observable either
directly or indirectly for substantially the full term of the asset or
liability. Level 2 inputs include the following:
a) Quoted prices for similar assets or liabilities in active markets;
b) Quoted prices for identical or similar assets or liabilities in non-active
markets;
c) Pricing models whose inputs are observable for substantially the full term of
the asset or liability; and
d) Pricing models whose inputs are derived principally from or corroborated by
observable market data through correlation or other means for substantially
the full term of the asset or liability.
Level 3. Financial assets and liabilities whose values are based on prices or
valuation techniques that require inputs that are both unobservable and
significant to the overall fair value measurement. These inputs reflect
management's own assumptions about the assumptions a market participant would
use in pricing the asset or liability.
An asset's categorization within the valuation hierarchy is based upon the
lowest level of input that is significant to the fair value measurement.
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 are valued at fair value as
determined in good faith by our board of directors.
In connection with that determination, portfolio company valuations are prepared
using the most currently available data. As appropriate, we obtain updates on
each portfolio company's financial performance, including information such as
economic and industry trends, new product development, and other operational
issues.
In making our good faith determination of the fair value of investments, we
consider valuation methodologies consistent with industry practice, including
but not limited to (i) publicly available information regarding the valuation of
the securities based on recent sales in comparable transactions of private
companies, (ii) when management believes there are comparable companies that are
publicly traded, a review of these publicly traded companies and applicable
market multiples of their equity securities and, (iii) an income approach that
estimates value based on the expectation of future cash flows that an asset or
business will generate.
35
We engage independent valuation firms to perform valuations of our investments
that are not publicly traded or for which there are no readily available market
quotations. We also engage independent valuation firms to perform 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. We consider the independent valuations,
among other factors, in making our fair value determinations.
U.S. Federal and State Income Taxes
The Company was taxed as a regular corporation (a "C corporation") under
subchapter C of the Internal Revenue Code of 1986, as amended, for its 2011
taxable year and will continue to be taxed as such for its 2012 taxable year,
and uses the liability method of accounting for income taxes. Deferred tax
assets and liabilities are recorded for temporary differences between the tax
basis of assets and liabilities and their reported amounts in the consolidated
financial statements, using statutory tax rates in effect for the year in which
the temporary differences are expected to reverse. A valuation allowance is
provided against deferred tax assets when it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
Beginning with its 2013 taxable year, the Company intends to elect to be treated
as a regulated investment company ("RIC") under subchapter M of the Internal
Revenue Code of 1986, as amended, and intends to operate in a manner so as to
qualify for the tax treatment applicable to RICs. In order to qualify as a RIC,
among other things, the Company is required to distribute to its stockholders on
a timely basis at least 90% of investment company taxable income, as defined by
the Code, for each year. So long as the Company maintains its status as a RIC,
it generally will not pay corporate-level U.S. federal and state income taxes on
any ordinary income or capital gains that it distributes at least annually to
its stockholders as dividends. Rather, any tax liability related to income
earned by the Company will represent obligations of the Company's investors and
will not be reflected in the consolidated financial statements of the Company.
The Company evaluates tax positions taken or expected to be taken in the course
of preparing its consolidated financial statements to determine whether the tax
positions are "more-likely-than-not" of being sustained by the applicable tax
authority. The Company recognizes the tax benefits of uncertain tax positions
only where the position has met the "more-likely-than-not" threshold. The
Company classifies penalties and interest associated with income taxes, if any,
as income tax expense. Conclusions regarding tax positions are subject to review
and may be adjusted at a later date based on factors including, but not limited
to, ongoing analyses of tax laws, regulations and interpretations thereof. The
Company did not have any unrecognized tax benefits as of the period presented
herein. The Company identified its major tax jurisdictions as U.S. federal and
California, and is not aware of any tax positions for which it is reasonably
possible that the total amount of unrecognized tax benefits will change
materially in the next 12 months.
Recently Adopted Accounting Standards
In May 2011, the Financial Accounting Standards Board (''FASB'') issued guidance
clarifying how to measure and disclose fair value. This guidance amends the
application of the ''highest and best use'' concept to be used only in the
measurement of fair value of nonfinancial assets, clarifies that the measurement
of the fair value of equity-classified financial instruments should be performed
from the perspective of a market participant who holds the instrument as an
asset, clarifies that an entity that manages a group of financial assets and
liabilities on the basis of its net risk exposure can measure those financial
instruments on the basis of its net exposure to those risks, and clarifies when
premiums and discounts should be taken into account when measuring fair value.
The fair value disclosure requirements also were amended. This accounting
standard is effective prospectively for interim and annual reporting periods
beginning after December 15, 2011. The adoption of this guidance did not have a
significant impact on our financial condition, results of operations or cash
flows.
Recent Developments
Subsequent to September 30, 2012, the Company closed on investments of $4.7
million, plus transaction costs as follows:
The Company closed on an investment of $3,000,000, plus transaction costs, in
Parchment, Inc., an education data company, on October 1, 2012.
The Company closed on an investment of $270,000, plus transaction costs, in
Palantir Technologies, Inc., a cyber-security company, on October 17, 2012.
The Company closed on an investment of $735,000, plus transaction costs, in
Control4 Corporation, a smart home automation company, on October 19, 2012.
36
The Company closed on an investment of $500,000, plus transaction costs, in Ozy
Media, Inc., a social media company, on November 2, 2012.
The Company closed on an investment of $150,000, plus transaction costs, in Top
Hat 430, Inc., an internet commerce company, on November 2, 2012.
37
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