10-Q 1 tv478086_10q.htm 10-Q

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

xQuarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2017.

 

OR

 

¨Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to           .

 

Commission File Number: 001-38152

 

USCF Funds Trust

(Exact name of registrant as specified in its charter)

 

Delaware 38-7159729
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

 

1999 Harrison Street, Suite 1530

Oakland, California 94612

(Address of principal executive offices) (Zip code)

 

(510) 522-9600

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x  Yes  ¨  No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  x  Yes  ¨  No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 ¨ Accelerated filer ¨
       
Non-accelerated filer x  (Do not check if a smaller reporting company) Smaller reporting company ¨
       
    Emerging growth company x

  

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 to Section 7(a)(2)(B) of the Securities Act. x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ¨    Yes  x    No

 

The number of shares outstanding of each series of the registrant as of November 9, 2017 are included in the table below:

 

   Number of
Outstanding
Shares as
of November
9, 2017
 
United States 3x Oil Fund   100,040 
United States 3x Short Oil Fund   100,040 
Total   200,080 

 

 

 

 

 

 

USCF Funds Trust

 

  Page
Part I. FINANCIAL INFORMATION  
   
Item 1. Condensed Financial Statements. 1
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 35
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 47
   
Item 4. Controls and Procedures. 48
   
Part II. OTHER INFORMATION 48
   
Item 1. Legal Proceedings. 48
   
Item 1A. Risk Factors. 48
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 48
   
Item 3. Defaults Upon Senior Securities. 49
   
Item 4. Mine Safety Disclosures. 49
   
Item 5. Other Information. 49
   
Item 6. Exhibits. 50

 

 

 

  

Part I. FINANCIAL INFORMATION

 

Item 1. Condensed Financial Statements.

 

Index to Condensed Financial Statements

 

Documents   Page
     
Condensed Statements of Financial Condition at September 30, 2017 (Unaudited)   2
     
Condensed Schedules of Investments (Unaudited) at September 30, 2017   7
     
Condensed Statements of Operations (Unaudited) for the period ended September 30, 2017   9
     
Condensed Statements of Changes in Capital (Unaudited) for the period ended September 30, 2017 and Condensed Statements of Changes in Shares Outstanding (Unaudited) for the period ended September 30, 2017   14
     
Condensed Statements of Cash Flows (Unaudited) for the period ended September 30, 2017   19
     
Notes to Condensed Financial Statements for the period ended September 30, 2017   24

 

 1 

 

  

USCF Funds Trust

Condensed Statement of Financial Condition

At September 30, 2017 (Unaudited)

 

United States 3x Oil Fund 

   September 30, 2017 
Assets     
Cash and cash equivalents (at cost $1,450,503) (Notes 2 and 6)  $1,450,503 
Equity in trading accounts:     
Cash and cash equivalents (at cost $1,129,243)   1,129,243 
Unrealized gain (loss) on open commodity futures contracts   424,660 
Interest receivable   1,311 
      
Total assets  $3,005,717 
      
Liabilities and Capital     
Management fees payable (Note 4)  $2,635 
      
Total liabilities   2,635 
      
Commitments and Contingencies  (Notes 4, 5 and 6)     
      
Capital     
Sponsor   1,000 
Shareholders   3,002,082 
Total Capital   3,003,082 
      
Total liabilities and capital  $3,005,717 
      
Shares outstanding   100,040 
Net asset value per share  $30.02 
Market value per share  $29.62 

 

See accompanying notes to condensed financial statements.

 

 2 

 

 

USCF Funds Trust

Condensed Statement of Financial Condition

At September 30, 2017 (Unaudited)

 

United States 3x Short Oil Fund 

   September 30, 2017 
Assets     
Cash and cash equivalents (at cost $1,345,577) (Notes 2 and 6)  $1,345,577 
Equity in trading accounts:     
Cash and cash equivalents (at cost $810,719)   810,719 
Unrealized gain (loss) on open commodity futures contracts   (303,980)
Interest receivable   866 
      
Total assets  $1,853,182 
      
Liabilities and Capital     
Management fees payable (Note 4)  $3,223 
      
Total liabilities   3,223 
      
Commitments and Contingencies  (Notes 4, 5 and 6)     
      
Capital     
Sponsor   1,000 
Shareholders   1,848,959 
Total Capital   1,849,959 
      
Total liabilities and capital  $1,853,182 
      
Shares outstanding   100,040 
Net asset value per share  $18.49 
Market value per share  $18.84 

 

See accompanying notes to condensed financial statements.

 

 3 

 

 

USCF Funds Trust    
Condensed Statement of Financial Condition    
At September 30, 2017 (Unaudited)*    
     
REX S&P MLP Fund    
   September 30, 2017* 
Assets     
Cash (Notes 2 and 6)  $1,000 
      
Total assets  $1,000 
      
Commitments and Contingencies  (Notes 4, 5 and 6)     
      
Capital     
Sponsor   1,000 
Shareholders    
Total Capital   1,000 
      
Total liabilities and capital  $1,000 

 

* The Sponsor contributed $1,000 on March 31, 2016. As of September 30, 2017, the Fund is in registration and had not commenced operations.

 

See accompanying notes to condensed financial statements.

 

 4 

 

  

USCF Funds Trust    
Condensed Statement of Financial Condition    
At September 30, 2017 (Unaudited)*    
     
REX S&P MLP Inverse Fund    
   September 30, 2017* 
Assets     
Cash (Notes 2 and 6)  $1,000 
      
Total assets  $1,000 
      
Commitments and Contingencies  (Notes 4, 5 and 6)     
      
Capital     
Sponsor   1,000 
Shareholders    
Total Capital   1,000 
      
Total liabilities and capital  $1,000 

 

* The Sponsor contributed $1,000 on April 15, 2016. As of September 30, 2017, the Fund is in registration and had not commenced operations.

 

See accompanying notes to condensed financial statements.

 

 5 

 

  

USCF Funds Trust    
Condensed Statement of Financial Condition    
At September 30, 2017 (Unaudited)    
     
USCF Funds Trust    
   September 30, 2017 
Assets     
Cash and cash equivalents (at cost $2,796,080) (Notes 2 and 6)  $2,798,080 
Equity in trading accounts:     
Cash and cash equivalents (at cost $1,939,962)   1,939,962 
Unrealized gain (loss) on open commodity futures contracts   120,680 
Interest receivable   2,177 
      
Total assets  $4,860,899 
      
Liabilities and Capital     
Management fees payable (Note 4)  $5,858 
      
Total liabilities   5,858 
      
Commitments and Contingencies  (Notes 4, 5 and 6)     
      
Capital     
Sponsor   4,000 
Shareholders   4,851,041 
Total Capital   4,855,041 
      
Total liabilities and capital  $4,860,899 
      
Shares outstanding   200,080 

 

See accompanying notes to condensed financial statements.

 

 6 

 

  

USCF Funds Trust
Condensed Schedule of Investments (Unaudited)
At September 30, 2017
                
                 
United States 3x Oil Fund                
   Notional
Amount
   Number of
Contracts
   Value/
Unrealized Gain
(Loss) on Open
Commodity
Contracts
   % of
Capital
 
Open Futures Contracts - Long                    
United States Contracts                    
NYMEX WTI Crude Oil Futures CL November 2017 contracts, expiring October 2017*  $8,565,920    174   $424,660    14.14 
                     
        Principal
Amount
   Market
Value
      
Cash Equivalents                    
United States Treasury Obligations                    
U.S. Treasury Bills:                    
1.08%, 10/05/2017       $200,000   $199,976    6.66 
1.06%, 10/12/2017        50,000    49,984    1.66 
1.07%, 10/19/2017        200,000    199,893    6.66 
1.05%, 10/26/2017        50,000    49,964    1.66 
0.99%, 11/09/2017        50,000    49,947    1.66 
0.99%, 11/30/2017        50,000    49,917    1.66 
0.99%, 12/07/2017        50,000    49,908    1.66 
1.01%, 12/28/2017        50,000    49,877    1.66 
1.12%, 2/15/2018        50,000    49,789    1.66 
1.10%, 2/22/2018        50,000    49,782    1.66 
1.09%, 3/01/2018        50,000    49,772    1.66 
1.16%, 3/22/2018        50,000    49,725    1.66 
1.17%, 3/29/2018        50,000    49,710    1.65 
Total Treasury Obligations             948,244    31.57 
                     
United States - Money Market Funds                    
Fidelity Investments Money Market Funds - Government Portfolio        500,000    500,000    16.65 
Goldman Sachs Financial Square Funds - Government Fund - Class FS        500,000    500,000    16.65 
Total Money Market Funds             1,000,000    33.30 
Total Cash Equivalents            $1,948,244    64.87 

 

* Collateral amounted to $1,129,243 on open futures contracts.

 

See accompanying notes to condensed financial statements.

 

 7 

 

  

USCF Funds Trust
Condensed Schedule of Investments (Unaudited)
At September 30, 2017
                
                 
United States 3x Short Oil Fund                
   Notional
Amount
   Number of
Contracts
   Value/
Unrealized Gain
(Loss) on Open
Commodity
Contracts
   % of
Capital
 
Open Futures Contracts - Short                    
United States Contracts                    
NYMEX WTI Crude Oil Futures CL November 2017 contracts, expiring October 2017*  $(5,276,380)   108   $(303,980)   (16.43)
                     
        Principal
Amount
   Market
Value
      
Cash Equivalents                    
United States Treasury Obligations                    
U.S. Treasury Bills:                    
1.08%, 10/05/2017       $200,000   $199,976    10.81 
1.06%, 10/12/2017        50,000    49,984    2.70 
1.07%, 10/19/2017        200,000    199,893    10.80 
1.05%, 10/26/2017        50,000    49,964    2.70 
0.99%, 11/09/2017        50,000    49,947    2.70 
0.99%, 11/30/2017        50,000    49,917    2.70 
0.99%, 12/07/2017        50,000    49,908    2.70 
1.01%, 12/28/2017        50,000    49,877    2.70 
1.12%, 2/15/2018        50,000    49,789    2.69 
1.10%, 2/22/2018        50,000    49,782    2.69 
1.09%, 3/01/2018        50,000    49,772    2.69 
1.16%, 3/22/2018        50,000    49,725    2.69 
1.17%, 3/29/2018        50,000    49,710    2.69 
Total Treasury Obligations             948,244    51.26 
                     
United States - Money Market Funds                    
Fidelity Investments Money Market Funds - Government Portfolio        350,000    350,000    18.92 
Goldman Sachs Financial Square Funds - Government Fund - Class FS        480,000    480,000    25.94 
Total Money Market Funds             830,000    44.86 
Total Cash Equivalents            $1,778,244    96.12 

 

* Collateral amounted to $810,719 on open futures contracts.

 

See accompanying notes to condensed financial statements.

 

 8 

 

  

USCF Funds Trust    
Condensed Statement of Operations (Unaudited)    
For the period ended September 30, 2017*    
     
United States 3x Oil Fund    
   Period ended  
September 30, 2017*
 
Income     
Gain (loss) on trading of commodity futures contracts:     
Realized gain (loss) on closed positions  $82,129 
Change in unrealized gain (loss) on open positions   424,660 
Interest income**   4,708 
ETF transaction fees   1,000 
      
Total income (loss)   512,497 
      
Expenses     
Management fees (Note 4)   7,051 
Brokerage commissions   3,364 
      
Total expenses   10,415 
      
Net income (loss)  $502,082 
Net income (loss) per share  $5.02 
Net income (loss) per weighted average share  $5.02 
Weighted average shares outstanding   100,040 

 

* Commencement of operations, July 20, 2017.

** Interest income does not exceed paid in kind of 5%.

 

See accompanying notes to condensed financial statements.

 

 9 

 

  

USCF Funds Trust    
Condensed Statement of Operations (Unaudited)    
For the period ended September 30, 2017*    
     
United States 3x Short Oil Fund    
   Period ended
September 30, 2017*
 
Income     
Gain (loss) on trading of commodity futures contracts:     
Realized gain (loss) on closed positions  $(341,362)
Change in unrealized gain (loss) on open positions   (303,980)
Interest income**   3,982 
ETF transaction fees   1,000 
      
Total income (loss)   (640,360)
      
Expenses     
Management fees (Note 4)   7,272 
Brokerage commissions   3,409 
      
Total expenses   10,681 
      
Net income (loss)  $(651,041)
Net income (loss) per share  $(6.51)
Net income (loss) per weighted average share  $(6.51)
Weighted average shares outstanding   100,040 

 

* Commencement of operations, July 20, 2017.

** Interest income does not exceed paid in kind of 5%.

 

See accompanying notes to condensed financial statements.

 

 10 

 

  

USCF Funds Trust    
Condensed Statement of Operations (Unaudited)    
For the period ended September 30, 2017*    
     
REX S&P MLP Fund    
   Period ended
September 30, 2017*
 
Income     
Gain (loss) on trading of commodity futures contracts:     
Realized gain (loss) on closed positions  $ 
Change in unrealized gain (loss) on open positions    
Interest income    
ETF transaction fees    
      
Total income (loss)    
      
Expenses     
Management fees (Note 4)    
Brokerage commissions    
      
Total expenses    
      
Net income (loss)  $ 
Net income (loss) per share  $ 
Net income (loss) per weighted average share  $ 
Weighted average shares outstanding    

 

* The Sponsor contributed $1,000 on March 31, 2016. As of September 30, 2017, the Fund is in registration and had not commenced operations.

 

See accompanying notes to condensed financial statements.

 

 11 

 

  

USCF Funds Trust    
Condensed Statement of Operations (Unaudited)    
For the period ended September 30, 2017*    
     
REX S&P MLP Inverse Fund    
   Period ended
September 30, 2017*
 
Income     
Gain (loss) on trading of commodity futures contracts:     
Realized gain (loss) on closed positions  $ 
Change in unrealized gain (loss) on open positions    
Interest income    
ETF transaction fees    
      
Total income (loss)    
      
Expenses     
Management fees (Note 4)    
Brokerage commissions    
      
Total expenses    
      
Net income (loss)  $ 
Net income (loss) per share  $ 
Net income (loss) per weighted average share  $ 
Weighted average shares outstanding    

 

* The Sponsor contributed $1,000 on April 15, 2016. As of September 30, 2017, the Fund is in registration and had not commenced operations.

 

See accompanying notes to condensed financial statements.

 

 12 

 

  

USCF Funds Trust    
Condensed Statement of Operations (Unaudited)    
For the period ended September 30, 2017*    
     
USCF Funds Trust    
   Period ended
September 30, 2017*
 
Income     
Gain (loss) on trading of commodity futures contracts:     
Realized gain (loss) on closed positions  $(259,233)
Change in unrealized gain (loss) on open positions   120,680 
Interest income**   8,690 
ETF transaction fees   2,000 
      
Total income (loss)   (127,863)
      
Expenses     
Management fees (Note 4)   14,323 
Brokerage commissions   6,773 
      
Total expenses   21,096 
      
Net income (loss)  $(148,959)

 

* Commencement of operations, July 20, 2017.

** Interest income does not exceed paid in kind of 5%.

 

See accompanying notes to condensed financial statements.

 

 13 

 

  

USCF Funds Trust            
Condensed Statement of Changes in Capital (Unaudited)            
For the period ended September 30, 2017*            
             
United States 3x Oil Fund            
   Sponsor   Shareholders   Total 
             
Balances, at July 20, 2017*  $   $   $ 
Additions   1,000    2,500,000    2,501,000 
Net income (loss)       502,082    502,082 
                
Balances, at September 30, 2017  $1,000   $3,002,082   $3,003,082 

 

Condensed Statement of Changes in Shares Outstanding (Unaudited)            
For the period ended September 30, 2017*            
             
   Sponsor   Shareholders   Total 
             
Shares Outstanding, at July 20, 2017*            
Additions   40    100,000    100,040 
Redemptions            
                
Shares Outstanding, at September 30, 2017   40    100,000    100,040 
                
Net Asset Value Per Share:               
At July 20, 2017*            $25.00 
At September 30, 2017            $30.02 

 

* Commencement of operations, July 20, 2017.

 

See accompanying notes to condensed financial statements.

 

 14 

 

  

USCF Funds Trust            
Condensed Statement of Changes in Capital (Unaudited)            
For the period ended September 30, 2017*            
             
United States 3x Short Oil Fund            
   Sponsor   Shareholders   Total 
             
Balances, at July 20, 2017*  $   $   $ 
Additions   1,000    2,500,000    2,501,000 
Net income (loss)       (651,041)   (651,041)
                
Balances, at September 30, 2017  $1,000   $1,848,959   $1,849,959 

 

Condensed Statement of Changes in Shares Outstanding (Unaudited)            
For the period ended September 30, 2017*            
             
   Sponsor   Shareholders   Total 
             
Shares Outstanding, at July 20, 2017*            
Additions   40    100,000    100,040 
Redemptions            
                
Shares Outstanding, at September 30, 2017   40    100,000    100,040 
                
Net Asset Value Per Share:               
At July 20, 2017*            $25.00 
At September 30, 2017            $18.49 

 

* Commencement of operations, July 20, 2017.

 

See accompanying notes to condensed financial statements.

 

 15 

 

  

USCF Funds Trust            
Condensed Statement of Changes in Capital (Unaudited)            
For the period ended September 30, 2017*            
             
REX S&P MLP Fund            
   Sponsor   Shareholders   Total 
             
Balances, at March 31, 2016*  $   $   $ 
Additions   1,000        1,000 
Net income (loss)            
                
Balances, at September 30, 2017  $1,000   $   $1,000 

 

* The Sponsor contributed $1,000 on March 31, 2016. As of September 30, 2017, the Fund is in registration and had not commenced operations.

 

See accompanying notes to condensed financial statements.

 

 16 

 

  

USCF Funds Trust            
Condensed Statement of Changes in Capital (Unaudited)            
For the period ended September 30, 2017*            
             
REX S&P MLP Inverse Fund            
   Sponsor   Shareholders   Total 
             
Balances, at April 15, 2016*  $   $   $ 
Additions   1,000        1,000 
Net income (loss)            
                
Balances, at September 30, 2017  $1,000   $   $1,000 

 

* The Sponsor contributed $1,000 on April 15, 2016. As of September 30, 2017, the Fund is in registration and had not commenced operations.

 

See accompanying notes to condensed financial statements.

 

 17 

 

  

USCF Funds Trust            
Condensed Statement of Changes in Capital (Unaudited)            
For the period ended September 30, 2017*            
             
USCF Funds Trust            
   Sponsor   Shareholders   Total 
             
Balances, at July 20, 2017*  $   $   $ 
Additions   4,000    5,000,000    5,004,000 
Net income (loss)       (148,959)   (148,959)
                
Balances, at September 30, 2017  $4,000   $4,851,041   $4,855,041 

 

Condensed Statement of Changes in Shares Outstanding (Unaudited)            
For the period ended September 30, 2017*            
             
   Sponsor   Shareholders   Total 
             
Shares Outstanding, at July 20, 2017*            
Additions   80    200,000    200,080 
Redemptions            
                
Shares Outstanding, at September 30, 2017   80    200,000    200,080 

 

* Commencement of operations, July 20, 2017.

 

See accompanying notes to condensed financial statements.

 

 18 

 

  

USCF Funds Trust    
Condensed Statement of Cash Flows (Unaudited)    
For the period ended September 30, 2017*    
     
United States 3x Oil Fund    
   Period ended
September 30, 2017*
 
Cash Flows from Operating Activities:     
Net income (loss)  $502,082 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:     
(Increase) decrease in commodity futures trading account - cash and cash equivalents   (1,129,243)
Unrealized (gain) loss on open futures contracts   (424,660)
(Increase) decrease in interest receivable   (1,311)
Increase (decrease) in management fees payable   2,635 
Net cash provided by (used in) operating activities   (1,050,497)
      
Cash Flows from Financing Activities:     
Addition of shares   2,501,000 
Redemption of shares    
Net cash provided by (used in) financing activities   2,501,000 
      
Net Increase (Decrease) in Cash and Cash Equivalents   1,450,503 
      
Cash and Cash Equivalents, beginning of period    
Cash and Cash Equivalents, end of period  $1,450,503 

 

* Commencement of operations, July 20, 2017.

 

See accompanying notes to condensed financial statements.

 

 19 

 

  

USCF Funds Trust    
Condensed Statement of Cash Flows (Unaudited)    
For the period ended September 30, 2017*    
     
United States 3x Short Oil Fund    
   Period ended
September 30, 2017*
 
Cash Flows from Operating Activities:     
Net income (loss)  $(651,041)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:     
(Increase) decrease in commodity futures trading account - cash and cash equivalents   (810,719)
Unrealized (gain) loss on open futures contracts   303,980 
(Increase) decrease in interest receivable   (866)
Increase (decrease) in management fees payable   3,223 
Net cash provided by (used in) operating activities   (1,155,423)
      
Cash Flows from Financing Activities:     
Addition of shares   2,501,000 
Redemption of shares    
Net cash provided by (used in) financing activities   2,501,000 
      
Net Increase (Decrease) in Cash and Cash Equivalents   1,345,577 
      
Cash and Cash Equivalents, beginning of period    
Cash and Cash Equivalents, end of period  $1,345,577 

 

* Commencement of operations, July 20, 2017.

 

See accompanying notes to condensed financial statements.

 

 20 

 

 

USCF Funds Trust    
Condensed Statement of Cash Flows (Unaudited)    
For the period ended September 30, 2017    
     
REX S&P MLP Fund    
   Period ended
September 30, 2017*
 
Cash Flows from Financing Activities:     
Addition of shares   1,000 
Redemption of shares    
Net cash provided by (used in) financing activities   1,000 
      
Net Increase (Decrease) in Cash and Cash Equivalents   1,000 
      
Cash and Cash Equivalents, beginning of period    
Cash and Cash Equivalents, end of period  $1,000 

 

* The Sponsor contributed $1,000 on March 31, 2016. As of September 30, 2017, the Fund is in registration and had not commenced operations.

 

See accompanying notes to condensed financial statements.

 

 21 

 

  

USCF Funds Trust    
Condensed Statement of Cash Flows (Unaudited)    
For the period ended September 30, 2017    
     
REX S&P MLP Inverse Fund    
   Period ended
September 30, 2017*
 
Cash Flows from Financing Activities:     
Addition of shares   1,000 
Redemption of shares    
Net cash provided by (used in) financing activities   1,000 
      
Net Increase (Decrease) in Cash and Cash Equivalents   1,000 
      
Cash and Cash Equivalents, beginning of period    
Cash and Cash Equivalents, end of period  $1,000 

 

* The Sponsor contributed $1,000 on April 15, 2016. As of September 30, 2017, the Fund is in registration and had not commenced operations.

 

See accompanying notes to condensed financial statements.

 

 22 

 

  

USCF Funds Trust    
Condensed Statement of Cash Flows (Unaudited)    
For the period ended September 30, 2017*    
     
USCF Funds Trust    
   Period ended
September 30, 2017*
 
Cash Flows from Operating Activities:     
Net income (loss)  $(148,959)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:     
(Increase) decrease in commodity futures trading account - cash and cash equivalents   (1,939,962)
Unrealized (gain) loss on open futures contracts   (120,680)
(Increase) decrease in interest receivable   (2,177)
Increase (decrease) in management fees payable   5,858 
Net cash provided by (used in) operating activities   (2,205,920)
      
Cash Flows from Financing Activities:     
Addition of shares   5,004,000 
Redemption of shares    
Net cash provided by (used in) financing activities   5,004,000 
      
Net Increase (Decrease) in Cash and Cash Equivalents   2,798,080 
      
Cash and Cash Equivalents, beginning of period    
Cash and Cash Equivalents, end of period  $2,798,080 

 

* Commencement of operations, July 20, 2017.

 

See accompanying notes to condensed financial statements.

 

 23 

 

  

USCF Funds Trust

Notes to Condensed Financial Statements

For the period from July 20, 2017 (Commencement of Operations) through September 30, 2017 (Unaudited)

 

NOTE 1 – ORGANIZATION AND BUSINESS

 

The USCF Funds Trust (the “Trust”) is a Delaware statutory trust formed on March 2, 2016. The Trust is a series trust formed pursuant to the Delaware Statutory Trust Act. The Trust contains four series: REX S&P MLP Fund (“RMLP”), REX S&P MLP Inverse Fund (“MLPD”), United States 3x Oil Fund (“USOU”) and United States 3x Short Oil Fund (“USOD”) (each series, a “Fund” and collectively, the “Funds”). RMLP and MLPD are commodity pools that are expected to issue shares that would be purchased and sold on an exchange, but are currently in registration and have not commenced operations. USOU and USOD are commodity pools that continuously issue common shares of beneficial interest that may be purchased and sold on NYSE Arca Equities, Inc. stock exchange (“NYSE”). The Trust and the Funds operate pursuant to the Trust’s Amended and Restated Declaration of Trust and Trust Agreement (the “Trust Agreement”), dated as of June 23, 2017. The sole trustee of the Trust is Wilmington Trust Company, National Association, a national banking association, with its principal place of business in the State of Delaware (the “Trustee”). The Trust and the Funds are managed and operated by the United States Commodity Funds, LLC (“USCF” or the “Sponsor”). USCF is a limited liability company formed in Delaware on May 10, 2005, that is registered as a commodity pool operator (“CPO”) with the Commodity Futures Trading Commission (“CFTC”) and is a member of the National Futures Association (“NFA”).

 

The Sponsor has the power and authority to establish and designate one or more series, or funds, and to issue shares thereof, from time to time as it deems necessary or desirable. The Sponsor also has the exclusive power to fix and determine the relative rights and preferences as between the shares of any series as to right of redemption, special and relative rights as to dividends and other distributions and on liquidation, conversion rights, and conditions under which the series shall have separate voting rights or no voting rights. The term for which the Trust will exist commenced on the date of the filing of the Certificate of Trust, and the Trust and any Fund will exist in perpetuity, unless earlier terminated in accordance with the provisions of the Trust Agreement. Each Fund is separate from all other Funds created as series of the Trust in respect of the assets and liabilities allocated to that Fund and each Fund represents a separate investment portfolio of the Trust. Separate and distinct records must be maintained for each Fund and the assets associated with a Fund shall be held in such separate and distinct records (directly or indirectly, including a nominee or otherwise) and accounted for in such separate and distinct records separately from the assets of any other Fund.

 

The Trustee is not affiliated with the Sponsor. The Trustee will accept legal service of process on the Trust in the State of Delaware and will make certain filings under the Delaware Statutory Trust Act. The Trustee’s duties and liabilities with respect to the offering of Shares and the management of the Trust are limited to its express obligations under the Trust Agreement and the Trustee does not owe any other duties to the Trust, the Sponsor or the shareholders of any Fund.

 

The Sponsor, is also the general partner of the United States Oil Fund, LP (“USO”), the United States Natural Gas Fund, LP (“UNG”), the United States 12 Month Oil Fund, LP (“USL”), the United States Gasoline Fund, LP (“UGA”) and the United States Diesel-Heating Oil Fund, LP (“UHN”), which listed their limited partnership shares on the American Stock Exchange (the “AMEX”) under the ticker symbols “USO” on April 10, 2006, “UNG” on April 18, 2007, “USL” on December 6, 2007, “UGA” on February 26, 2008 and “UHN” on April 9, 2008, respectively. As a result of the acquisition of the AMEX by NYSE Euronext, each of USO’s, UNG’s, USL’s, UGA’s and UHN’s shares commenced trading on the NYSE on November 25, 2008. USCF is also the general partner of the United States Short Oil Fund, LP (“DNO”), the United States 12 Month Natural Gas Fund, LP (“UNL”) and the United States Brent Oil Fund, LP (“BNO”), which listed their limited partnership shares on the NYSE under the ticker symbols “DNO” on September 24, 2009, “UNL” on November 18, 2009 and “BNO” on June 2, 2010, respectively. USCF is also the sponsor of the United States Commodity Index Fund (“USCI”), the United States Copper Index Fund (“CPER”), the United States Agriculture Index Fund (“USAG”), and the USCF Canadian Crude Oil Index Fund (“UCCO”), each a series of the United States Commodity Index Funds Trust. USCI, CPER and USAG listed their shares on the NYSE under the ticker symbol “USCI” on August 10, 2010, “CPER” on November 15, 2011 and “USAG” on April 13, 2012, respectively. UCCO is currently in registration and has not commenced operations.

 

All funds listed previously, other than UCCO, RMLP and MLPD, are referred to collectively herein as the “Related Public Funds” and are also commodity pools.

 

Effective as of July 20, 2017, each of USOU and USOD issued shares to certain authorized purchasers (“Authorized Participants”) by offering baskets consisting of 50,000 shares (“Creation Baskets”) through ALPS Distributors, Inc., as the marketing agent (the “Marketing Agent”). The purchase price for a Creation Basket of USOU or USOD, as applicable, is based upon the net asset value (“NAV”) of a share of USOU or USOD, as applicable, calculated shortly after the close of the core trading session on the NYSE Arca on the day the order to create the basket is properly received.

 

Authorized Participants pay USOU and USOD, as applicable, a transaction fee equal to 0.04% of total NAV of the Creation Baskets for each order placed to create one or more Creation Baskets or to redeem one or more baskets (“Redemption Baskets”), consisting of 50,000 shares. The transaction fee may be waived, reduced, increased or otherwise changed by the Sponsor. Shares may be purchased or sold on a nationally recognized securities exchange in smaller increments than a Creation Basket or Redemption Basket. Shares purchased or sold on a nationally recognized securities exchange are not purchased or sold at the per share NAV of each Fund but rather at market prices quoted on such exchange.

 

 24 

 

  

The accompanying unaudited condensed financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the U.S. Securities and Exchange Commission (the “SEC”) and, therefore, do not include all information and footnote disclosure required under generally accepted accounting principles in the United States of America (“U.S. GAAP”). The financial information included herein is unaudited; however, such financial information reflects all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of USCF, necessary for the fair presentation of the condensed financial statements for the interim period.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The financial statements have been prepared in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”), as detailed in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification. Each series of the Trust is an investment company and follows the accounting and reporting guidance in FASB Topic 946.

 

Revenue Recognition

 

Commodity futures contracts, forward contracts, physical commodities, and related options are recorded on the trade date. All such transactions are recorded on the identified cost basis and marked to market daily. Unrealized gains or losses on open contracts are reflected in the condensed statements of financial condition and represent the difference between the original contract amount and the market value (as determined by exchange settlement prices for futures contracts and related options and cash dealer prices at a predetermined time for forward contracts, physical commodities, and their related options) as of the last business day of the year or as of the last date of the condensed financial statements. Changes in the unrealized gains or losses between periods are reflected in the condensed statements of operations. The Funds earn income on funds held at the custodian or futures commission merchant (“FCM”) at prevailing market rates earned on such investments.

 

Brokerage Commissions

 

Brokerage commissions on all open commodity futures contracts are accrued on a full-turn basis.

 

Income Taxes

 

The Funds are not subject to federal income taxes; each investor reports his/her allocable share of income, gain, loss deductions or credits on his/her own income tax return.

 

In accordance with U.S. GAAP, each Fund is required to determine whether a tax position is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any tax related appeals or litigation processes, based on the technical merits of the position. Each Fund files an income tax return in the U.S. federal jurisdiction, and may file income tax returns in various U.S. states. None of the Funds is subject to income tax return examinations by major taxing authorities for years before 2017 (commencement of operations). The tax benefit recognized is measured as the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. De-recognition of a tax benefit previously recognized results in each Fund recording a tax liability that reduces net assets. However, each Fund’s conclusions regarding this policy may be subject to review and adjustment at a later date based on factors including, but not limited to, on-going analysis of and changes to tax laws, regulations and interpretations thereof. Each Fund recognizes interest accrued related to unrecognized tax benefits and penalties related to unrecognized tax benefits in income tax fees payable, if assessed. No interest expense or penalties have been recognized as of and for the period from July 20, 2017 (commencement of operations) through September 30, 2017 for any Fund.

 

Creations and Redemptions

 

“Authorized Participants,” institutional firms that can purchase or redeem shares in blocks of 50,000 shares called “baskets” through the Fund’s marketing agent, may purchase or redeem baskets only in blocks of 50,000 shares at a price equal to the NAV of the shares calculated shortly after the close of the core trading session on the NYSE on the day the order is placed.

  

The Funds receive or pay the proceeds from shares sold or redeemed within three business days after the trade date of the purchase or redemption. The amounts due from Authorized Participants are reflected in the Funds’ condensed statements of financial condition as receivable for shares sold, and amounts payable to Authorized Participants upon redemption are reflected as payable for shares redeemed.

 

For USOU or USOD, Authorized Participants pay a transaction fee equal to 0.04% of total NAV of baskets to the Fund for each order placed to create or redeem one or more baskets. For RMLP or MLPD, Authorized Participants will pay a transaction fee equal to 0.02% of total NAV of baskets to the Fund for each order placed to create or redeem one or more baskets. The transaction fee may be reduced, waived, increased or otherwise changed by USCF.

 

 25 

 

 

Trust Capital and Allocation of Income and Losses

 

The Trust is a treated as partnership for tax purposes. Profit or loss shall be allocated among the shareholders of each Fund in proportion to the number of shares each investor holds as of the close of each month. USCF may revise, alter or otherwise modify this method of allocation as described in the Trust Agreement.

 

Calculation of Per Share NAV

 

USOU and USOD Funds’ per share NAV is calculated on each NYSE trading day by taking the current market value of its total assets, subtracting any liabilities and dividing that amount by the total number of shares outstanding. The Funds use the closing price for the contracts on the relevant exchange on that day to determine the value of contracts held on such exchange. The NAV for a normal trading day is released after 4:00 p.m. Eastern time (“E.T.”). For futures contracts and options traded on exchanges, USOU and USOD’s administrator (the “Administrator”) use the closing or settlement price published by the applicable exchange or, in the case of a market disruption, the last traded price before settlement. In the case of the Benchmark Oil Futures Contract, the NYMEX closing price (determined at the earlier of the close of the NYMEX or 2:30 p.m. E.T.) for the contracts traded on the NYMEX is used. Other investments’ values for purposes of determining the NAV for each of USOU and USOD, including Treasuries, cash equivalents (other than money market funds), cleared and non-cleared swaps, forwards, options and swaps are calculated by the Administrator using market quotations and market data, if available, or other information customarily used to determine the fair value of such investments as of the earlier of the close of the NYSE or 4:00 p.m. E.T. Money market funds are valued at their end of day NAV.

 

RMLP and MLPD are currently in registration and have not commenced operations and the RMLP and MLPD Funds’ per share NAV will not be calculated until such time as operations commence.

 

Net Income (Loss) Per Share

 

Net income (loss) per share is the difference between the per share NAV at the beginning of each period and at the end of each period. The weighted average number of shares outstanding was computed for purposes of disclosing net income (loss) per weighted average share. The weighted average shares are equal to the number of shares outstanding at the end of the period, adjusted proportionately for shares added and redeemed based on the amount of time the shares were outstanding during such period. As of September 30, 2017, USCF held 40 shares of each of USOU and USOD.

 

Offering Costs

 

Offering costs incurred in connection with the registration of additional shares of any Fund after the initial registration of shares of such Fund are borne by each respective Fund. These costs include registration fees paid to regulatory agencies and all legal, accounting, printing and other expenses associated with such offerings. These costs are accounted for as a deferred charge and thereafter amortized to expense over twelve months on a straight-line basis or a shorter period if warranted.

 

Cash Equivalents

 

Cash equivalents include money market funds, overnight deposits and obligations of the United States with an original maturity of less than six months.

 

Reclassifications

 

Certain amounts in the accompanying condensed financial statements may have been reclassified to conform to the current presentation.

  

Use of Estimates

 

The preparation of condensed financial statements in conformity with U.S. GAAP requires USCF to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed financial statements, and the reported amounts of the revenue and expenses during the reporting period. Actual results may differ from those estimates and assumptions.

 

NOTE 3 - TRUST SERIES

 

Pursuant to the Trust Agreement, four series have been designated as series of the Trust. Following the designation of the Funds as a series of the Trust, an initial capital contribution of $1,000 was made to each respective Fund by the Sponsor and deemed an initial contribution of capital to each respective Fund. The Sponsor contributed an aggregate of $4,000 to the Trust, $1,000 on March 31, 2016 for RMLP, $1,000 on April 15, 2016 for MLPD, $1,000 on June 20, 2017 for USOU and $1,000 on June 20, 2017 for USOD. As of September 30, 2017, RMLP and MLPD were in registration and had not commenced operations. In connection with the commencement of trading for USOU and USOD under each Fund’s ticker, and the initial offering of shares, USCF received 40 Sponsor Shares of each of USOU and USOD in exchange for the previously received capital contribution, representing a beneficial ownership interest in each Fund. As of September 30, 2017, USCF held 40 shares of each of USOU and USOD.

 

 26 

 

  

On July 19, 2017, the Trust received a notice of effectiveness from the U.S. Securities and Exchange Commission (the “SEC”) for its registration of 30,000,000 shares of USOU and 30,000,000 shares of USOD on Form S-1 with the SEC. The order to permit listing of USOU and USOD shares on the NYSE Arca was received on July 20, 2017. On July 20, 2017, USOU and USOD listed their shares on the NYSE Arca under the ticker symbols “USOU” and “USOD,” respectively. USOU and USOD established their initial per share NAV by setting the price at $25.00. In order to satisfy NYSE Arca listing standards that at least 100,000 shares be outstanding at the beginning of the trading day on the NYSE Arca, on July 20, 2017, each Fund issued 100,000 shares to the initial Authorized Participant, RBC Capital Markets, LLC in exchange for $2,500,000 for USOU and $2,500,000 for USOD. Each of USOU and USOD also commenced investment operations on July 20, 2017 by purchasing Futures Contracts traded on the Futures Exchanges.

 

Investment Objective of the Funds

 

USOU

 

USOU’s shares trade on the NYSE. The investment objective of USOU is for the daily changes in percentage terms of its shares’ per share net asset value (“NAV”) to reflect three times (3x) the daily change in percentage terms of the price of a specified short-term futures contract on light, sweet crude oil (the “Benchmark Oil Futures Contract”) less USOU’s expenses. To achieve this objective, USCF endeavors to have the notional value of USOU’s aggregate exposure to the Benchmark Oil Futures Contract at the close of each trading day approximately equal to 300% of USOU’s NAV. USOU seeks a return that is 300% of the return of the Benchmark Oil Futures Contract for a single day and does not seek to achieve its stated investment objective over a period of time greater than one day.

 

The pursuit of daily leveraged investment goals means that the return of USOU for a period longer than a full trading day may have no resemblance to 300% of the return of the Benchmark Oil Futures Contract for a period of longer than a full trading day because the aggregate return of USOU is the product of the series of each trading day’s daily returns.

 

USOU’s shares began trading on July 20, 2017. As of September 30, 2017, USOU held 174 Futures Contracts on the New York Mercantile Exchange (“NYMEX”), totaling 174 futures contracts.

 

USOD

 

USOD’s shares trade on the NYSE. The investment objective of USOD is for the daily changes in percentage terms of its shares’ per share net asset value (“NAV”) to reflect three times the inverse (-3x) of the daily change in percentage terms of the price of a specified short-term futures contract on light, sweet crude oil (the “Benchmark Oil Futures Contract”) less USOD’s expenses. To achieve this objective, USCF endeavor to have the notional value of USOD’s aggregate short exposure to the Benchmark Oil Futures Contract at the close of each trading day approximately equal to 300% of USOD’s NAV. USOD seeks a return that is -300% of the return of the Benchmark Oil Futures Contract for a single day and does not seek to achieve its stated investment objective over a period of time greater than one day.

 

The pursuit of daily inverse leveraged investment goals means that the return of USOD for a period longer than a full trading day may have no resemblance to -300% of the return of the Benchmark Oil Futures Contract for a period of longer than a full trading day because the aggregate return of USOD is the product of the series of each trading day’s daily returns.

 

USOD’s shares began trading on July 20, 2017. As of September 30, 2017, USOD held 108 Futures Contracts on the NYMEX, totaling 108 futures contracts.

 

RMLP

 

RMLP’s shares will trade on a to be determined exchange if, and when, the registration statement for such shares is declared effective by the SEC and approved by the NFA and RMLP commences operations. The investment objective of RMLP will be for the daily changes in percentage terms of its shares’ per share net asset value (“NAV”) to reflect the daily changes in percentage terms of the S&P MLP Total Return Index Futures (the “MLP Benchmark Futures Contract”), less RMLP’s expenses and distributions made by RMLP. The S&P MLP Total Return Index (the “Index”) is designed to measure the total return performance of leading master limited partnerships (“MLPs”) and publicly traded limited liability companies (“LLCs”), which have a similar legal structure to MLPs and share the same tax benefits, that trade on major U.S. exchanges. As the vast majority of traded partnerships have operations in the oil and gas industries, the Index focuses on companies in the Global Industry Classification Standard’s (“GICS®”) Energy Sector and the GICS Gas Utilities Industry. The Index is owned, maintained, calculated, and published by S&P Dow Jones Indices, LLC (the “Index Sponsor”).

 

 27 

 

 

MLPD

 

MLPD’s shares will trade on a to be determined exchange if, and when, the registration statement for such shares is declared effective by the SEC and approved by the NFA and RMLP commences operations. The investment objective of MLPD will be for the daily changes in percentage terms of its shares’ per share NAV to reflect the inverse of the daily changes in percentage terms of the Benchmark Futures Contract, less MLPD’s expenses. MLPD will seek a return that is -100% of the return of the MLP Benchmark Futures Contract for a single day. MLPD should not be expected to provide 100% of the inverse of the cumulative return for the MLP Benchmark Futures Contract for periods greater than a day. The Index is designed to measure the total return performance of leading MLPs and publicly traded LLCs, which have a similar legal structure to MLPs and share the same tax benefits, that trade on major U.S. exchanges. As the vast majority of traded partnerships have operations in the oil and gas industries, the Index focuses on companies in the Global Industry Classification Standard’s (“GICS®”) Energy Sector and the GICS Gas Utilities Industry. The Index is owned, maintained, calculated, and published by the Index Sponsor.

 

Each of RMLP and MLPD will seek to achieve its investment objective by primarily investing in MLP Benchmark Futures Contracts. If constrained by regulatory requirements or in view of market conditions, each of RMLP and MLPD will invest next in other exchange-traded futures contracts and options contracts, if available, based on the Index, other MLP indices or individual MLPs. If constrained by regulatory requirements or in view of market conditions, each of the Funds will invest next in over the counter (“OTC”) swaps on the Index, other MLP indices or individual MLPs. Other exchange-traded futures contracts, options contracts and OTC swaps based on the Index, other MLP indices or individual MLPs are collectively referred to as “Related Investments,” and together with MLP Benchmark Futures Contracts, the “MLP Interests.”

 

RMLP and MLPD are commodity pools that are expected to issue shares that would be purchased and sold on an exchange, but are currently in registration and have not commenced operations.

 

NOTE 4 — FEES PAID BY THE FUND AND RELATED PARTY TRANSACTIONS

 

USCF Management Fee

 

Under the Trust Agreement, USCF is responsible for investing the assets of USOU and USOD (together the “Active Funds”) in accordance with the objectives and policies of USOU or USOD, as applicable. In addition, USCF has arranged for one or more third parties to provide administrative, custody, accounting, transfer agency and other necessary services to the Active Funds. For these services, each Fund is obligated to pay USCF a fee, which is paid monthly, equal to 1.35% and 1.65%, respectively for USOU and USOD per annum of average daily total net assets. If and when RMLP and MLPD commence operations, USCF would have the same responsibilities and make the same arrangements for RMLP and MLPD and, USCF would be paid a fee of 0.75% and 0.75%, respectively, for RMLP and MLPD per annum of average daily total net assets for these services.

 

Trustee Fee

 

The Trustee is the Delaware trustee of the Trust. In connection with the Trustee’s services to the Trust, USCF is responsible for paying the Trustee’s annual fee in the amount of $3,000.

 

Ongoing Registration Fees and Other Offering Expenses

 

The Active Funds pay (a) the applicable Management Fee payable to USCF, discussed above, (b) brokerage fees, futures commission merchant fees and other fees and commissions incurred in connection with the trading activities of the Fund, (c) any costs and expenses related to registration of additional shares of the Fund, and (d) all other expenses allocated to the Fund by USCF in consultation with REX MLPshares, LLC, as may be disclosed from time to time. During the period ended September 30, 2017, the Active Funds did not incur any registration fees or other offering expenses.

 

Independent Directors’ and Officers’ Expenses

 

The Sponsor is responsible for paying its portion of the directors’ and officers’ liability insurance for the Funds and the fees and expenses of the independent directors who also serve as audit committee members of the Funds. The directors also serve as the directors, and for the independent directors as audit committee members, of the Related Public Funds and the other Funds that are series of the Trust. The Sponsor shares the fees and expenses on a pro rata basis with each Related Public Fund, as described above, based on the relative asset value of the Funds to the total Related Public Fund’s asset value computed on a daily basis. These fees and expenses for the period ended December 31, 2017, are estimated to be a total of $539,350 for the Funds and the Related Public Funds. USOU’s portion of such fees and expenses for the period ended December 31, 2017 are estimated to be a total of $1,500 and USOD’s portion of such fees and expenses for the period ended December 31, 2017 are estimated to be a total of $1,500.

 

Licensing Fees

 

REX MLPshares, LLC licenses certain intellectual property rights to USCF and certain of the Funds.

 

Investor Tax Reporting Cost

 

The fees and expenses associated with the Funds’ audit expenses and tax accounting and reporting requirements are paid by the Sponsor. These costs are estimated to be $75,000 for the period ended December 31, 2017 for USOU and USOD. Tax reporting costs fluctuate between years due to the number of shareholders during any given year.

 

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Other Expenses and Fees

 

In addition to the fees described above, each Active Fund pays all brokerage fees and other expenses in connection with the operation of such Active Fund, excluding costs and expenses paid by USCF.

 

NOTE 5 - CONTRACTS AND AGREEMENTS

 

Marketing Agent Agreement

 

The Sponsor and the Trust, each on its own behalf and on behalf of the Funds, are party to a marketing agent agreement, dated as of July 14, 2017, as amended from time to time, with the Marketing Agent, whereby the Marketing Agent provides certain marketing services for the Funds as outlined in the agreement. The fee of the Marketing Agent, which is borne by the Sponsor, is equal to 0.06% on the assets of USOU and USOD up to $3 billion and 0.04% on the assets of USOU and USOD in excess of $3 billion. In no event may the aggregate compensation paid to the Marketing Agent and any affiliate of the Sponsor for distribution related services exceed 10% of the gross proceeds of each Funds’ offering.

 

The above fee does not include website construction and development, which are also borne by the Sponsor. 

  

Brown Brothers Harriman & Co. Agreements

 

The Sponsor and the Trust, on its own behalf and on behalf of the Funds, are also party to a custodian agreement, dated July 7, 2017, as amended from time to time, with Brown Brothers Harriman & Co. (“BBH&Co.”), whereby BBH&Co. holds investments on behalf of the Active Funds. The Sponsor pays the fees of the custodian, which are determined by the parties from time to time. In addition, the Sponsor and the Trust, on its own behalf and on behalf of the Funds, are party to an administrative agency agreement, dated July 7, 2017, as amended from time to time, with BBH&Co., whereby BBH&Co. acts as the administrative agent, transfer agent and registrar for the Funds. The Sponsor also pays the fees of BBH&Co. for its services under such agreement and such fees are determined by the parties from time to time.

 

Currently, the Sponsor pays BBH&Co. for its services, in the foregoing capacities, a minimum amount of $75,000 annually for its custody, fund accounting and fund administration services rendered to the Related Public Funds, as well as a $20,000 annual fee for its transfer agency services. In addition, the Sponsor pays BBH&Co. an asset-based charge of: (a) 0.06% for the first $500 million of the Related Public Funds’ combined net assets, (b) 0.0465% for the Related Public Funds’ combined net assets greater than $500 million but less than $1 billion, and (c) 0.035% once the Related Public Funds’ combined net assets exceed $1 billion. The annual minimum amount will not apply if the asset-based charge for all accounts in the aggregate exceeds $75,000. The Sponsor also pays BBH&Co. transaction fees ranging from $7 to $15 per transaction.

 

Brokerage and Futures Commission Merchant Agreements

 

On June 23, 2017, the Trust entered into a futures commission merchant agreement with RBC Capital Markets, LLC (“RBC Capital” or “RBC”) to serve as the Active Funds’ FCM. The agreement with RBC requires it to provide services to the Active Funds in connection with the purchase and sale of Oil Futures Contracts and Other Oil-Related Investments that may be purchased and sold by or through RBC Capital for the Active Funds’ account. In accordance with the agreement, RBC Capital charges the Active Funds commissions of approximately $7 to $8 per round-turn trade, including applicable exchange and NFA fees for Oil Futures Contracts and options on Oil Futures Contracts. Such fees include those incurred when purchasing Oil Futures Contracts and options on Oil Futures Contracts when the Funds issues shares as a result of a Creation Basket, as well as fees incurred when selling Oil Futures Contracts and options on Oil Futures Contracts when the Funds redeems shares as a result of a Redemption Basket. Such fees are also incurred when Oil Futures Contracts and options on Oil Futures Contracts are purchased or redeemed for the purpose of rebalancing the portfolio. The Active Funds also incur commissions to brokers for the purchase and sale of Oil Futures Contracts, Other Oil-Related Investments or short-term obligations of the United States of two years or less (“Treasuries”).

 

No information is provided below for RMLP and MLPD, since such Funds are currently in registration and have not commenced operations.

 

USOU

 

   For the period from
commencement of
operations on
July 20, 2017 to
September 30, 2017*
 
Total commissions accrued to brokers  $3,364 
Total commissions as an annualized percentage of average total net assets   0.64%
Commissions accrued as a result of rebalancing  $2,866 
Percentage of commissions accrued as a result of rebalancing   85.20%
Commissions accrued as a result of creation and redemption activity  $498 
Percentage of commissions accrued as a result of creation and redemption activity   14.80%

 

*Inception date, July 20, 2017. 

 

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USOD

 

   For the period from
commencement of
operations on
July 20, 2017 to
September 30, 2017*
 
Total commissions accrued to brokers  $3,409 
Total commissions as an annualized percentage of average total net assets   0.77%
Commissions accrued as a result of rebalancing  $2,902 
Percentage of commissions accrued as a result of rebalancing   85.13%
Commissions accrued as a result of creation and redemption activity  $507 
Percentage of commissions accrued as a result of creation and redemption activity   14.87%

 

*Inception date, July 20, 2017.

 

Other Fund Service Providers

 

The Sponsor has entered into an agreement with REX MLP Shares, LLC (“REX”), a single member limited liability company that was formed in the state of Delaware on December 3, 2015. REX is a wholly-owned subsidiary of REX Shares, LLC, a Delaware limited liability company (“REX Shares”). Pursuant to the agreement between the Sponsor and REX, REX will assist the Sponsor with the development and launch of each respective Fund and provide certain ongoing services. REX also licenses certain intellectual property rights to the Sponsor and certain of the Funds. REX does not make investment decisions for the Sponsor, the Trust or the Funds and is not involved in the day-to-day operations or maintenance of the Funds.

 

NOTE 6 – FINANCIAL INSTRUMENTS, OFF-BALANCE SHEET RISKS AND CONTINGENCIES

 

The Active Funds may engage in the trading of futures contracts, options on futures contracts and swaps (collectively, “derivatives”). The Active Funds are exposed to both market risk, which is the risk arising from changes in the market value of the contracts, and credit risk, which is the risk of failure by another party to perform according to the terms of a contract.

 

The Active Funds may enter into futures contracts, options on futures contracts and swaps to gain exposure to changes in the value of an underlying commodity. A futures contract obligates the seller to deliver (and the purchaser to accept) the future delivery of a specified quantity and type of a commodity at a specified time and place. Some futures contracts may call for physical delivery of the asset, while others are settled in cash. The contractual obligations of a buyer or seller may generally be satisfied by taking or making physical delivery of the underlying commodity or by making an offsetting sale or purchase of an identical futures contract on the same or linked exchange before the designated date of delivery. Cleared swaps are agreements that are eligible to be cleared by a clearinghouse, e.g., ICE Clear Europe, and provide the efficiencies and benefits that centralized clearing on an exchange offers to traders of futures contracts, including credit risk intermediation and the ability to offset positions initiated with different counterparties.

 

The purchase and sale of futures contracts, options on futures contracts and cleared swaps require margin deposits with an FCM. Additional deposits may be necessary for any loss on contract value. The Commodity Exchange Act requires an FCM to segregate all customer transactions and assets from the FCM’s proprietary activities.

 

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Futures contracts, options on futures contracts and cleared swaps involve, to varying degrees, elements of market risk (specifically commodity price risk) and exposure to loss in excess of the amount of variation margin. The face or contract amounts reflect the extent of the total exposure each of the Active Funds has in the particular classes of instruments. Additional risks associated with the use of futures contracts are an imperfect correlation between movements in the price of the futures contracts and the market value of the underlying securities and the possibility of an illiquid market for a futures contract. Buying and selling options on futures contracts exposes investors to the risks of purchasing or selling futures contracts.

 

All of the futures contracts held by USOU and USOD through September 30, 2017 were exchange-traded. The risks associated with exchange-traded contracts are generally perceived to be less than those associated with OTC swaps since, in OTC swaps, a party must rely solely on the credit of its respective individual counterparties. However, in the future, if any of the Funds were to enter into non-exchange traded contracts, it would be subject to the credit risk associated with counterparty non-performance. The credit risk from counterparty non-performance associated with such instruments is the net unrealized gain, if any, on the transaction. The Funds have credit risk under its futures contracts since the sole counterparty to all domestic and foreign futures contracts is the clearinghouse for the exchange on which the relevant contracts are traded. In addition, the Funds bear the risk of financial failure by the clearing broker.

 

The Active Funds’ cash and other property, such as Treasuries, deposited with an FCM are considered commingled with all other customer funds, subject to the FCM’s segregation requirements. In the event of an FCM’s insolvency, recovery may be limited to a pro rata share of segregated funds available. It is possible that the recovered amount could be less than the total of cash and other property deposited. The insolvency of an FCM could result in the complete loss of each of the Funds’ assets posted with that FCM; however, the majority of the Funds’ assets is held in cash and/or cash equivalents with the Funds’ custodian and would not be impacted by the insolvency of an FCM. The failure or insolvency of the Funds’ custodian, however, could result in a substantial loss of the Funds’ assets.

 

The Sponsor invests a portion of the Active Funds’ cash in money market funds that seek to maintain a stable per share NAV. The Active Funds are exposed to any risk of loss associated with an investment in such money market funds. As of September 30, 2017, USOU and USOD held investments in money market funds in the amounts of $1,000,000 and $830,000, respectively. USOU and USOD also hold cash deposits with their custodian. Pursuant to a written agreement with BBH&Co., uninvested overnight cash balances are swept to offshore branches of U.S. regulated and domiciled banks located in Toronto, Canada; London, United Kingdom; Grand Cayman, Cayman Islands and Nassau, Bahamas, which are subject to U.S. regulation and regulatory oversight. As of September 30, 2017, USOU and USOD each held cash deposits and investments in Treasuries in the amounts of $1,579,746 and $1,326,296, respectively, with the custodian and FCM. Some or all of these amounts may be subject to loss should USOU’s or USOD’s custodian and/or FCM cease operations.

 

For derivatives, risks arise from changes in the market value of the contracts. Theoretically, the Active Funds are exposed to market risk equal to the value of futures contracts purchased and unlimited liability on such contracts sold short. As both a buyer and a seller of options, the Active Funds pay or receive a premium at the outset and then bear the risk of unfavorable changes in the price of the contract underlying the option.

 

The Active Funds’ policy is to continuously monitor its exposure to market and counterparty risk through the use of a variety of financial, position and credit exposure reporting controls and procedures. In addition, the Active Funds have a policy of requiring review of the credit standing of each broker or counterparty with which it conducts business.

 

The financial instruments held by the Active Funds are reported in its condensed statements of financial condition at market or fair value, or at carrying amounts that approximate fair value, because of their highly liquid nature and short-term maturity.

 

 No information is provided for RMLP and MLPD, since such Funds are currently in registration and have not commenced operations.

  

 31 

 

 

NOTE 7 – FINANCIAL HIGHLIGHTS

 

The following tables present per share performance data and other supplemental financial data for USOU and USOD for the period from commencement of operations on July 20, 2017 to September 30, 2017 for the shareholders. This information has been derived from information presented in the condensed financial statements.

 

No information is provided below for RMLP and MLPD, since such Funds are currently in registration and have not commenced operations.

 

USOU

 

   For the period from
commencement of
operations on
July 20, 2017 to
September 30, 2017
(Unaudited)*
 
Per Share Operating Performance:     
Net asset value, beginning of period  $25.00 
Total income (loss)   5.12 
Net expenses   (0.10)
Net increase (decrease) in net asset value   5.02 
Net asset value, end of period  $30.02 
      
Total Return   20.08%
      
Ratios to Average Net Assets     
Total income (loss)   19.36%
Management fees**   1.35%
Total expenses excluding management fees**   0.64%
Expenses waived**   %
Net expenses excluding management fees**   0.64%
Net income (loss)   18.96%

 

*Inception date, July 20, 2017.

**Annualized.

 

USOD

 

   For the period from
commencement of
operations on
July 20, 2017 to
September 30, 2017
(Unaudited)*
 
Per Share Operating Performance:     
Net asset value, beginning of period  $25.00 
Total income (loss)   (6.40)
Net expenses   (0.11)
Net increase (decrease) in net asset value   (6.51)
Net asset value, end of period  $18.49 
      
Total Return   (26.04)%
      
Ratios to Average Net Assets     
Total income (loss)   (28.66)%
Management fees*   1.65%
Total expenses excluding management fees**   0.77%
Expenses waived**   %
Net expenses excluding management fees**   0.77%
Net income (loss)   (29.14)%

 

*Inception date, July 20, 2017.

**Annualized.

 

Total returns are calculated based on the change in value during the period. An individual shareholder’s total return and ratio may vary from the above total returns and ratios based on the timing of contributions to and withdrawals from each Trust Series.

 

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NOTE 8 — FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The Trust and the Active Funds value their investments in accordance with Accounting Standards Codification 820 – Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurement. The changes to past practice resulting from the application of ASC 820 relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurement. ASC 820 establishes a fair value hierarchy that distinguishes between: (1) market participant assumptions developed based on market data obtained from sources independent of the Trust and the Active Funds (observable inputs) and (2) the Trust’s and the Active Funds’ own assumptions about market participant assumptions developed based on the best information available under the circumstances (unobservable inputs). The three levels defined by the ASC 820 hierarchy are as follows:

 

Level I – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

 

Level II – Inputs other than quoted prices included within Level I that are observable for the asset or liability, either directly or indirectly. Level II assets include the following: quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market-corroborated inputs).

 

Level III – Unobservable pricing input at the measurement date for the asset or liability. Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available.

 

In some instances, the inputs used to measure fair value might fall within different levels of the fair value hierarchy. The level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest input level that is significant to the fair value measurement in its entirety.

 

No information is provided in this section for RMLP and MLPD, since such Funds are currently in registration and have not commenced operations.

 

The following table summarizes the valuation of USOU’s securities at September 30, 2017 using the fair value hierarchy:

 

At September 30, 2017  Total   Level I   Level II   Level III 
Short-Term Investments  $1,948,244   $1,948,244   $   $ 
Exchange-Traded Futures Contracts                    
United States Contracts   424,660    424,660         
                     

 

During the period from commencement of operations on July 20, 2017 to September 30, 2017, there were no transfers between Level I and Level II.

  

The following table summarizes the valuation of USOD’s securities at September 30, 2017 using the fair value hierarchy:

 

At September 30, 2017  Total   Level I   Level II   Level III 
Short-Term Investments  $1,778,244   $1,778,244   $   $ 
Exchange-Traded Futures Contracts                    
United States Contracts   (303,980)   (303,980)        

 

During the period from commencement of operations on July 20, 2017 to September 30, 2017, there were no transfers between Level I and Level II.

 

 33 

 

   

The Trust and the Funds have adopted the provisions of Accounting Standards Codification 815 – Derivatives and Hedging, which require presentation of qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts and gains and losses on derivatives.

 

Fair Value of Derivative Instruments Held by USOU

 

Derivatives not Accounted for
as Hedging Instruments
  Condensed
Statements of
Financial
Condition Location
  Fair Value
At September 30,
2017
 
Futures - Commodity Contracts  Assets  $424,660 

 

Fair Value of Derivative Instruments Held by USOD

 

Derivatives not Accounted for
as Hedging Instruments
  Condensed
Statements of
Financial
Condition Location
  Fair Value
At September 30,
2017
 
Futures - Commodity Contracts  Assets  $(303,980)

 

The Effect of Derivative Instruments on the Condensed Statements of Operations of USOU

 

   For the period from commencement of operations on
July 20, 2017 to September 30, 2017
 
Derivatives
not Accounted
for as
Hedging
Instruments
  Location of
Gain (Loss)
on Derivatives  
Recognized
in Income
  Realized
Gain (Loss)
on Derivatives
Recognized
in Income
   Change in
Unrealized
Gain (Loss)
on Derivatives
Recognized
in Income
 
Futures – Commodity Contracts  Realized gain (loss) on
closed contracts
  $82,129      
   Change in unrealized gain (loss) on open
contracts
       $424,660 

 

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The Effect of Derivative Instruments on the Condensed Statements of Operations of USOD

 

   For the period from commencement of operations on
July 20, 2017 to September 30, 2017
 
Derivatives
not Accounted
for as
Hedging
Instruments
  Location of
Gain (Loss)
on Derivatives  
Recognized
in Income
  Realized
Gain (Loss)
on Derivatives
Recognized
in Income
   Change in
Unrealized
Gain (Loss)
on Derivatives
Recognized
in Income
 
Futures – Commodity Contracts  Realized gain (loss) on
closed contracts
  $(341,362)     
   Change in unrealized gain (loss) on open
contracts
       $(303,980)

 

NOTE 9 – SUBSEQUENT EVENTS

 

The Trust and the Funds have performed and evaluated the need for disclosure and/or adjustments resulting from subsequent events through the date the financial statements were issued. This evaluation did not result in any subsequent events that necessitated disclosures and/or adjustments.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion should be read in conjunction with the condensed financial statements and the notes thereto of the USCF Funds Trust (the “Trust”) included elsewhere in this quarterly report on Form 10-Q.

 

Forward-Looking Information

 

This quarterly report on Form 10-Q, including this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding the plans and objectives of management for future operations. This information may involve known and unknown risks, uncertainties and other factors that may cause the Trust’s actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements, which involve assumptions and describe the Trust’s future plans, strategies and expectations, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project,” the negative of these words, other variations on these words or comparable terminology. These forward-looking statements are based on assumptions that may be incorrect, and the Trust cannot assure investors that the projections included in these forward-looking statements will come to pass. The Trust’s actual results could differ materially from those expressed or implied by the forward-looking statements as a result of various factors.

 

The Trust has based the forward-looking statements included in this quarterly report on Form 10-Q on information available to it on the date of this quarterly report on Form 10-Q, and the Trust assumes no obligation to update any such forward-looking statements. Although the Trust undertakes no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, investors are advised to consult any additional disclosures that the Trust may make directly to them or through reports that the Trust in the future files with the U.S. Securities and Exchange Commission (the “SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

 

Introduction

 

The United States Commodity Funds, LLC ("USCF") is the sponsor of the USCF Funds Trust (the "Trust"), and each of four series thereof: United States 3x Oil Fund (“USOU”), United States 3x Short Oil Fund (“USOD”), REX S&P MLP Fund (“RMLP”), and REX S&P MLP Inverse Fund (“MLPD”), (each series, a “Fund” and collectively, the “Funds”). USOU and USOD are commodity pools that continuously issue shares representing fractional undivided beneficial interests in USOU and USOD, respectively (“shares”) that may be purchased and sold on NYSE Arca Equities, Inc. stock exchange (“NYSE”). USOU and USOD are collectively referred to herein as the “Trust Series.” RMLP and MLPD are commodity pools that are currently in registration and have not commenced operations. The shares of RMLP and MLPD will trade on a to be determined exchange if, and when, the respective registration statement for such shares is declared effective by the SEC and approved by the NFA and each of RMLP and MLPD commence operations. The Trust, a Delaware statutory trust formed on March 2, 2016, and each series thereof operate pursuant to the Trust’s Amended and Restated Declaration of Trust and Trust Agreement (the “Trust Agreement”), dated June 23, 2017. Wilmington Trust, National Association (the “Trustee”), a national banking association, is the Delaware trustee of the Trust.

 

 35 

 

 

United States 3x Oil Fund

 

The investment objective of USOU is for the daily changes in percentage terms of its shares’ per share net asset value (“NAV”) to reflect three times (3x) the daily change in percentage terms of the price of a specified short-term futures contract on light, sweet crude oil (the “Benchmark Oil Futures Contract”) less USOU’s expenses. To achieve this objective, USCF endeavors to have the notional value of USOU’s aggregate exposure to the Benchmark Oil Futures Contract at the close of each trading day approximately equal to 300% of its NAV. USOU seeks a return that is 300% of the return of the Benchmark Oil Futures Contract for a single day and does not seek to achieve its stated investment objective over a period of time greater than one day. The pursuit of daily leveraged investment goals means that the return of USOU for a period longer than a full trading day may have no resemblance to 300% of the return of the Benchmark Oil Futures Contract for a period of longer than a full trading day because the aggregate return of USOU is the product of the series of each trading day’s daily returns.

 

USCF believes that market arbitrage opportunities will cause daily changes in USOU’s share price on NYSE on a percentage basis, to closely track the daily changes in USOU’s per share NAV on a percentage basis. USOU will not seek to achieve its stated investment objective over a period of time greater than one day. During periods of market volatility, the volatility of the Benchmark Oil Futures Contract may affect USOU’s return as much as or more than the return of the Benchmark Oil Futures Contract. Further, the return for investors that invest for periods less than a full trading day or for a period different than a trading day will not be the product of the return of USOU’s stated investment objective and the performance of the Benchmark Oil Futures Contract for the full trading day. Additionally, investors should be aware that USOU’s investment objective is not for its NAV or market price of shares to equal, in dollar terms, the spot price of light, sweet crude oil. Natural market forces called contango and backwardation can impact the total return on an investment in USOU’s shares relative to a hypothetical direct investment in crude oil and, in the future, it is likely that the relationship between the market price of USOU’s shares and changes in the spot prices of light, sweet crude oil will continue to be so impacted by contango and backwardation. (It is important to note that the disclosure above ignores the potential costs associated with physically owning and storing crude oil, which could be substantial.)

 

United States 3x Short Oil Fund

 

The investment objective of USOD is for the daily changes in percentage terms of its shares’ per share net asset value (“NAV”) to reflect three times the inverse (-3x) of the daily change in percentage terms of the price of a specified short-term futures contract on light, sweet crude oil (the “Benchmark Oil Futures Contract”) less USOD’s expenses. To achieve this objective, USCF endeavors to have the notional value of USOD’s aggregate short exposure to the Benchmark Oil Futures Contract at the close of each trading day approximately equal to 300% of USOD’s NAV. USOD seeks a return that is -300% of the return of the Benchmark Oil Futures Contract for a single day and does not seek to achieve its stated investment objective over a period of time greater than one day. The pursuit of daily inverse leveraged investment goals means that the return of USOD for a period longer than a full trading day may have no resemblance to -300% of the return of the Benchmark Oil Futures Contract for a period of longer than a full trading day because the aggregate return of USOD is the product of the series of each trading day’s daily returns.

 

USCF believes that market arbitrage opportunities will cause daily changes in USOD’s share price on NYSE on a percentage basis, to closely track the daily changes in USOD’s per share NAV on a percentage basis. USOD will not seek to achieve its stated investment objective over a period of time greater than one day. During periods of market volatility, the volatility of the Benchmark Oil Futures Contract may affect USOD’s return as much as or more than the return of the Benchmark Oil Futures Contract. Further, the return for investors that invest for periods less than a full trading day or for a period different than a trading day will not be the product of the return of USOD’s stated investment objective and the performance of the Benchmark Oil Futures Contract for the full trading day. Additionally, investors should be aware that USOD’s investment objective is not for its NAV or market price of shares to equal, in dollar terms, the spot price of light, sweet crude oil or to track the inverse performance thereof. Natural market forces called contango and backwardation can impact the total return on an investment in USOD’s shares relative to a hypothetical direct investment in crude oil and, in the future, it is likely that the relationship between the market price of USOD’s shares and changes in the spot prices of light, sweet crude oil will continue to be so impacted by contango and backwardation. (It is important to note that the disclosure above ignores the potential costs associated with physically owning and storing crude oil, which could be substantial.)

 

REX S&P MLP Fund

 

The investment objective of RMLP will be for the daily changes in percentage terms of its shares’ per share net asset value (“NAV”) to reflect the daily changes in percentage terms of the S&P MLP Total Return Index Futures (the “MLP Benchmark Futures Contract”), less RMLP’s expenses and distributions made by RMLP. The S&P MLP Total Return Index (the “Index”) is designed to measure the total return performance of leading master limited partnerships (“MLPs”) and publicly traded limited liability companies (“LLCs”), which have a similar legal structure to MLPs and share the same tax benefits, that trade on major U.S. exchanges. As the vast majority of traded partnerships have operations in the oil and gas industries, the Index focuses on companies in the Global Industry Classification Standard’s (“GICS®”) Energy Sector and the GICS Gas Utilities Industry. The Index is owned, maintained, calculated, and published by S&P Dow Jones Indices, LLC (the “Index Sponsor”).

 

RMLP will seek to achieve its investment objective by primarily investing in MLP Benchmark Futures Contracts. If constrained by regulatory requirements or in view of market conditions, RMLP will invest next in other exchange-traded futures contracts and options contracts, if available, based on the Index, other MLP indices or individual MLPs. If constrained by regulatory requirements or in view of market conditions RMLP will invest next in over the counter (“OTC”) swaps on the Index, other MLP indices or individual MLPs.

 

 36 

 

 

REX S&P MLP Inverse Fund

 

The investment objective of MLPD will be for the daily changes in percentage terms of its shares’ per share NAV to reflect the inverse of the daily changes in percentage terms of the Benchmark Futures Contract, less MLPD’s expenses. MLPD will seek a return that is -100% of the return of the MLP Benchmark Futures Contract for a single day. MLPD should not be expected to provide 100% of the inverse of the cumulative return for the MLP Benchmark Futures Contract for periods greater than a day.

 

MLPD will seek to achieve its investment objective by primarily investing in MLP Benchmark Futures Contracts. If constrained by regulatory requirements or in view of market conditions, MLPD will invest next in other exchange-traded futures contracts and options contracts, if available, based on the Index, other MLP indices or individual MLPs. If constrained by regulatory requirements or in view of market conditions, MLPD will invest next in OTC swaps on the Index, other MLP indices or individual MLPs.

 

Regulatory Disclosure

 

Accountability Levels, Position Limits and Price Fluctuation Limits. Designated contract markets, such as the NYMEX and ICE Futures, have established accountability levels and position limits on the maximum net long or net short futures contracts in commodity interests that any person or group of persons under common trading control (other than as a hedge, which an investment by the Trust Series is not) may hold, own or control. These levels and position limits apply to the futures contracts that each of the Trust Series invests in to meet its respective investment objective. In addition to accountability levels and position limits, the NYMEX and ICE Futures also set daily price fluctuation limits on futures contracts. The daily price fluctuation limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day’s settlement price. Once the daily price fluctuation limit has been reached in a particular futures contract, no trades may be made at a price beyond that limit.

 

The accountability levels for the Benchmark Oil Futures Contract and other Oil Futures Contracts traded on U.S.-based futures exchanges, such as the NYMEX, are not a fixed ceiling, but rather a threshold above which the NYMEX may exercise greater scrutiny and control over an investor’s positions. The current accountability level for investments for any one month in the Benchmark Oil Futures Contract is 10,000 contracts. In addition, the NYMEX imposes an accountability level for all months of 20,000 net futures contracts for light, sweet crude oil. In addition, the ICE Futures maintains the same accountability levels, position limits and monitoring authority for its light, sweet crude oil contract as the NYMEX. If the Trust Series and the Related Public Funds exceed these accountability levels for investments in the futures contracts for light, sweet crude oil, the NYMEX and ICE Futures will monitor such exposure and may ask for further information on their activities including the total size of all positions, investment and trading strategy, and the extent of liquidity resources of the Trust Series and the Related Public Funds. If deemed necessary by the NYMEX and/or ICE Futures, each of the Trust Series could be ordered to reduce its Crude Oil Futures CL contracts to below the 10,000 single month and/or 20,000 all month accountability level. As of September 30, 2017, USOU and USOD held 174 and 108 NYMEX Crude Oil Futures CL contracts, respectively, and did not hold ICE WTI Crude Oil Futures Contracts. USOU and USOD did not exceed accountability levels of the NYMEX or ICE Futures during the period ended September 30, 2017, however, the aggregated total of the Related Public Funds did exceed the accountability levels. No action was taken by NYMEX and USOU and USOD did not reduce the number of Oil Futures Contracts held as a result.

 

As of September 30, 2017, RMLP and MLPD were in registration and had not commenced investment activities nor issued any shares.

 

Position limits differ from accountability levels in that they represent fixed limits on the maximum number of futures contracts that any person may hold and cannot allow such limits to be exceeded without express CFTC authority to do so. In addition to accountability levels and position limits that may apply at any time, the NYMEX and ICE Futures impose position limits on contracts held in the last few days of trading in the near month contract to expire. It is unlikely that the Trust Series will run up against such position limits because each of the Trust Series’ investment strategies is to close out its positions and “roll” from the near month contract to expire to the next month contract during a four-day period beginning two weeks from expiration of the contract. For the period ended September 30, 2017, the Trust Series did not exceed any position limits imposed by the NYMEX and ICE Futures.

 

The regulation of commodity interest trading in the United States and other countries is an evolving area of the law. The various statements made in this summary are subject to modification by legislative action and changes in the rules and regulations of the SEC, Financial Industry Regulatory Authority (“FINRA”), CFTC, the National Futures Association (the “NFA”), the futures exchanges, clearing organizations and other regulatory bodies.

 

Futures Contracts and Position Limits

 

The CFTC is generally prohibited by statute from regulating trading on non-U.S. futures exchanges and markets. The CFTC, however, has adopted regulations relating to the marketing of non-U.S. futures contracts in the United States. These regulations permit certain contracts on non-U.S. exchanges to be offered and sold in the United States.

 

The CFTC has proposed to adopt limits on speculative positions in 25 physical commodity futures, and option contracts and swaps that are economically equivalent to such contracts, in the agriculture, energy and metals markets. The Position Limit Rules would, among other things: identify which contracts are subject to speculative position limits; set thresholds that restrict the size of speculative positions that a person may hold in the spot month, other individual months, and all months combined; create an exemption for positions that constitute bona fide hedging transactions; impose responsibilities on designated contract markets (“DCMs”) and swap execution facilities (“SEFs”) to establish position limits or, in some cases, position accountability rules; and apply to both futures and swaps across four relevant venues: OTC, DCMs, SEFs as well as certain non-U.S. located platforms. The CFTC’s first attempt at finalizing the Position Limit Rules, in 2011, was successfully challenged by market participants in 2012 and, since then, the CFTC has re-proposed them and solicited comments from market participants multiple times. At this time, it is unclear how the Position Limit Rules may affect the Trust Series, but the effect may be substantial and adverse. By way of example, the Position Limit Rules may negatively impact the ability of a Trust Series to meet its investment objectives through limits that may inhibit USCF’s ability to sell additional Creation Baskets of a Trust Series.

 

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Until such time as the Position Limit Rules are adopted, the regulatory architecture in effect prior to the adoption of the Position Limit Rules will govern transactions in commodities and related. Under that system, the CFTC enforces federal limits on speculation in nine agricultural products (e.g., corn, wheat and soy), while futures exchanges establish and enforce position limits and accountability levels for other agricultural products and certain energy products (e.g., oil and natural gas). As a result, a Trust Series may be limited with respect to the size of its investments in any commodities subject to these limits.

 

Under existing and recently adopted CFTC regulations, for the purpose of position limits, a market participant is generally required, subject to certain narrow exceptions, to aggregate all positions for which the market participant controls the trading decisions with all positions for which the participant has a 10 percent or greater ownership interest in an account or position, as well as the positions of two or more persons acting pursuant to an express or implied agreement or understanding with that participant (the “Aggregation Rules”). The Aggregation Rules will also apply with respect to the Position Limit Rules if and when such Position Limit Rules are adopted.

 

“Swap” Transactions

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) imposes regulatory requirements on certain “swap” transactions that a Trust Series is authorized to engage in that may ultimately impact the ability of a Trust Series to meet its investment objective. The term “swap” is broadly defined to include various types of OTC derivatives, including swaps and options.

 

CFTC regulations require that certain transactions ultimately falling within the definition of “swap” be executed on organized exchanges or “swap execution facilities” and cleared through regulated clearing organizations (“CCPs”). “Clearing” refers to the process by which a trade that is bilaterally executed by two parties is submitted to a CCP, via a clearing member (i.e., an FCM), and replaced by two mirror swaps, with the CCP becoming the counterparty to both of the initial parties to the swap. CCPs have several layers of protection against default including margin, member capital contributions and FCM guarantees of their customers’ transactions with the CCP. FCMs also pre-qualify the counterparties to all swaps that are sent to the CCP from a credit perspective, setting limits for each counterparty and collecting initial and variation margin daily from each counterparty for changes in the value of cleared swaps. The margin collected from both parties to the swap protects against credit risk in the event a counterparty defaults. The initial and variation margin requirements are set by and held for the benefit of the CCP. Additional initial margin may be required and held by the FCM.

 

Current rules and regulations require enhanced customer protections, risk management programs, internal monitoring and controls, capital and liquidity standards, customer disclosures and auditing and examination programs for FCMs. The rules are intended to afford greater assurances to market participants that customer segregated funds and secured amounts are protected, customers are provided with appropriate notice of the risks of futures trading and of the FCMs with which they may choose to do business, FCMs are monitoring and managing risks in a robust manner, the capital and liquidity of FCMs are strengthened to safeguard the continued operations and the auditing and examination programs of the CFTC and the self-regulatory organizations are monitoring the activities of FCMs in a thorough manner.

 

Certain index-based credit default swaps and interest rate swaps are subject to mandatory clearing. If a Trust Series enters into index-based credit default swaps or interest rate swaps that are subject to mandatory clearing, the Trust Series will be required to centrally clear those swaps.

 

To the extent that a swap is required to be cleared, it must also be executed on a SEF or DCM if it is designated as “made available to trade” by a SEF or DCM. “Made available to trade” refers to the regulatory process by which the SEF or DCM execution requirement is implemented by the CFTC. To date, only certain of the index-based credit default swaps and interest rate swaps that are required to be cleared are made available to trade on a SEF. If a Trust Series enters into index-based credit default swaps or interest rate swaps that are subject to mandatory clearing, such Trust Series will be required to execute those swaps on a SEF if they are designated as made available to trade. In order to execute swaps on a SEF, a Trust Series will have to be a member of a SEF or it may access the SEF through an intermediary. Members of a SEF are subject to additional requirements under CFTC regulations and are subject to the rules and jurisdiction of the relevant SEF.

 

Swaps that are not required to be cleared and executed on a SEF but that are executed bilaterally are also subject to various requirements pursuant to CFTC regulations, including, among others, reporting and recordkeeping requirements and, depending on the status of the counterparties, trading documentation requirements and dispute resolution requirements. In addition, U.S. regulators have adopted rules to impose initial and variation margin requirements that will apply to swap dealers and major swap participants and their counterparties. If a Trust Series engages in non-cleared swap transactions it will be subject to some or all of the requirements of the margin rules, which include a requirement that swap dealers and major swap participants collect variation margin daily, beginning in March 2017, and potentially initial margin, beginning in September 2020.

 

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Derivatives Regulations in non-U.S. Jurisdictions

 

In addition to U.S. laws and regulations, the Trust Series may be subject to non-U.S. derivatives laws and regulations if it engages in futures and/or swaps transactions with non-U.S. persons. For example, the Trust Series may be impacted by European laws and regulations to the extent that it engages in futures transactions on European exchanges or derivatives transactions with European entities. Other jurisdictions impose requirements applicable to futures and derivatives that are similar to those imposed by the U.S., including position limits, margin, clearing and trade execution requirements. 

 

Money Market Reform

 

The SEC adopted Rule 2a-7 under the Investment Company Act of 1940, which became effective in 2016, to reform money market funds (“MMFs”). While the new rule applies only to MMFs, it may indirectly affect institutional investors such as the Trust Series. A portion of the Trust Series’ assets that are not used for margin or collateral in the Futures Contracts currently are invested in government MMFs. The Trust Series does not hold any non-government MMFs and, particularly in light of recent changes to the rule governing the operation of MMFs, does not anticipate investing in any non-government MMFs.  However, if the Trust Series invests in other types of MMFs besides government MMFs in the future, the Trust Series could be negatively impacted by investing in an MMF that does not maintain a stable $1.00 net asset value or that has the potential to impose redemption fees and gates (temporary suspension of redemptions).

 

Price Movements

 

Crude oil futures prices were volatile during the period July 20, 2017 to September 30, 2017, the Funds first period of operation. The price of the Benchmark Futures Contract started the period at $47.32 per barrel. The high of the period was on September 25, 2017 when the price reached $52.22 per barrel. The low of the period was on July 21, 2017 when the price dropped to $45.77 per barrel. The period ended with the Benchmark Futures Contract at $51.67 per barrel, up approximately 9.19% over the period. USOU’s per share NAV began the period at $25.00 and ended the period at $30.02 on September 30, 2017, an increase of approximately 20.08% over the period. USOU’s per share NAV reached its high for the period on September 25, 2017 at $31.01 and reached its low for the period on August 30, 2017 at $22.12. USOD’s per share NAV began the period at $25.00 and ended the period at $18.49 on September 30, 2017, a decrease of approximately (26.04)% over the period. USOD’s per share NAV reached its high for the period on July 21, 2017 at $27.52 and reached its low for the period on September 25, 2017 at $17.93. The Benchmark Oil Futures Contract prices listed above began with the February 2017 contracts and ended with the November 2017 contracts. The increase of approximately 9.19% on the Benchmark Oil Futures Contract listed above is a hypothetical return only and could not actually be achieved by an investor holding Oil Futures Contracts. An investment in Oil Futures Contracts would need to be rolled forward during the time period described in order to simulate such a result. Furthermore, the change in the nominal price of these differing crude Oil Futures Contracts, measured from the start of the period to the end of the period, does not represent the actual benchmark results that USOU and USOD seeks to track, which are more fully described below in the section titled “Tracking Each Trust Series’ Benchmark.

 

During the period ended September 30, 2017, the crude oil futures market was in a state of contango, meaning that the price of the near month crude Oil Futures Contract was lower than the price of the next month crude Oil Futures Contract, and contracts further away from expiration. (On days when the market is in backwardation, the price of the near month crude Oil Futures Contract is typically higher than the price of the next month crude Futures Contract or contracts further away from expiration.) For a discussion of the impact of backwardation and contango on total returns, see “Term Structure of Crude Oil Prices and the Impact on Total Returns” below.

 

Valuation of Oil Futures Contracts and the Computation of the Per Share NAV

 

Each Trust Series’ NAV is calculated once each NYSE Arca trading day. The per share NAV for a particular trading day is released after 4:00 p.m. New York time. Trading during the core trading session on the NYSE Arca typically closes at 4:00 p.m. New York time. The Trust Series’ Administrator uses the NYMEX closing price (determined at the earlier of the close of the NYMEX or 2:30 p.m. New York time) for the contracts held on the NYMEX, but calculates or determines the value of all other investments of such Trust Series, including ICE Futures contracts or other futures contracts, as of the earlier of the close of the NYSE Arca or 4:00 p.m. New York time.

 

Results of Operations

 

Results of Operations. On July 20, 2017, each Trust Series listed its shares on the NYSE Arca under the ticker symbols “USOU” and “USOD.” On that day, USOU and USOD established their initial offering price at $25.00 per share and $25.00 per share, respectively, and each issued 100,000 shares to the initial Authorized Participant in exchange for $2,500,000 and $2,500,000, respectively, in cash.

 

Since its initial and ongoing offering of 30,000,000 shares, USOU has not registered any subsequent offerings of its shares. As of September 30, 2017, USOU had issued 100,040 shares, 100,040 of which were outstanding. As of September 30, 2017, there were 29,900,000 remaining shares registered but not yet issued. More shares may have been issued by USOU than are outstanding due to the redemption of shares.

 

Since its initial and ongoing offering of 30,000,000 shares, USOD has not registered any subsequent offerings of its shares. As of September 30, 2017, USOD had issued 100,000 shares, 100,000 of which were outstanding. As of September 30, 2017, there were 29,900,000 remaining shares registered but not yet issued. More shares may have been issued by USOD than are outstanding due to the redemption of shares.

 

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Unlike funds that are registered under the Investment Company Act, shares that have been redeemed by the Trust Series cannot be resold. As a result, each Trust Series contemplates that additional offerings of its shares will be registered with the SEC in the future in anticipation of additional issuances and redemptions.

 

As of September 30, 2017, USOU and USOD had the following Authorized Participants: RBC Capital Markets LLC and Merrill Lynch Professional Clearing Corp.

 

For the Period from Commencement of Operations on July 20, 2017 to September 30, 2017

 

USOU

 

   For the period from
Commencement of
Operations on
July 20, 2017 to
September 30, 2017*
 
Average daily total net assets  $2,647,598 
Dividend and interest income earned on Treasuries, cash and/or cash equivalents  $4,708 
Annualized yield based on average daily total net assets   0.90%
Management fee  $7,051 
Total commissions accrued to brokers  $3,364 
Total commissions as annualized percentage of average total net assets   0.64%
Commissions accrued as a result of rebalancing  $2,866 
Percentage of commissions accrued as a result of rebalancing   85.20%
Commissions accrued as a result of creation and redemption activity  $498 
Percentage of commissions accrued as a result of creation and redemption activity   14.80%

 

*Inception date July 20, 2017. 

 

Portfolio Expenses. USOU’s expenses consist of the management fee payable to USCF, (b) brokerage fees, futures commission merchant fees and other fees and commissions incurred in connection with the trading activities of USOU, (c) any costs and expenses related to registration of additional shares of USOU, and (d) any other expenses allocated to USOU by USCF in consultation with REX. The management fee that USOU pays to USCF is calculated as a percentage of the total net assets of USOU. The fee is accrued daily and paid monthly.

 

USOD

 

   For the period from
Commencement of
Operations on
July 20, 2017 to
September 30, 2017*
 
Average daily total net assets  $2,234,177 
Dividend and interest income earned on Treasuries, cash and/or cash equivalents  $3,982 
Annualized yield based on average daily total net assets   0.90%
Management fee  $7,272 
Total commissions accrued to brokers  $3,409 
Total commissions as annualized percentage of average total net assets   0.77%
Commissions accrued as a result of rebalancing  $2,902 
Percentage of commissions accrued as a result of rebalancing   85.13%
Commissions accrued as a result of creation and redemption activity  $507 
Percentage of commissions accrued as a result of creation and redemption activity   14.87%

 

*Inception date July 20, 2017.

 

Portfolio Expenses. USOD’s expenses consist of the management fee payable to USCF, brokerage fees, futures commission merchant fees and other fees and commissions incurred in connection with the trading activities of USOD, any costs and expenses related to registration of additional shares of USOD, and any other expenses allocated to USOD by USCF in consultation with REX. The management fee that USOD pays to USCF is calculated as a percentage of the total net assets of USOD. The fee is accrued daily and paid monthly.

 

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As of September 30, 2017, RMLP and MLPD were in registration and had not commenced investment activities nor issued any shares.

  

Tracking Each Trust Series’ Benchmark

 

Each Trust Series seeks, on a daily basis, to provide investment results that correspond (before fees and expenses) to (1) in the case of USOU, three times (3x) the performance of the Benchmark Oil Futures Contract and (2) in the case of USOD, three times the inverse (-3x) of the performance of the Benchmark Oil Futures Contract. Each Trust Series does not seek to achieve its stated objective over a period greater than a single day. Because each Trust Series seeks investment results for a single day only (as measured from the time the Trust Series calculates its NAV to the time of the Trust Series’ next NAV calculation) and on a leveraged basis for USOU and an inverse leveraged basis for USOD, each of Trust Series are different from most exchange-traded funds.

 

As of the NAV calculation time each trading day, each Trust Series will seek to position its portfolio so that its exposure to the Benchmark Oil Futures Contract is consistent with its investment objective. The impact of a Benchmark Oil Futures Contract’s movements during the day will affect whether the portfolio of the Trust Series needs to be rebalanced. For example, USOU’s long exposure will need to be increased on days when the Benchmark Oil Futures Contract rises and decreased on days the Benchmark Oil Futures Contract falls whereas USOD’s short exposure will need to be increased on days when the Benchmark Oil Futures Contract falls and decreased on days the Benchmark Oil Futures Contract rises. Daily rebalancing and the compounding of each day’s return over time means that the return of the Trust Series for a period longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from three times (3x) the return of the Benchmark Oil Futures Contract for the period for USOU and from three times the inverse (-3x) of the return of the Benchmark Oil Futures Contract for the period for USOD. Each Trust Series could lose money over time regardless of the performance of the Benchmark Oil Futures Contract, including as a result of daily rebalancing, the Benchmark Oil Futures Contract’s volatility, and compounding.

 

For each Trust Series to maintain a consistent 300% return versus the Benchmark Oil Futures Contract for USOU or versus the short position in the Benchmark Oil Futures Contract for USOD, the holdings of the Trust Series must be rebalanced on a daily basis by buying additional Oil Interests or selling Oil Interests that it holds. Such rebalancing will occur generally before or at the close of trading of the shares on the Exchange, at or as near as possible to that day’s settlement price, and will be disclosed on the Fund’s website as pending trades before the opening of trading on the Exchange the next business day and will be taken into account in the Fund’s intra-day Indicative Fund Value and reflected in the Fund’s end of day NAV on that business day.

 

The Trust Series use leverage and should produce returns for a single day that are more volatile than that of the Benchmark Oil Futures Contract. During periods of market volatility, the volatility of the Benchmark Oil Futures Contract may affect each Trust Series’ return as much as or more than the return of the Benchmark Oil Futures Contract.

 

The returns of each Trust Series over periods longer than a single day will likely differ in amount and possibly even direction from three times the Benchmark Oil Futures Contract return for the period as a result of compounding of daily returns. Daily compounding of the investment returns of the Trust Series can dramatically and adversely affect its longer-term performance during periods of high volatility. In general, during periods of higher volatility for the Benchmark Oil Futures Contract, compounding will cause the results for the Trust Series for periods longer than a single day to be less than, for USOU, three times (3x) the return of the Benchmark Oil Futures Contract and, for USOD, three times the inverse (-3x) of the return of the Benchmark Oil Futures Contract. This effect becomes more pronounced as volatility increases. Conversely, in periods of lower volatility for the Benchmark Oil Futures Contract (particularly when combined with higher returns for the Benchmark Oil Futures Contract), the returns over longer periods can be higher than three times (3x) and three times the inverse (-3x) of the return of the Benchmark Oil Futures Contract for USOU and USOD, respectively. Actual results for a particular period, before fees and expenses, are also dependent on the magnitude of the return of the Benchmark Oil Futures Contract in addition to the volatility of the Benchmark Oil Futures Contract.

 

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Impact of Contango and Backwardation on Total Returns

 

Several factors determine the total return from investing in futures contracts. One factor arises from “rolling” futures contracts that will expire at the end of the current month (the “near” or “front” month contract) forward each month prior to expiration. For a strategy that entails holding the near month contract, the price relationship between that futures contract and the next month futures contract will impact returns. For example, if the price of the near month futures contract is higher than the next futures month contract (a situation referred to as “backwardation”), then absent any other change, the price of a next month futures contract tends to rise in value as it becomes the near month futures contract and approaches expiration. Conversely, if the price of a near month futures contract is lower than the next month futures contract (a situation referred to as “contango”), then absent any other change, the price of a next month futures contract tends to decline in value as it becomes the near month futures contract and approaches expiration.

 

Contango and backwardation are natural market forces that can impact the total return on an investment in the shares of each Trust Series relative to a hypothetical direct investment in crude oil. In the future, it is likely that the relationship between the market price of the shares of each Trust Series and changes in the spot prices of light, sweet crude oil will continue to be impacted by contango and backwardation. It is important to note that this comparison ignores the potential costs associated with physically owning and storing crude oil, which could be substantial.

 

As an example, assume that the price of crude oil for immediate delivery (the “spot” price), was $50 per barrel, and the value of a position in the near month futures contract was also $50. Over time, the price of the barrel of crude oil will fluctuate based on a number of market factors, including demand for oil relative to its supply. The value of the near month contract will likewise fluctuate in reaction to a number of market factors. If investors seek to maintain their position in a near month contract and not take delivery of the oil, every month they must sell their current near month contract as it approaches expiration and invest in the next month contract.

 

If the futures market is in backwardation, e.g., when the price of the near month futures contract is higher than the price of the next month futures contract, the investor would buy a next month futures contract for a lower price than the current near month futures contract. Assuming the price of the next month futures contract was $49 per barrel, or 2% cheaper than the $50 near month futures contract, then, hypothetically, and assuming no other changes (e.g., to either prevailing crude oil prices or the price relationship between the spot price, the near month contract and the next month contract, and, ignoring the impact of commission costs and the income earned on cash and/or cash equivalents), the value of the $49 next month futures contract would rise to $50 as it approaches expiration. In this example, the value of an investment in the next month futures contract would tend to outperform the spot price of crude oil. As a result, it would be possible for the new near month futures contract to rise 12% while the spot price of crude oil may have risen a lower amount, e.g., only 10%. Similarly, the spot price of crude oil could have fallen 10% while the value of an investment in the futures contract might have fallen another amount, e.g., only 8%. Over time, if backwardation remained constant, this difference between the spot price and the futures contract price would continue to increase.

 

If the futures market is in contango, an investor would be buying a next month futures contract for a higher price than the current near month futures contract. Again, assuming the near month futures contract is $50 per barrel, the price of the next month futures contract might be $51 per barrel, or 2% more expensive than the front month futures contract. Hypothetically, and assuming no other changes, the value of the $51 next month futures contract would fall to $50 as it approaches expiration. In this example, the value of an investment in the second month would tend to underperform the spot price of crude oil. As a result, it would be possible for the new near month futures contract to rise only 10% while the spot price of crude oil may have risen a higher amount, e.g., 12%. Similarly, the spot price of crude oil could have fallen 10% while the value of an investment in the second month futures contract might have fallen another amount, e.g., 12%. Over time, if contango remained constant, this difference between the spot price and the futures contract price would continue to increase.

 

Historically, the crude oil futures markets have experienced periods of contango and backwardation, with backwardation being in place roughly as often as contango since oil futures trading, started in 1982. Following the global financial crisis in the fourth quarter of 2008, the crude oil market moved into contango and remained in contango for a period of several years. During parts of 2009, the level of contango was unusually steep as a combination of slack U.S. and global demand for crude oil and issues involving the physical transportation and storage of crude oil at Cushing, Oklahoma, the primary pricing point for oil traded in the U.S., led to unusually high inventories of crude oil. A combination of improved transportation and storage capacity, along with growing demand for crude oil globally, moderated the inventory build-up and lead to reduced levels of contango by 2011. However, at the end of November, 2014, global crude oil inventories grew rapidly after the Organization of Petroleum Exporting Countries (“OPEC”) decided to defend its market share against U.S. shale-oil producers, resulting in another period during which the crude oil market remained primarily in contango, sometimes steep contango. This period of contango continued through December 31, 2016. In addition, the crude oil markets are expected to remain in contango until U.S. and global oil inventories decline significantly. If OPEC’s recent cuts in oil production have their intended effect on the crude oil market then such a decline may occur in 2017.

 

Periods of contango or backwardation do not materially impact the investment objective of having the daily percentage changes in its per share NAV track, on a leveraged basis for USOU and an inverse leveraged basis for USOD, the daily percentage changes in the price of the Benchmark Oil Futures Contract since the impact of backwardation and contango tend to proportionally impact the daily percentage changes in price of both the Fund’s shares and the Benchmark Oil Futures Contract. It is impossible to predict with any degree of certainty whether backwardation or contango will occur in the future. It is likely that both conditions will occur during different periods.

 

Crude Oil Market

 

Crude Oil Market. During the nine months ended September 30, 2017, crude oil prices have traded in a range between $43 to $53 as U.S. production growth threatened to overwhelm the impact of OPEC supply cuts. Prices rose during the third quarter as U.S. and global inventories declined. U.S. storage fell faster than the normal seasonal pace and dropped below prior-year inventory levels for the first time since 2014. U.S. production ramped up steadily throughout the year, returning to record levels last seen during summer 2015. However, production and rig count growth both appeared to level off towards the end of the quarter and may represent caution on the part of producers. Temporary disruptions also occurred as a result of hurricane Harvey. Looking ahead, expected demand growth appears strong while OPEC has stated it is prepared to take any action necessary to perpetuate the current trend towards a balanced market. Should global demand growth forecasts fail to be realized, or if OPEC is unable to counter growing U.S. production, there is a meaningful possibility that crude prices could fall again. On the other hand, increasing global tensions and the possibility of any number of conflicts escalating could lead to price shocks to the upside.  

 

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Crude Oil Price Movements in Comparison to Other Energy Commodities and Investment Categories. USCF believes that investors frequently measure the degree to which prices or total returns of one investment or asset class move up or down in value in concert with another investment or asset class. Statistically, such a measure is usually done by measuring the correlation of the price movements of the two different investments or asset classes over some period of time. The correlation is scaled between 1 and -1, where 1 indicates that the two investment options move up or down in price or value together, known as “positive correlation,” and -1 indicates that they move in completely opposite directions, known as “negative correlation.” A correlation of 0 would mean that the movements of the two are neither positively nor negatively correlated, known as “non-correlation.” That is, the investment options sometimes move up and down together and other times move in opposite directions.

 

For the ten-year time period between September 30, 2007 and September 30, 2017, the table below compares the monthly movements of crude oil prices versus the monthly movements of the prices of several other energy commodities, such as natural gas, diesel-heating oil, and unleaded gasoline, as well as several major non-commodity investment asset classes, such as large cap U.S. equities, U.S. government bonds and global equities. It can be seen that over this particular time period, the movement of crude oil on a monthly basis exhibited strong correlation with unleaded gasoline and diesel-heating oil, moderate correlation with the movements of large cap U.S. equities and global equities, limited correlation with natural gas, and limited negative correlation with U.S. government bonds.

 

       U.S.                     
       Gov’t.                     
       Bonds                     
   Large   (EFFAS   Global                 
   Cap U.S.   U.S.   Equities                 
   Equities   Gov’t.   (FTSE       Diesel-         
Correlation Matrix  (S&P   Bond   World   Unleaded   Heating   Natural   Crude 
September 30, 2007 – September 30, 2017*  500)   Index)   Index)   Gasoline   Oil   Gas   Oil 
Large Cap U.S. Equities (S&P 500)   1.000    (0.287)   0.965    0.446    0.436    0.083    0.464 
U.S. Gov’t. Bonds (EFFAS U.S. Gov’t. Bond Index)        1.000    (0.257)   (0.349)   (0.331)   (0.041)   (0.390)
Global Equities (FTSE World Index)             1.000    0.484    0.476    0.121    0.514 
Unleaded Gasoline                  1.000    0.729    0.154    0.700 
Diesel-Heating Oil                       1.000    0.258    0.805 
Natural Gas                            1.000    0.263 
Crude Oil                                 1.000 

 

Source: Bloomberg, NYMEX

 

*PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS

 

The table below covers a more recent, but much shorter, range of dates than the above table. Over the one year period ended September 30, 2017, movements of crude oil displayed strong correlation with large cap U.S. equites and diesel-heating oil, moderate correlation with movements of global equities, and limited negative to little correlation with movements with U.S. Government bonds, unleaded gasoline and natural gas.

 

       U.S.                     
       Gov’t.                     
       Bonds                     
   Large   (EFFAS   Global                 
   Cap U.S.   U.S.   Equities                 
   Equities   Gov’t.   (FTSE       Diesel-         
Correlation Matrix  (S&P   Bond   World   Unleaded   Heating   Natural   Crude 
12 Months ended September 30, 2017*  500)   Index)   Index)   Gasoline   Oil   Gas   Oil 
Large Cap U.S. Equities (S&P 500)   1.000    (0.229)   0.768    (0.150)   0.326    (0.331)   0.620 
U.S. Gov’t. Bonds (EFFAS U.S. Gov’t. Bond Index)        1.000    0.288    0.319    (0.103)   (0.271)   (0.393)
Global Equities (FTSE World Index)             1.000    (0.124)   0.223    (0.516)   0.515 
Unleaded Gasoline                  1.000    0.497    0.408    (0.212)
Diesel-Heating Oil                       1.000    0.185    0.676 
Natural Gas                            1.000    (0.119)
Crude Oil                                 1.000 

 

Source: Bloomberg, NYMEX

 

*PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS

 

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Investors are cautioned that the historical price relationships between crude oil and various other energy commodities, as well as other investment asset classes, as measured by correlation may not be reliable predictors of future price movements and correlation results. The results pictured above would have been different if a different range of dates had been selected. USCF believes that crude oil has historically not demonstrated a strong correlation with equities or bonds over long periods of time. However, USCF also believes that in the future it is possible that crude oil could have long term correlation results that indicate prices of crude oil more closely track the movements of equities or bonds. In addition, USCF believes that, when measured over time periods shorter than ten years, there will always be some periods where the correlation of crude oil to equities and bonds will be either more strongly positively correlated or more strongly negatively correlated than the long term historical results suggest.

 

As the Trust Series approach or reach position limits with respect to the Benchmark Oil Futures Contract and other Oil Futures Contracts or in view of market conditions, the Trust Series may begin investing in Other Oil-Related Investments. If certain other fuel-based commodity futures contracts do not closely correlate with the crude oil futures contract, then their use could lead to greater tracking error for the Trust Series.

 

Critical Accounting Policies

 

Preparation of the condensed financial statements and related disclosures in compliance with accounting principles generally accepted in the United States of America requires the application of appropriate accounting rules and guidance, as well as the use of estimates. The Trust’s application of these policies involves judgments and actual results may differ from the estimates used.

 

USCF has evaluated the nature and types of estimates that it makes in preparing the Trust Series’ condensed financial statements and related disclosures and has determined that the valuation of its investments, which are not traded on a United States or internationally recognized futures exchange (such as forward contracts and OTC swaps) involves a critical accounting policy. The values which are used by the Trust Series for its Oil Futures Contracts are provided by its commodity broker who uses market prices when available, while OTC swaps are valued based on the present value of estimated future cash flows that would be received from or paid to a third party in settlement of these derivative contracts prior to their delivery date and valued on a daily basis. In addition, the Trust Series estimates interest and dividend income on a daily basis using prevailing rates earned on its cash and cash equivalents. These estimates are adjusted to the actual amount received on a monthly basis and the difference, if any, is not considered material

 

Liquidity and Capital Resources

 

None of the Trust Series has made, and does not anticipate making, use of borrowings or other lines of credit to meet its obligations. Each Trust Series has met, and it is anticipated that each Trust Series will continue to meet, its liquidity needs in the normal course of business from the proceeds of the sale of its investments, or from the Treasuries, cash and/or cash equivalents that it intends to hold at all times. Each Trust Series’ liquidity needs include: redeeming shares, providing margin deposits for its existing Futures Contracts or the purchase of additional Futures Contracts and posting collateral for its OTC swaps and payment of its expenses, summarized below under “Contractual Obligations.”

 

Each Trust Series currently expects to generate cash primarily from: (i) the sale of baskets consisting of 50,000 shares (“Creation Baskets”) and (ii) income earned on Treasuries, cash and/or cash equivalents. Each Trust Series has allocated substantially all of its net assets to trading in Oil Interests. Each Trust Series invests in Oil Interests to the fullest extent possible without being leveraged or unable to satisfy its current or potential margin or collateral obligations with respect to its investments in Oil Futures Contracts and Other Oil-Related Investments. A significant portion of each Trust Series’ NAV is held in cash and cash equivalents that are used as margin and as collateral for its trading in Oil Interests. The balance of the assets is held in each Trust Series’ account at the Custodian and in Treasuries at the FCM. Income received from any investments in money market funds and Treasuries by a Trust Series will be paid to such Trust Series. During the period from commencement of operations on July 20, 2017 to September 30, 2017, each Trust Series’ expenses exceeded the income it earned and the cash earned from the sale of Creation Baskets and the redemption of Redemption Baskets. During the period from commencement of operations on July 20, 2017 to September 30, 2017, each Trust Series used other assets to pay expenses, which could cause a decrease in a Trust Series’ NAV over time. To the extent expenses exceed income, a Trust Series’ NAV will be negatively impacted.

 

 44 

 

 

Each Trust Series’ investments in Oil Interests may be subject to periods of illiquidity because of market conditions, regulatory considerations and other reasons. For example, most commodity exchanges limit the fluctuations in futures contracts prices during a single day by regulations referred to as “daily limits.” During a single day, no trades may be executed at prices beyond the daily limit. Once the price of a futures contract has increased or decreased by an amount equal to the daily limit, positions in the contracts can neither be taken nor liquidated unless the traders are willing to effect trades at or within the specified daily limit. Such market conditions could prevent a Trust Series from promptly liquidating its positions in Oil Futures Contracts. During the period from commencement of operations on July 20, 2017 to September 30, 2017, none of the Trust Series purchased or liquidated any of its positions while daily limits were in effect; however, no Trust Series can predict whether such an event may occur in the future.

 

Prior to the initial offering of each Trust Series, all payments with respect to each Trust Series’ expenses were paid by USCF. None of the Trust Series has an obligation or intention to refund such payments made by USCF. Since the initial offering of USOU and USOD, each of USOU and USOD is responsible for paying “Fund Expenses”, which means (a) the Management Fee payable to USCF, (b) brokerage fees, futures commission merchant fees and other fees and commissions incurred in connection with the trading activities of each Trust Series, (c) any costs and expenses related to registration of additional shares of each Trust Series, and (d) all other expenses allocated to each Trust Series by USCF in consultation with REX.

 

As of September 30, 2017, RMLP and MLPD were in registration and had not commenced operations nor made any investments. 

 

Market Risk

 

Trading in Oil Futures Contracts and Other Oil-Related Investments, such as forwards, involves each Trust Series entering into contractual commitments to purchase or sell oil at a specified date in the future. The aggregate market value of the contracts will significantly exceed each Trust Series’ future cash requirements since each Trust Series intends to close out its open positions prior to settlement. As a result, each Trust Series is generally only subject to the risk of loss arising from the change in value of the contracts. The Trust Series considers the “fair value” of its derivative instruments to be the unrealized gain or loss on the contracts. The market risk associated with each Trust Series’ commitments to purchase oil is limited to the aggregate market value of the contracts held. However, should the Trust Series enter into a contractual commitment to sell oil, it would be required to make delivery of the oil at the contract price, repurchase the contract at prevailing prices or settle in cash. Since there are no limits on the future price of oil, the market risk to the Trust Series could be unlimited.

 

Each Trust Series’ exposure to market risk depends on a number of factors, including the markets for oil, the volatility of interest rates and foreign exchange rates, the liquidity of the Oil Futures Contracts and Other Oil-Related Investments markets and the relationships among the contracts held by each such Trust Series. Drastic market occurrences could ultimately lead to the loss of all or substantially all of an investor’s capital.

 

As of September 30, 2017, RMPL and MLPD were in registration and had not commenced operations or made any investments.

 

Credit Risk

 

When each Trust Series enters into Oil Futures Contracts and Other Oil-Related Investments, it is exposed to the credit risk that the counterparty will not be able to meet its obligations. The counterparty for the Oil Futures Contracts traded on the NYMEX and on most other futures exchanges is the clearinghouse associated with the particular exchange. In general, in addition to margin required to be posted by the clearinghouse in connection with cleared trades, clearinghouses are backed by their members who may be required to share in the financial burden resulting from the nonperformance of one of their members and, therefore, this additional member support should significantly reduce credit risk. Neither Trust Series is currently a member of any clearinghouse. Some foreign exchanges are not backed by their clearinghouse members but may be backed by a consortium of banks or other financial institutions. There can be no assurance that any counterparty, clearinghouse, or their members or their financial backers will satisfy their obligations to the Trust Series in such circumstances.

 

USCF attempts to manage the credit risk of the Trust Series by following various trading limitations and policies. In particular, each Trust Series generally posts margin and/or holds liquid assets that are approximately equal to the market value of its obligations to counterparties under the Oil Futures Contracts and Other Oil-Related Investments it holds. USCF has implemented procedures that include, but are not limited to, executing and clearing trades only with creditworthy parties and/or requiring the posting of collateral or margin by such parties for the benefit of each such Trust Series to limit its credit exposure. An FCM, when acting on behalf of the Trust Series in accepting orders to purchase or sell Oil Futures Contracts on United States exchanges, is required by CFTC regulations to separately account for and segregate as belonging to the Trust Series, all assets of the Trust Series relating to domestic Oil Futures Contracts trading. These FCMs are not allowed to commingle the Trust Series’ assets with their other assets. In addition, the CFTC requires commodity brokers to hold in a secure account the Trust Series’ assets related to foreign Oil Futures Contracts trading.

 

In the future, each Trust Series may purchase OTC swaps, see “Item 3. Quantitative and Qualitative Disclosures About Market Risk” in this quarterly report on Form 10-Q for a discussion of OTC swaps.

 

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As of September 30, 2017, USOU and USOD held cash deposits and investments in Treasuries and money market funds in the amount of $2,579,746 and $2,156,296, respectively, with the custodian and FCM. Some or all of these amounts held by a custodian or an FCM, as applicable, may be subject to loss should the Trust Series’ custodian or FCM, as applicable, cease operations.

 

As of September 30, 2017, RMLP and MLPD were in registration and had not commenced operations or made any investments.

 

Off Balance Sheet Financing

 

As of September 30, 2017, neither the Trust nor any Trust Series had any loan guarantee, credit support or other off-balance sheet arrangement of any kind other than agreements entered into in the normal course of business, which may include indemnification provisions relating to certain risks that service providers undertake in performing services which are in the best interests of any Trust Series. While each Trust Series’ exposure under these indemnification provisions cannot be estimated, they are not expected to have a material impact on any Trust Series’ financial position. 

 

As of September 30, 2017, RMLP and MLPD were in registration and had not commenced operations nor investment activities. Therefore, RMLP and MLPD did not have any loan guarantee, credit support or other off-balance sheet arrangements as of September 30, 2017.

 

European Sovereign Debt

 

USOU and USOD had no direct exposure to European sovereign debt as of September 30, 2017 and have no direct exposure to European sovereign debt as of the filing of this quarterly report on Form 10-Q.

 

As of September 30, 2017, RMLP and MLPD were in registration and had not commenced operations nor investment activities. Therefore, RMLP and MLPD did not have any direct exposure to European sovereign debt as of September 30, 2017 nor did they have direct exposure to European sovereign debt as of the filing of this quarterly report on Form 10-Q.

 

Redemption Basket Obligation

 

In order to meet its investment objective and pay its contractual obligations described below, each Trust Series requires liquidity to redeem shares, which redemptions must be in blocks of 50,000 shares called “Redemption Baskets.” Each Trust Series has to date satisfied this obligation by paying from the cash or cash equivalents it holds or through the sale of its Treasuries in an amount proportionate to the number of shares being redeemed. Authorized Participants paid USOU and USOD a transaction fee equal to 0.04% of total NAV of the Creation Baskets for each order placed to create one or more Creation Baskets or to redeem one or more Redemption Baskets. The transaction fee may be waived, reduced, increased or otherwise changed by USCF.

 

As of September 30, 2017, RMLP and MLPD were in registration and had not commenced operations nor issued any shares.  

 

Contractual Obligations

 

The Trust’s (and each series thereunder) primary contractual obligations are with USCF and certain other service providers. USCF, in return for its services, is entitled to a management fee calculated daily and paid monthly as a fixed percentage of each of USOU’s and USOD’s NAV, currently equal to 1.35% and 1.65%, respectively for USOU and USOD per annum of average daily total net assets.

 

While USCF has agreed to pay registration fees to the SEC, FINRA, NYSE Arca or any other regulatory agency or exchange in connection with the initial offer and sale of the shares and the legal, printing, accounting and other expenses associated with such registration, each Trust Series is responsible for any registration fees and related expenses incurred in connection with any subsequent offer and sale of its shares after the initial offering of shares. 

 

Each Trust Series pays its own brokerage and other transaction costs. Each Trust Series pays fees to the FCM in connection with its transactions in Futures Contracts. For the period from commencement of operations on July 20, 2017 to September 30, 2017, FCM fees were approximately 0.64% of average daily total net assets for USOU and approximately 0.77% of average daily total net assets for USOD. In general, transaction costs on OTC Applicable Interests and on Treasuries and other short-term securities are embedded in the purchase or sale price of the instrument being purchased or sold, and may not readily be estimated.

 

The parties cannot anticipate the amount of payments that will be required under these arrangements for future periods, as each Trust Series’ NAVs and trading levels to meet its investment objective will not be known until a future date. These agreements are effective for a specific term agreed upon by the parties with an option to renew, or, in some cases, are in effect for the duration of a Trust Series’ existence. Either party may terminate these agreements earlier for certain reasons described in the agreements.

 

As of September 30, 2017, USOU’s portfolio consisted of 174 WTI Crude Oil Futures CL November 2017 Contracts traded on the NYMEX and USOD’s portfolio consisted of 108 WTI Crude Oil Futures CL November 2017 Contracts traded on the NYMEX. For a list of each of USOU and USOD’s current holdings, please see www.uscfinvestments.com. See “Portfolio Holdings” for a complete list of Futures Contracts held by each of USOU and USOD during the period from commencement of operations on July 20, 2017 to September 30, 2017.

 

As of September 30, 2017, RMLP and MLPD were in registration and had not commenced operations or investment activities.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Commodity Price Risk.

 

Each of USOU and USOD are exposed to commodity price risk. In particular, each of USOU and USOD is exposed to crude oil price risk through its holdings of Futures Contracts together with any other derivatives in which it may invest, which are discussed below. As a result, fluctuations in the value of the Oil Futures Contracts that each of USOU and USOD holds in its portfolio, as described in “Contractual Obligations” under “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are expected to directly affect the value of the shares of USOU and USOD, respectively.

 

As of September 30, 2017, RMLP and MLPD were in registration and had not commenced operations or investment activities. Therefore, RMLP and MLPD were not exposed to commodity price risk as of September 30, 2017.

 

OTC Contract Risk

 

Currently, OTC transactions are subject to changing regulation.

 

The Trust Series may purchase OTC Oil Interests such as forward contracts or swap or spot contracts. Unlike most exchange-traded futures contracts or exchange-traded options on such futures, each party to an OTC swap bears the credit risk that the other party may not be able to perform its obligations under its contract.

 

The Trust, on behalf of each Trust Series, may enter into certain transactions where an OTC component is exchanged for a corresponding futures contract (“Exchange for Related Position” or “EFRP” transactions). In the most common type of EFRP transaction entered into by the Trust, the OTC component is the purchase or sale of one or more baskets of a Trust Series’ shares. These EFRP transactions may expose a Trust Series to counterparty risk during the interim period between the execution of the OTC component and the exchange for a corresponding futures contract. Generally, the counterparty risk from the EFRP transaction will exist only on the day of execution.

 

Swap transactions, like other financial transactions, involve a variety of significant risks. The specific risks presented by a particular swap transaction necessarily depend upon the terms and circumstances of the transaction. In general, however, all swap transactions involve some combination of market risk, credit risk, counterparty credit risk, funding risk, liquidity risk and operational risk.

 

Highly customized swap transactions in particular may increase liquidity risk, which may result in a suspension of redemptions. Highly leveraged transactions may experience substantial gains or losses in value as a result of relatively small changes in the value or level of an underlying or related market factor.

 

In evaluating the risks and contractual obligations associated with a particular swap transaction, it is important to consider that a swap transaction may be modified or terminated only by mutual consent of the original parties and subject to agreement on individually negotiated terms. Therefore, it may not be possible for USCF to modify, terminate or offset a Trust Series’ obligations or its exposure to the risks associated with a transaction prior to its scheduled termination date.

 

To reduce the credit risk that arises in connection with such contracts, a Trust Series will generally enter into an agreement with each counterparty based on the Master Agreement published by the International Swaps and Derivatives Association (“ISDA”) that provides for the netting of its overall exposure to its counterparty, if the counterparty is unable to meet its obligations to the Trust Series due to the occurrence of a specified event, such as the insolvency of the counterparty.

 

USCF assesses or reviews, as appropriate, the creditworthiness of each potential or existing counterparty to an OTC swap. Furthermore, USCF on behalf of the Trust and the Funds only enters into OTC swaps with counterparties who are, or are affiliates of, (a) banks regulated by a United States federal bank regulator, (b) broker-dealers regulated by the SEC, (c) insurance companies domiciled in the United States, or (d) producers, users or traders of energy, whether or not regulated by the CFTC. Any entity acting as a counterparty shall be regulated in either the United States or the United Kingdom unless otherwise approved by the Board after consultation with its legal counsel. Existing counterparties are also reviewed periodically by USCF. USCF will also require that the counterparty be highly rated and/or provide collateral or other credit support. Even if collateral is used to reduce counterparty credit risk, sudden changes in the value of OTC transactions may leave a party open to financial risk due to a counterparty default since the collateral held may not cover a party’s exposure on the transaction in such situations.

 

In general, valuing OTC derivatives is less certain than valuing actively traded financial instruments such as exchange-traded futures contracts and securities or cleared swaps because the price and terms on which such OTC derivatives are entered into or can be terminated are individually negotiated, and those prices and terms may not reflect the best price or terms available from other sources. In addition, while market makers and dealers generally quote indicative prices or terms for entering into or terminating OTC swaps, they typically are not contractually obligated to do so, particularly if they are not a party to the transaction. As a result, it may be difficult to obtain an independent value for an outstanding OTC derivatives transaction.

 

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Each Trust Series anticipates that the use of Other Oil-Related Investments together with its investments in Oil Futures Contracts will produce price and total return results that closely track the investment goals of such Trust Series. However, there can be no assurance of this. OTC swaps may result in higher transaction-related expenses than the brokerage commissions paid in connection with the purchase of Oil Futures Contracts, which may impact a Trust Series’ ability to successfully track its Applicable Index/Benchmark Oil Futures Contract.

 

During the period from commencement of operations on July 20, 2017 to September 30, 2017, each Trust Series limited its OTC activities to EFRP transactions.

 

As of September 30, 2017, RMLP and MLPD were in registration and had not commenced operations or investment activities. Therefore, RMLP and MLPD were not exposed to OTC contract risk as of September 30, 2017.

 

Item 4. Controls and Procedures.

 

Disclosure Controls and Procedures

 

The Trust and each Trust Series maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Trust’s periodic reports filed or submitted under the Exchange Act, is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms.

 

The duly appointed officers of USCF, including its chief executive officer and chief financial officer, who perform functions equivalent to those of a principal executive officer and principal financial officer of the Trust if the Trust had any officers, have evaluated the effectiveness of the Trust’s and each Trust Series’ disclosure controls and procedures and have concluded that the disclosure controls and procedures of the Trust and each Trust Series have been effective as of the end of the period covered by this quarterly report on Form 10-Q.

 

Change in Internal Control Over Financial Reporting

 

There were no changes in the Trust’s or any Trust Series’ internal control over financial reporting during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Trust’s or any Trust Series’ internal control over financial reporting.

 

Part II. OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

There has been no material change in the information provided under the heading “Risk Factors Involved With An Investment In The Fund” in the final prospectuses of USOU and USOD filed with the Sec on July 19, 2017.

 

Item 1A. Risk Factors.

 

Not applicable.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

(a)On June 20, 2017, USCF made contributions of capital to the Trust of $1,000 and $1,000 as initial contributions of capital for each of USOU and USOD. On July 20, 2017, each of USOU and USOD issued 40 Sponsor Shares to USCF in exchange for the previously received capital contribution. The issuance of such shares of USOU and USOD was deemed to be exempt from registration under the Securities Act of 1933 in reliance on Section 4(a)(2) of the Securities Act as transactions by an issuer not involving a public offering.

 

(b)The Trust’s Registration Statement on Form S-1 (Registration No. 333-214825) with respect to its initial public offering of shares of the United States 3x Oil Fund, a series of the Registrant (“USOU”), and Registration Statement on Form S-1 (Registration No. 333-214881) with respect to its initial public offering of shares of the United States 3x Short Oil Fund, a series of the Registrant (“USOD,” and together with USOU, the “Trust Series”), were declared effective on July 19, 2017.  Each of the registration statements registered 30,000,000 shares of the applicable Trust Series at a proposed maximum offering price per share of $25 and a proposed maximum aggregate offering price of $750,000,000.  Each offering of shares of USOU and USOD pursuant to the registration statements described above commenced on July 20, 2017 and remains ongoing and has not terminated.  Shares of each of USOU and USOD are sold to institutional firms call “Authorized Participants” that purchase shares in blocks of 50,000 shares called “baskets” through each Trust Series’ marketing agent, ALPS Distributors, Inc.  RBC Capital Markets, LLC is the initial Authorized Participant for each Trust Series.  From July 19, 2017 to September 30, 2017, USOU has sold 100,000 shares (consisting of 2 creation baskets) with an aggregate offering price of $25.00 and USOD has sold 100,000 shares (consisting of 2 creation baskets) with an aggregate offering price of $25.00.  The net offering proceeds to USOU with respect to the above sales were $2,500,000, after deducting the payment of distribution-related services paid by the Registrant of $0 and other offering expenses paid by the Registrant of $0.  The net offering proceeds to USOD with respect to the above sales were $2,500,000, after deducting the payment of distribution-related services paid by the Registrant of $0 and other offering expenses paid by the Registrant of $0.  The net proceeds of each offering have been invested in commodity futures contracts and treasury obligations.  There has been no material change in the planned use of proceeds from the offering of shares of USOU and USOD as described in the prospectus for each such Trust Series.

 

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(c)USOU does not purchase shares directly from its shareholders. In connection with its redemption of baskets held by Authorized Participants, USOU did not have any redemptions during the period from the commencement of operations on July 20, 2017 to September 30, 2017. The following table summarizes the redemptions by Authorized Participants during the period from the commencement of operations on July 20, 2017 to September 30, 2017.

 

Issuer Purchases of Equity Securities

 

Period   

Total
Number of

Shares
Redeemed

    

Average Price Per

Share

 
7/20/17* to 7/31/17   ˗˗˗    NA 
8/1/17 to 8/31/17   ˗˗˗    NA 
9/1/17 to 9/30/17   ˗˗˗    NA 
Total   ˗˗˗      

 

 *Commencement of Operations.

 

(d)USOD does not purchase shares directly from its shareholders. In connection with its redemption of baskets held by Authorized Participants, USOD redeemed 0 baskets during the period from the commencement of operations on July 20, 2017 to September 30, 2017. The following table summarizes the redemptions by Authorized Participants during the period from the commencement of operations on July 20, 2017 to September 30, 2017:

 

Issuer Purchases of Equity Securities

 

Period   

Total

Number of

Shares
Redeemed

    Average Price Per
Share
 
7/20/17* to 7/31/17   ˗˗˗    NA 
8/1/17 to 8/31/17   ˗˗˗    NA 
9/1/17 to 9/30/17   ˗˗˗    NA 
Total   ˗˗˗      

 

*Commencement of Operations.

 

Item 3. Defaults Upon Senior Securities.

 

Not applicable.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

Monthly Account Statements

 

Not applicable.

 

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Item 6. Exhibits.

 

Listed below are the exhibits, which are filed as part of this quarterly report on Form 10-Q (according to the number assigned to them in Item 601 of Regulation S-K):

 

Exhibit Number   Description of Document
31.1*   Certification by Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*   Certification by Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*   Certification by Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*   Certification by Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS   XBRL Instance Document.
101.SCH   XBRL Taxonomy Extension Schema.
101.CAL   XBRL Taxonomy Extension Calculation Linkbase.
101.DEF   XBRL Taxonomy Extension Definition Linkbase.
101.LAB   XBRL Taxonomy Extension Label Linkbase.
101.PRE   XBRL Taxonomy Extension Presentation Linkbase.

 

*Filed herewith.

 

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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.

 

USCF Funds Trust (Registrant)

By: United States Commodity Funds LLC, its Sponsor

 

By: /s/ John P. Love  
  John P. Love  
  President and Chief Executive Officer  
  (Principal executive officer)  
   
Date: November 13, 2017  
   
By:  /s/ Stuart P. Crumbaugh  
  Stuart P. Crumbaugh  
  Chief Financial Officer  
  (Principal financial and accounting officer)  
   
Date: November 13, 2017  

  

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