10-Q 1 f10q0317_princetoncapital.htm QUARTERLY REPORT

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2017

 

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 814-00710

 

PRINCETON CAPITAL CORPORATION

(Exact name of Registrant as specified in its charter)

 

Maryland   46-3516073
(State or other jurisdiction of
incorporation or organization)
 

(I.R.S. Employer

Identification No.)

     

800 Turnpike Street, Suite 300

North Andover, Massachusetts

  01845
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code: (978) 794-3366

  

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐  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). 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 definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one.)

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
  (do not check if a smaller reporting company) Emerging growth company

 

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

The number of shares of the issuer’s Common Stock, $.001 par value, outstanding as of May 30, 2018 was 120,486,061.

 

 

 

 

 

 

PRINCETON CAPITAL CORPORATION

TABLE OF CONTENTS

 

  Page
   
PART I. FINANCIAL INFORMATION  
   
Item 1. Financial Statements 1
   
Statements of Assets and Liabilities as of March 31, 2017 (unaudited) and December 31, 2016 1
   
Statements of Operations (unaudited) for the three months ended March 31, 2017 and March 31, 2016 2
   
Statements of Changes in Net Assets (unaudited) for the three months ended March 31, 2017 and March 31, 2016 3
   
Statements of Cash Flows (unaudited) for the three months ended March 31, 2017 and March 31, 2016 4
   
Schedule of Investments as of March 31, 2017 (unaudited) 5
   
Schedule of Investments as of December 31, 2016 8
   
Notes to Financial Statements (unaudited) as of March 31, 2017 11
   
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 47 
   
PART II. OTHER INFORMATION  
   
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 48 
   
Item 4. Mine Safety Disclosures 49 
   
Item 5. Other Information 49 
   
Item 6. Exhibits 49 

 

- i -

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

PRINCETON CAPITAL CORPORATION
  
STATEMENTS OF ASSETS AND LIABILITIES

 

  

March 31, 2017

(unaudited)

   December 31, 2016 
         
ASSETS          
Control investments at fair value (cost of $19,172,466 and $16,486,985, respectively)  $13,308,770   $13,059,138 
Affiliate investments at fair value (cost of $5,306,750 and $5,306,750, respectively)   5,895,860    6,386,679 
Non-control/non-affiliate investments at fair value (cost of $31,042,338 and $33,537,946, respectively)   24,644,031    26,161,123 
Investment in U.S. Treasury Bill (cost of $45,998,007 and $52,398,253, respectively)   45,998,007    52,398,952 
Total investments at fair value (cost of $101,519,561 and $107,729,934, respectively)   89,846,668    98,005,892 
Cash   17,788    9,942 
Restricted cash   462,253    524,007 
Due from portfolio companies   263,246    172,959 
Due from affiliates   43,940    43,940 
Note receivable   450,000    500,000 
Interest receivable   341,362    233,906 
Deferred tax asset   314,590    319,516 
Prepaid expenses   3,938    9,602 
Total assets   91,743,785    99,819,764 
           
LIABILITIES          
Accrued management fees   505,693    535,783 
Accounts payable (Note 2)   2,170,372    2,088,342 
Term loan – related party   815,000    365,000 
Due to affiliates   64,116    86,216 
Short term payable for securities purchased   45,997,700    52,398,253 
Tax expense payable   52,015    42,245 
Deferred fee income   19,286    24,107 
Accrued expenses and other liabilities   292,962    294,499 
Total liabilities   49,917,144    55,834,445 
           
Commitments and contingencies (Note 8)   -    - 
           
Net assets  $41,826,641   $43,985,319 
           
NET ASSETS          
Common Stock, par value $0.001 per share (250,000,000 shares authorized; 120,486,061 shares issued and outstanding at March 31, 2017 and December 31, 2016)  $120,486   $120,486 
Paid-in capital   64,868,884    64,868,884 
Accumulated undistributed net realized loss   (1,226,377)   (1,226,377)
Distributions in excess of net investment income   (10,263,459)   (10,053,632)
Accumulated unrealized gain (loss) on investments   (11,672,893)   (9,724,042)
Total net assets  $41,826,641   $43,985,319 
Net asset value per share  $0.347   $0.365 

 

See notes to financial statements (unaudited).

 

 - 1 - 

 

PRINCETON CAPITAL CORPORATION
  
STATEMENTS OF OPERATIONS (Unaudited)

 

   Three Months Ended
March 31,
 
   2017   2016 
INVESTMENT INCOME          
Interest income from non-control/non-affiliate investments  $328,799   $212,439 
Interest income from control investments   9,528    239,410 
Other income from non-control/non-affiliate investments   4,821    - 
Other income from affiliate investments   9,912    12,040 
Other income from non-investment sources   74    128 
Total investment income   353,134    464,017 
           
OPERATING EXPENSES          
Management fees   107,055    213,529 
Administration fees   84,431    123,305 
Professional fees (Note 2)   168,856    447,887 
Valuation fees   37,100    - 
Compliance fees   -    54,999 
Directors’ fees   35,600    41,679 
Consulting fees   30,000    - 
Insurance expense   46,724    42,475 
Interest expense   21,697    - 
Other general and administrative expenses   21,068    35,604 
Total operating expenses   552,531    959,478 
           
Net investment income (loss) before tax   (199,397)   (495,461)
Income tax expense   10,430    320,000 
Net investment income (loss) after taxes   (209,827)   (815,461)
           
Net change in unrealized gain (loss) on:          
Non-control/non-affiliate investments   978,516    (286,993)
Affiliate investments   (490,819)   1,493,144 
Control investments   (2,435,849)   1,696,186 
U.S. Treasury Bills   (699)   (172)
Net change in unrealized gain (loss) on investments   (1,948,851)   2,902,165 
Net increase (decrease) in net assets resulting from operations  $(2,158,678)  $2,086,704 
           
Net investment income (loss) per share          
Basic  $(0.002)  $(0.007)
Diluted  $(0.002)  $(0.007)
Net increase (decrease) in net assets resulting from operations per share          
Basic  $(0.018)  $0.017 
Diluted  $(0.018)  $0.017 
Weighted average shares of common stock outstanding          
Basic   120,486,061    120,486,061 
Diluted   120,486,061    120,486,061 

 

See notes to financial statements (unaudited).

  

 - 2 - 

 

PRINCETON CAPITAL CORPORATION
  
STATEMENTS OF CHANGES IN NET ASSETS (Unaudited)

 

   Three Months Ended
March 31,
 
   2017   2016 
Increase (decrease) in net assets resulting from operations:          
Net investment loss  $(209,827)  $(815,461)
Net change in unrealized gain (loss) on investments   (1,948,851)   2,902,165 
Net increase (decrease) in net assets resulting from operations   (2,158,678)   2,086,704 
           
Capital share transactions:          
Unpaid dividend written off   -    600 
Net increase in net assets resulting from capital share transactions   -    600 
           
Total increase (decrease) in net assets   (2,158,678)   2,087,304 
Net assets at beginning of period   43,985,319    48,225,563 
Net assets at end of period  $41,826,641   $50,312,867 
           
Capital share activity:          
Common stock          
Issuance of common stock   -    - 
Common stock outstanding at the beginning of period   120,486,061    120,486,061 
Common stock outstanding at the end of period   120,486,061    120,486,061 

 

See notes to financial statements (unaudited).

 

 - 3 - 

 

PRINCETON CAPITAL CORPORATION
 
STATEMENTS OF CASH FLOWS (Unaudited)

 

   Three Months Ended
March 31,
 
   2017   2016 
Cash flows from operating activities:          
Net increase (decrease) in net assets resulting from operations  $(2,158,678)  $2,086,704 
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities:          
Purchases of investments in:          
Portfolio investments   (192,655)   (195,000)
U.S. Treasury Bills   (45,998,007)   (50,000,172)
Proceeds from sales, repayments, or maturity of investments in:          
U.S. Treasury Bills   52,398,253    - 
Net change in unrealized (gain) loss on investments   1,948,851    (2,902,165)
Increase in investments due to PIK   -    (313,344)
Amortization of fixed income premium or discounts   2,782    7,409 
Changes in other assets and liabilities:          
Due from portfolio companies   (90,287)   (2,825)
Due from affiliates   -    (11,592)
Interest receivable   (107,456)   89,813 
Prepaid expenses   5,664    48,150 
Note receivable   50,000    - 
Deferred tax asset   4,926    - 
Accrued management fees   (30,090)   113,530 
Accounts payable   82,030    244,686 
Due to affiliates   (22,100)   845 
Tax expense payable   9,770    - 
Deferred fee income   (4,821)   - 
Accrued expenses and other liabilities   (1,537)   60,177 
Net cash provided by (used in) operating activities   5,896,645    (50,773,784)
           
Cash flows from financing activities:          
Short term payable for securities purchased   (6,400,553)   50,000,172 
Term loan – related party   450,000    1,500,000 
Net cash provided by (used in) financing activities   (5,950,553)   51,500,172 
           
Net increase (decrease) in cash and restricted cash   (53,908)   726,388 
Cash and restricted cash at beginning of period   533,949    1,022,510 
Cash and restricted cash at end of period  $480,041   $1,748,898 
           
Supplemental disclosure of non-cash financing activities:          
Dividends payable to stockholders  $-   $(600)
Unpaid dividend written off  $-   $600 
Supplemental disclosure of cash flow financing activities:          
Interest expense paid  $5,728   $7,409 
Income tax paid  $660   $320,000 

 

See notes to financial statements (unaudited).

 

 - 4 - 

 

PRINCETON CAPITAL CORPORATION

 

SCHEDULE OF INVESTMENTS as of March 31, 2017 (Unaudited)

 

Investments  Headquarters / Industry    

Principal
Amount/
Shares/

% Ownership

   Amortized Cost   Fair
Value (1)
   % of Net Assets 
Portfolio Investments (6)                         
Control investments                       
Rockfish Seafood Grill, Inc.  Richardson, TX                    
First Lien Loan, 8% Cash, 6.0% PIK, due 3/31/2018 (2), (3), (5)  Casual Dining  $6,352,944  $6,352,944   $6,647,500    15.89%
Revolving Loan, 8% Cash, due 6/29/2017 (2), (5), (7)     $1,621,000    1,621,000    1,621,000    3.88%
Rockfish Holdings, LLC                       
Warrant for Membership Interest, exercise price $0.001 per 1% membership interest, expires 7/28/2018 (5)        10.000%   414,960    100,745    0.24%
Membership Interest – Class A(5)        99.997%   3,734,636    906,673    2.17%
Total           12,123,540    9,275,918    22.18%
Integrated Medical Partners, LLC  Milwaukee, WI                    
Unsecured Loan, 2.0% Cash, due 3/1/2018 (5), (8)  Medical Business  $276,922    276,922    276,922    0.66%
Preferred Membership, Class A units (5)  Services     800    4,196,937    1,904,260    4.55%
Preferred Membership, Class B units (5)      760    29,586    87,792    0.21%
Common Units (5)      14,082    -    3,878    0.01%
Total           4,503,445    2,272,852    5.43%
PCC SBH Sub, Inc.  Karnes City, TX                    
Unsecured loan, 12% Cash, due 2/15/2018  Energy Services  $20,000    20,000    20,000    0.05%
Common stock (5)        100    2,525,481    1,740,000    4.16%
Total           2,545,481    1,760,000    4.21%
Total control investments           19,172,466    13,308,770    31.82%
Affiliate investments                       
Spencer Enterprises Holdings, LLC  City of Industry, CA                      
Preferred Membership, Class AA units  Home Furnishings   500,000    2,391,001    2,071,043    4.95%
Preferred Membership, Class BB units (5)    Manufacturing     500,000    2,915,749    3,824,817    9.15%
Total           5,306,750    5,895,860    14.10%
Total affiliate investments           5,306,750    5,895,860    14.10%
Non-control/non-affiliate investments                       
Advantis Certified Staffing Solutions, Inc.  Austin, TX                    
Second Lien Loan, 6.0% Cash, due 11/30/2021  Staffing  $4,500,000    4,500,000    4,500,000    10.76%
Warrant for 700,000 Common Stock, exercise price $0.01 per share, expires 1/1/2027 (5)        1    -    14,647    0.03%
Total           4,500,000    4,514,647    10.79%
Performance Alloys, LLC  Houston, TX                    
Second Lien Loan, 6.0% cash, due 5/31/2020  Nickel Pipe, Fittings & Flanges  $6,750,000    6,750,000    6,750,000    16.14%
Membership Interest – Class B (5)        25.97%   5,131,090   814,184   1.95%
Total           11,881,090    7,564,184    18.09%
Lone Star Brewery Development, Inc.  San Marcos, TX                    
Second Lien Loan, 12.0% in cash, 2.0% PIK, due 4/10/2018 (2), (3), (5)    Real Estate Development  $8,076,135    8,076,135    6,000,000    14.35%
Great Value Storage, LLC  Austin, TX                      
First Lien Loan, 12.0% cash, 2.0% PIK, due 12/31/2018 (3)    Storage Company Property Management    $6,563,627    6,583,913    6,564,000    15.69%

 

See notes to financial statements.

 

 - 5 - 

 

PRINCETON CAPITAL CORPORATION

 

SCHEDULE OF INVESTMENTS as of March 31, 2017 (Unaudited) (Continued)

 

Investments  Headquarters / Industry 

Principal
Amount/

Shares/

% Ownership

   Amortized Cost   Fair
Value (1)
  

% of

Net Assets

 
Non-control/non-affiliate investments (continued)                       
Rampart Detection Systems, Ltd.  British Columbia, Canada                    
Common Stock Shares (4), (5)  Security   600,000   $1,200   $1,200    0.00%
Total non-control/non-affiliate investments           31,042,338    24,644,031    58.92%
Total Portfolio Investments           55,521,554    43,848,661    104.84%
                        
United States Treasury                       
U. S. Treasury Bill 0.0% 4/6/2017     $46,000,000    45,998,007    45,998,007    109.97%
                        
Total Investments          $101,519,561   $89,846,668    214.81%

  

 

(1)See Note 5 of the Notes to Financial Statements for a discussion of the methodologies used to value securities in the portfolio.

(2)Investment is on non-accrual status.

(3)Represents a security with a payment-in-kind component (“PIK”). At the option of the issuer, interest can be paid in cash or cash and PIK. The percentage of PIK shown is the maximum PIK that can be elected by the portfolio company.

(4)The investment in Rampart Detection Systems, Ltd does not represent a “qualifying asset” under Section 55(a) of the 1940 Act as the principal place of business is in British Columbia, Canada. As of March 31, 2017, less than 1% of the total fair value of investments represents non-qualifying assets.

(5)Investment is non-income producing as of March 31, 2017.

(6)Represents an illiquid investment. At March 31, 2017, 100% of the total fair value of portfolio investments are illiquid.

(7)On June 29, 2015, the Company entered into a revolving loan commitment with Rockfish Seafood Grill, Inc. This revolving loan commitment was increased in January 2017 by $140,000. As of March 31, 2017, the commitment was fully funded.

(8)Represents investment in Dominion Medical Management, Inc., a wholly owned subsidiary of Integrated Medical Partners, LLC. 

 

See notes to financial statements (unaudited).

 

 - 6 - 

 

PRINCETON CAPITAL CORPORATION

 

SCHEDULE OF INVESTMENTS as of March 31, 2017 (Unaudited) (Continued)

 

The following tables show the fair value of our portfolio of investments (excluding U.S. Treasury Bills) by geography and industry as of March 31, 2017.

 

   March 31, 2017 
Geography  Investments
at
Fair Value
   Percentage of Net Assets 
         
Canada  $1,200    0.00%
United States   43,847,461    104.84 
Total  $43,848,661    104.84%

  

   March 31, 2017 
Industry  Investments
at
Fair Value
   Percentage of Net Assets 
         
Casual Dining  $9,275,918    22.18%
Nickel Pipe, Fittings and Flanges   7,564,184    18.09 
Storage Company Property Management   6,564,000    15.69 
Real Estate Development   6,000,000    14.35 
Home Furnishings Manufacturing   5,895,860    14.10 
Staffing   4,514,647    10.79 
Medical Business Services   2,272,852    5.43 
Energy Services   1,760,000    4.21 
Security   1,200    0.00 
Total  $43,848,661    104.84%

 

See notes to financial statements (unaudited).

 

 - 7 - 

 

PRINCETON CAPITAL CORPORATION

 

SCHEDULE OF INVESTMENTS as of December 31, 2016

 

Investments  Headquarters / Industry 

Principal Amount/

Shares/

% Ownership

   Amortized Cost   Fair
Value (1)
   % of Net Assets 
Portfolio Investments (6)                       
Control investments                       
Rockfish Seafood Grill, Inc.  Richardson, TX                    

First Lien Loan, 8% Cash, 6.0% PIK, due 3/31/2018 (2), (3), (5)

  Casual Dining  $6,352,944   $6,352,944   $6,549,261    14.89%
Revolving Loan, 8% Cash, due 6/29/2017 (2), (5), (7)     $1,481,000    1,481,000    1,481,000    3.37%
Rockfish Holdings, LLC                       

Warrant for Membership Interest, exercise

price $0.001 per 1% membership interest,

expires 7/28/2018 (5)

      10.000%   414,960    102,826    0.23%
Membership Interest – Class A(5)      99.997%   3,734,636    925,407    2.10%
Total           11,983,540    9,058,494    20.59%
Dominion Medical Management, Inc.  Milwaukee, WI                    
Unsecured Loan, 2.0% cash, due 3/1/2018 (2), (5)  Medical Business  $276,922    276,922    276,922    0.63%
Integrated Medical Partners, LLC  Services                    
Preferred Membership, Class A units (5)      800    4,196,937    3,337,779    7.59%
Preferred Membership, Class B units (5)      760    29,586    365,884    0.83%
Common Units (5)      14,082    -    20,059    0.05%
Total           4,503,445    4,000,644    9.10%
Total control investments           16,486,985    13,059,138    29.69%
                        
Affiliate investments                       
Spencer Enterprises Holdings, LLC  City of Industry, CA                    
Preferred Membership, Class AA units (5)  Home Furnishings   500,000    2,391,001    2,705,363    6.15%
Preferred Membership, Class BB units (5)  Manufacturing   500,000    2,915,749    3,681,316    8.37%
Total           5,306,750    6,386,679    14.52%
Total affiliate investments           5,306,750    6,386,679    14.52%
                        
Non-control/non-affiliate investments                       
Advantis Certified Staffing Solutions, Inc.  Austin, TX                    
Second Lien Loan, 6.0% Cash, due 11/30/2021  Staffing  $4,500,000    4,500,000    4,500,000    10.23%
Warrant for 700,000 Common Stock, exercise price $0.01 per share, expires 1/1/2027 (5)      1    -    7,352    0.02%
Total           4,500,000    4,507,352    10.25%
Performance Alloys, LLC  Houston, TX                    
Second Lien Loan, 6.0% cash, due 3/31/2018  Nickel Pipe, Fittings & Flanges  $6,750,000    6,750,000    6,750,000    15.35%
Membership Interest – Class B (5)      25.97%    5,131,090   631,571   1.43%
Total           11,881,090    7,381,571    16.78%
Lone Star Brewery Development, Inc.  San Marcos, TX                    
Second Lien Loan, 12.0% in cash, 2.0% PIK, due 4/10/2018 (2), (3), (5)  Real Estate Development  $8,076,135    8,076,135    6,000,000    13.64%
Great Value Storage, LLC  Austin, TX                    

First Lien Loan, 12.0% cash, 2.0% PIK, due12/31/2018 (3)

 

Storage Company

Property Management

  $6,530,972    6,554,040    6,531,000    14.85%
South Boots Hill, LLC  San Marcos, TX                    

First Lien Loan, 12.0% cash, 2.0% PIK, due 3/31/2018 (2), (3), (5)

  Energy Services  $2,525,481    2,525,481    1,740,000    3.96%

 

See notes to financial statements (unaudited).

 

 - 8 - 

 

PRINCETON CAPITAL CORPORATION

 

SCHEDULE OF INVESTMENTS as of December 31, 2016 (Continued)

 

Investments 

Headquarters

/ Industry

  Principal Amount/Shares/% Ownership   Amortized Cost   Fair Value (1)  

% of

Net Assets

 
Non-control/non-affiliate investments (continued)                       
Rampart Detection Systems, Ltd.  British Columbia, Canada                    
Common Stock Shares (4), (5)  Security   600,000   $1,200   $1,200    0.00%
Total non-control/non-affiliate investments           33,537,946    26,161,123    59.48%
Total Portfolio Investments           55,331,681    45,606,940    103.69%
                        
United States Treasury                       
U. S. Treasury Bill 0.0% 1/5/2017     $52,400,000    52,398,253    52,398,952    119.13%
                        
Total Investments          $107,729,934   $98,005,892    222.82%

 

 

(1)See Note 5 of the Notes to Financial Statements for a discussion of the methodologies used to value securities in the portfolio.

(2)Investment is on non-accrual status.

(3)Represents a security with a payment-in-kind component (“PIK”). At the option of the issuer, interest can be paid in cash or cash and PIK. The percentage of PIK shown is the maximum PIK that can be elected by the portfolio company.

(4)The investment in Rampart Detection Systems, Ltd does not represent a “qualifying asset” under Section 55(a) of the 1940 Act as the principal place of business is in British Columbia, Canada. As of December 31, 2016, less than 1% of the total fair value of investments represents non-qualifying assets.

(5)Investment is non-income producing as of December 31, 2016.

(6)Represents an illiquid investment. At December 31, 2016, 100% of the total fair value of portfolio investments are illiquid.

(7)On June 29, 2015, the Company entered into a revolving loan commitment with Rockfish Seafood Grill, Inc. As of December 31, 2016, $10,000 remains unfunded.

 

See notes to financial statements (unaudited).

 

 - 9 - 

 

PRINCETON CAPITAL CORPORATION

 

SCHEDULE OF INVESTMENTS as of December 31, 2016 (Continued)

 

The following tables show the fair value of our portfolio of investments (excluding U.S. Treasury Bills) by geography and industry as of December 31, 2016.

 

   December 31, 2016 
Geography  Investments
at
Fair Value
   Percentage of Net Assets 
         
Canada  $1,200    0.00%
United States   45,605,740    103.69 
Total  $45,606,940    103.69%

 

   December 31, 2016 
Industry  Investments
at
Fair Value
   Percentage of Net Assets 
         
Casual Dining  $9,058,494    20.59%
Nickel Pipe, Fittings and Flanges   7,381,571    16.78 
Storage Company Property Management   6,531,000    14.85 
Home Furnishings Manufacturing   6,386,679    14.52 
Real Estate Development   6,000,000    13.64 
Staffing   4,507,352    10.25 
Medical Business Services   4,000,644    9.10 
Energy Services   1,740,000    3.96 
Security   1,200    0.00 
Total  $45,606,940    103.69%

 

See notes to financial statements (unaudited).

 

 - 10 - 

 

PRINCETON CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

March 31, 2017 (Unaudited)

 

NOTE 1 – NATURE OF OPERATIONS

 

References herein to “we”, “us” or “our” refer to Princeton Capital Corporation (the “Company” or “Princeton Capital”), unless the context specifically requires otherwise.

 

Princeton Capital Corporation, a Maryland corporation, was incorporated under the general laws of the State of Maryland on July 25, 2013, with its principal office located in North Andover, MA. We are a non-diversified, closed-end investment company that has filed an election to be regulated as a business development company (“BDC”), under the Investment Company Act of 1940, as amended (the “1940 Act”). As a BDC, our goal is to annually qualify and elect to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Company, however, did not meet the requirements to qualify as a RIC for the 2016 or 2017 tax years and expects to be taxed as a corporation under Subchapter C of the Code for those years. We invest primarily in private small and lower middle-market companies through first lien loans, second lien loans, unsecured loans, unitranche and mezzanine debt financing, often times with a corresponding equity investment. Our investment objective is to maximize the total return to our stockholders in the form of current income and capital appreciation through debt and related equity investments.

 

Prior to March 13, 2015, Princeton Capital’s predecessor operated under the name Regal One Corporation (“Regal One”). Regal One had been located in Scottsdale, Arizona, and was a Florida corporation initially incorporated in 1959 as Electro-Mechanical Services Inc. In 1998 Electro-Mechanical Services Inc. changed its name to Regal One Corporation.

 

On March 7, 2005, Regal One’s board of directors determined it was in the shareholders’ best interest to change the focus of its operations to providing financial consulting services through its network of advisors and professionals, and to be regulated as a BDC under the 1940 Act. On September 16, 2005, Regal One filed a Form N54A (Notification of Election by Business Development Companies) with the Securities and Exchange Commission (“SEC”), which transformed Regal One into a BDC in accordance with sections 55 through 65 of the 1940 Act. Regal One reported as an operating BDC from March 31, 2006 until March 13, 2015 and since March 13, 2015 (following the Reincorporation described below) Princeton Capital has reported as an operating BDC.

 

On July 9, 2014, Regal One acquired Princeton Capital as a wholly owned subsidiary. On July 14, 2014, Regal One, Princeton Capital, Capital Point Partners, LP, a Delaware limited partnership (“CPP”), and Capital Point Partners II, LP, a Delaware limited partnership (“CPPII” and, together with CPP, the “Partnerships”), entered into an Asset Purchase Agreement (the “Purchase Agreement”). Pursuant to the Purchase Agreement, Regal One would acquire cash, equity and debt investments of the Partnerships in exchange for shares of common stock of Regal One. In addition to the customary conditions to closing the transactions contemplated by the Purchase Agreement, Regal One was required to (i) to effect a reverse stock split of Regal One’s outstanding common stock at a ratio of 1-for-2 (the “Reverse Stock Split”), (ii) reincorporate from Florida to Maryland by merging into Princeton Capital (the “Reincorporation”) and (iii) become an externally managed BDC by entering into an external investment advisory agreement with Princeton Investment Advisors, LLC, (“Princeton Investment Advisors”) a Delaware limited liability company.

 

On March 13, 2015, following the Reverse Stock Split and the Reincorporation, we completed our previously announced acquisition in the approximate amounts of $11.2 million in cash, $43.5 million in equity and debt investments, and $1.9 million in restricted cash escrow deposits of the Partnerships with an aggregate value of approximately $56.6 million and issued approximately 115.5 million shares of our common stock to the Partnerships. The shares issued were based on a pre-valuation presumed fair value of $60.9 million. We also entered into an investment advisory agreement with Princeton Investment Advisors, which subsequently was terminated by the Company’s Board of Directors on January 18, 2016, effective as of June 9, 2016.

 

On January 18, 2016, the Board of Directors of the Company conditionally approved the investment advisory agreement with Princeton Advisory Group, Inc., a New Jersey corporation (“Princeton Advisory Group”) (the “PAG Investment Advisory Agreement”), subject to the approval of the Company’s stockholders at the 2016 Annual Meeting of Stockholders. At the 2016 Annual Meeting of Stockholders held on June 9, 2016, the Company’s stockholders approved the PAG Investment Advisory Agreement, effective June 9, 2016. From June 9, 2016 through March 31, 2017 (the date covered by this quarterly report), Princeton Advisory Group acted as the Company’s investment advisor pursuant to the terms of the PAG Investment Advisory Agreement. The PAG Investment Advisory Agreement was subsequently terminated on December 31, 2017 as disclosed in Note 10.

 

 - 11 - 

 

PRINCETON CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

March 31, 2017 (Unaudited)

 

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying financial statements (unaudited) have been prepared in accordance with accounting principles generally accepted in the United States of America, (“U.S. GAAP”). In accordance with Regulation S-X under the Securities Act of 1933 and Securities Exchange Act of 1934, the Company does not consolidate portfolio company investments. The accounting records of the Company are maintained in U.S. dollars. As an investment company, as defined by the 1940 Act, the Company follows investment company accounting and reporting guidance of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946 – Financial Services - Investment Companies, which is U.S. GAAP.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Changes in the economic environment, financial markets, creditworthiness of our portfolio companies and any other parameters used in determining these estimates could cause actual results to differ.

 

Portfolio Investment Classification

 

The Company classifies its investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, “Control Investments” are defined as investments in companies in which the Company owns more than 25% of the voting securities or maintains greater than 50% of the board representation. Under the 1940 Act, “Affiliated Investments” are defined as those non-control investments in companies in which the Company owns between 5% and 25% of the voting securities. Under the 1940 Act, “Non-affiliated Investments” are defined as investments that are neither Control Investments nor Affiliated Investments. As of March 31, 2017, the Company had control investments in Rockfish Seafood Grill, Inc., Rockfish Holdings, LLC, Integrated Medical Partners, LLC, and PCC SBH Sub, Inc. and affiliated investments in Spencer Enterprises Holdings, LLC, as defined under the 1940 Act. As of December 31, 2016, the Company had control investments in Rockfish Seafood Grill, Inc., Rockfish Holdings, LLC, and Integrated Medical Partners, LLC and affiliated investments in Spencer Enterprises Holdings, LLC, as defined under the 1940 Act

 

Investments are recognized when we assume an obligation to acquire a financial instrument and assume the risks for gains or losses related to that instrument. Investments are derecognized when we assume an obligation to sell a financial instrument and forgo the risks for gains and losses related to that instrument. Specifically, we record all security transactions on a trade date basis. Investments in other non-security financial instruments, such as limited partnerships or private companies, are recorded on the basis of subscription date or redemption date, as applicable. Amounts for investments recognized or derecognized but not yet settled are reported as receivables for investments sold or payable for investments acquired, respectively, in the Statements of Assets and Liabilities.

 

Valuation of Investments

 

In accordance with U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.

 

In determining fair value, our board of directors uses various valuation approaches. In accordance with U.S. GAAP, ASC 820 establishes a fair value hierarchy for inputs and is used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.

 

Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the board of directors. Unobservable inputs reflect our board of director’s assumptions about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

 

With respect to investments for which market quotations are not readily available, our board of directors undertakes a multi-step valuation process each quarter, as described below:

 

Our quarterly valuation process begins with each portfolio company or investment being initially valued by an independent valuation firm, except for those investments where market quotations are readily available;

Preliminary valuation conclusions are then documented and discussed with our senior management and our investment advisor (our investment advisor, as disclosed in various public filings and elsewhere in this Form 10-Q, changed on June 9, 2016 from Princeton Investment Advisors to Princeton Advisory Group as disclosed in Note 1);

 

 - 12 - 

 

PRINCETON CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

March 31, 2017 (Unaudited)

 

The valuation committee of our board of directors then reviews these preliminary valuations and approves them for recommendation to the board of directors;

The board of directors then discusses valuations and determines the fair value of each investment in our portfolio in good faith, based on the input of our investment advisor (our investment advisor, as disclosed in various public filings and elsewhere in this Form 10-Q, changed on June 9, 2016 from Princeton Investment Advisors to Princeton Advisory Group as disclosed in Note 1), the independent valuation firm and the valuation committee.

 

U.S. GAAP establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:

 

Level 1 — Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 securities. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these securities does not entail a significant degree of judgment.

 

Level 2 — Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

 

Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

 

The availability of valuation techniques and observable inputs can vary from security to security and is affected by a wide variety of factors including, the type of security, whether the security is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Those estimated values do not necessarily represent the amounts that may be ultimately realized due to the occurrence of future circumstances that cannot be reasonably determined. Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower than the values that would have been used had a ready market for the securities existed. Accordingly, the degree of judgment exercised by the board of directors in determining fair value is greatest for securities categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement.

 

Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. The Company uses prices and inputs that are current as of the measurement date, including periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many securities. This condition could cause a security to be reclassified to a lower level within the fair value hierarchy.

 

Valuation Processes

 

The Company establishes valuation processes and procedures to ensure that the valuation techniques for investments that are categorized within Level 3 of the fair value hierarchy are fair, consistent, and verifiable.  The Company’s board of directors designates a Valuation Committee (the “Committee”) to oversee the entire valuation process of the Company’s Level 3 investments.  The Committee is comprised of independent directors and reports to the Company’s board of directors.  The Committee is responsible for developing the Company’s written valuation processes and procedures, conducting periodic reviews of the valuation policies, and evaluating the overall fairness and consistent application of the valuation policies. 

 

The Committee meets on a quarterly basis, or more frequently as needed, to determine the valuations of the Company’s Level 3 investments.  Valuations determined by the Committee are required to be supported by market data, third-party pricing sources, industry accepted pricing models, counterparty prices, or other methods that the Committee deems to be appropriate. 

 

 - 13 - 

 

PRINCETON CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

March 31, 2017 (Unaudited)

 

The Company will periodically test its valuations of Level 3 investments through performing back testing of the sales of such investments by comparing the amounts realized against the most recent fair values reported, and if necessary, uses the findings to recalibrate its valuation procedures.  On a quarterly basis, the Company engages the services of a nationally recognized third-party valuation firm to perform an independent valuation of the Company’s Level 3 investments.

 

Investment Valuation

 

We expect that most of our portfolio investments will take the form of securities that are not publicly traded. The fair value of loans, securities and other investments that are not publicly traded may not be readily determinable, and we will value these investments at fair value as determined in good faith by our board of directors, including reflecting significant events affecting the value of our investments. Most, if not all, of our investments (other than cash and cash equivalents) will be classified as Level 3 under Financial Accounting Standards Board Accounting Standards Codification “Fair Value Measurements and Disclosures”, or ASC 820. This means that our portfolio valuations will be based on unobservable inputs and our own assumptions about how market participants would price the asset or liability in question. We expect that inputs into the determination of fair value of our portfolio investments will require significant management judgment or estimation. Even if observable market data are available, such information may be the result of consensus pricing information or broker quotes, which include a disclaimer that the broker would not be held to such a price in an actual transaction. The non-binding nature of consensus pricing and/or quotes accompanied by disclaimers materially reduces the reliability of such information. We expect to retain the services of one or more independent service providers to review the valuation of these loans and securities. The types of factors that the board of directors may take into account in determining the fair value of our investments generally include, as appropriate, comparison to publicly traded securities including such factors as yield, maturity and measures of credit quality, the enterprise value of a portfolio company, the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business and other relevant factors. Because such valuations, and particularly valuations of private securities and private companies, are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if a ready market for these loans and securities existed. Our net asset value could be adversely affected if our determinations regarding the fair value of our investments were materially higher than the values that we ultimately realize upon the disposal of such loans and securities.

 

We will adjust the valuation of our portfolio quarterly to reflect our board of directors’ determination of the fair value of each investment in our portfolio. Any changes in fair value are recorded in our statement of operations as net change in unrealized gain or loss.

 

Debt Securities

 

The Company’s portfolio consists primarily of first lien loans, second lien loans, and unsecured loans. Investments for which market quotations are readily available (“Level 2 Loans”) are generally valued using market quotations, which are generally obtained from an independent pricing service or broker-dealers. For other debt investments (“Level 3 Loans”), market quotations are not available and other techniques are used to determine fair value. The Company considers its Level 3 Loans to be performing if the borrower is not in default, the borrower is remitting payments in a timely manner, the loan is in covenant compliance or is otherwise not deemed to be impaired. In determining the fair value of the performing Level 3 Loans, the Board considers fluctuations in current interest rates, the trends in yields of debt instruments with similar credit ratings, financial condition of the borrower, economic conditions, success and prepayment fees, and other relevant factors, both qualitative and quantitative. In the event that a Level 3 Loan instrument is not performing, as defined above, the Board may evaluate the value of the collateral utilizing the same framework described above for a performing loan to determine the value of the Level 3 Loan instrument.

 

Equity Investments

 

Our equity investments, including common stock, membership interests, and warrants, are generally valued using a market approach and income approach. The income approach utilizes primarily the discount rate to value the investment whereas the primary inputs for the market approach are the earnings before interest, taxes, depreciation and amortization (“EBITDA”) multiple and revenue multiples. The Black-Scholes Option Pricing Model, a valuation technique that follows the income approach, is used to allocate the value of the equity to the investment. The pricing model takes into account the contract terms (including maturity) as well as multiple inputs, including time value, implied volatility, equity prices, risk free rates, and interest rates.

 

 - 14 - 

 

PRINCETON CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

March 31, 2017 (Unaudited)

 

Valuation of Other Financial Instruments

 

The carrying amounts of the Company’s other, non-investment, financial instruments, consisting of cash, receivables, accounts payable, and accrued expenses, approximate fair value due to their short-term nature.

 

Cash and Restricted Cash

 

The Company deposits its cash and restricted cash in financial institutions and, at times, such balances may be in excess of the Federal Deposit Insurance Corporation insured limit; however, management does not believe it is exposed to any significant credit risk.

 

The following table provides a reconciliation of cash and restricted cash as of March 31, 2017 and December 31, 2016 reported within the statements of assets and liabilities that sum to the total of the same such amounts shown in the statements of cash flows:

 

   March 31, 2017
(unaudited)
   December 31, 2016 
Cash  $17,788   $9,942 
Restricted Cash   462,253    524,007 
Total Cash and Restricted Cash  $480,041   $533,949 

 

As of March 31, 2017 and December 31, 2016, restricted cash consisted of cash held at Jefferies for purpose of purchasing U.S. Treasury Bills on margin.

 

Notes Receivable

 

As of March 31, 2017, the Company had $450,000 in receivables relating to the sale of its equity investment in Advantis Certified Staffing Solutions, Inc. As of December 31, 2016, the Company had $500,000 in receivables relating to the sale of its equity investment in Advantis Certified Staffing Solutions, Inc. Subsequent to quarter end, a notice of default on the note receivable was sent to the party that purchased the equity investment in Advantis Certified Staffing Solutions, Inc. and the Company reclaimed the shares on July 3, 2017. See Note 10.

 

U.S. Treasury Bills

 

At the end of each fiscal quarter, we may take proactive steps to ensure we are in compliance with the RIC diversification requirements under Subchapter M of the Code, which are dependent upon the composition of our total assets at quarter end. We may accomplish this in several ways, including purchasing U.S. Treasury Bills and closing out positions after quarter-end.

 

Revenue Recognition

 

Realized gains or losses on the sale of investments are calculated using the specific identification method. The Company measures realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized upfront fees and prepayment penalties.

 

Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis. Origination, closing and/or commitment fees associated with senior and subordinated secured loans are accreted into interest income over the respective terms of the applicable loans. Upon the prepayment of a senior or subordinated secured loan, any prepayment penalties and unamortized loan origination, closing and commitment fees are recorded as interest income. Generally, when a payment default occurs on a loan in the portfolio, or if the Company otherwise believes that borrower will not be able to make contractual interest payments, the Company may place the loan on non-accrual status and cease recognizing interest income on the loan until all principal and interest is current through payment, or until a restructuring occurs, and the interest income is deemed to be collectible. The Company may make exceptions to this policy if a loan has sufficient collateral value, is in the process of collection or is viewed to be able to pay all amounts due if the loan were to be collected on through an investment in or sale of the business, the sale of the assets of the business, or some portion or combination thereof.

 

Dividend income is recorded on the ex-dividend date.

 

Structuring fees, excess deal deposits, prepayment fees and similar fees are recognized as income as earned, usually when paid. Other fee income, including annual fees and monitoring fees are included in other income. Income from such sources was $14,733 and $12,040 for the three months ended March 31, 2017 and 2016, respectively. Interest income earned on cash in the Company’s bank account is included in other income from non-investment sources. Income from such sources was $74 and $128 for the three months ended March 31, 2017 and 2016, respectively.

 

 - 15 - 

 

PRINCETON CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

March 31, 2017 (Unaudited)

 

Payment-in-Kind Interest (“PIK”)

 

We have investments in our portfolio that contain a PIK interest provision. Any PIK interest is added to the principal balance of such investments and is recorded as income, if the portfolio company valuation indicates that such PIK interest is collectible. In order to qualify as a RIC, substantially all of this income must be paid out to stockholders in the form of dividends, even if we have not collected any cash. For the three months ended March 31, 2017 and 2016 and through the date of issuance of this report, no dividends have been paid out to stockholders.

 

Net Change in Unrealized Gain or Loss

 

Net change in unrealized gain or loss will reflect the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized.

 

Legal Fees

 

The Company incurred legal fees related to the lawsuit captioned Capital Link Fund I, LLC, et al. v. Capital Point Management, LP, et al. as disclosed in Note 8.  Through March 31, 2017, it was undeterminable the ultimate responsibility for amounts invoiced to the Company by two law firms that provided services, as these invoices were for all of such law firm’s fees even though they represented multiple parties and the Company believed that some of these services rendered were provided solely or primarily for the benefit of other represented parties. For the three months ended March 31, 2017 and 2016, the Company was invoiced legal fees by these two law firms related to this lawsuit in the amount of $0 and $343,126, respectively, which are included in professional fees on the Statements of Operations. As of December 31, 2017, the Company reached an agreement with the two law firms and paid them $330,000 to settle all outstanding invoices. Other legal fees invoiced to the Company for the three months ended March 31, 2017 and 2016, were incurred in the normal operating course of business and are included in professional fees on the Statements of Operations.

 

Federal and State Income Taxes 

 

The Company was taxed as a regular corporation (a “C corporation”) under subchapter C of the Internal Revenue Code of 1986, as amended, for its 2016 taxable year. The Company uses the liability method of accounting for income taxes. Deferred tax assets and liabilities are recorded for tax loss carryforwards and temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, using statutory tax rates in effect for the year in which the temporary differences are expected to reverse. A valuation allowance is provided against deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

 

The Company did not meet the qualifications of a RIC for the 2016 or 2017 tax years and expects to be taxed as a corporation under Subchapter C of the Code. The failure to qualify as a RIC, however, did not impact the 2016 tax year as the Company incurred tax losses. As a result of the loss incurred for the year ended December 31, 2016, the Company intends to carry back the net operating loss to prior periods in which the Company generated taxable income and apply for a refund of federal taxes paid. Accordingly, the Company has recorded a deferred tax asset for the expected refund. In order to qualify as a RIC, among other things, the Company is required to distribute to its stockholders on a timely basis at least 90% of investment company taxable income, as defined by the Code, for each year. If the Company hereafter achieves and maintains status as a RIC, it generally would not pay corporate-level U.S. federal and state income taxes on any ordinary income or capital gains that it distributes at least annually to its stockholders as dividends. Rather, any tax liability related to income earned by the Company would represent obligations of the Company’s investors and will not be reflected in the financial statements of the Company.

 

The Company evaluates tax positions taken or expected to be taken while preparing its financial statements to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. The Company recognizes the tax benefits of uncertain tax positions only where the position has met the “more-likely-than-not” threshold. The Company classifies penalties and interest associated with income taxes, if any, as income tax expense. Conclusions regarding tax positions are subject to review and may be adjusted at a later date based on factors including, but not limited to, ongoing analyses of tax laws, regulations and interpretations thereof.

 

 - 16 - 

 

PRINCETON CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

March 31, 2017 (Unaudited)

 

Dividends and Distributions

 

Dividends and distributions to common stockholders are recorded on the ex-dividend date. The amount, if any, to be paid as a dividend is approved by our board of directors each quarter and is generally based upon our management’s estimate of our earnings for the quarter.  For the three months ended March 31, 2017 and 2016 and through the date of issuance of this report, no dividends have been declared or distributed to stockholders.

 

Per Share Information

 

Basic and diluted earnings (loss) per common share is calculated using the weighted average number of common shares outstanding for the period presented.

 

Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is computed by dividing net loss per share by the weighted average number of shares outstanding, plus, any potentially dilutive shares outstanding during the period. For the three months ended March 31, 2017 and 2016, basic and diluted earnings (loss) per share were the same, since there were no potentially dilutive securities outstanding.

 

Capital Accounts

 

Certain capital accounts including undistributed net investment income, accumulated net realized gain or loss, accumulated net unrealized gain or loss, and paid-in capital in excess of par, are adjusted, at least annually, for permanent differences between book and tax. In addition, the character of income and gains to be distributed is determined in accordance with income tax regulations that may differ from U.S. GAAP.

 

Recent Accounting Pronouncements

 

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 requires management to evaluate relevant conditions or events that are known or reasonably knowable as of the evaluation date when determining whether substantial doubt about an entity’s ability to continue as a going concern exists. If management concludes that substantial doubt about an entity’s ability to continue as a going concern is not alleviated by its plans, the notes to the financial statements are required to include a statement that there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued, when applicable). ASU 2014-15 is effective for annual periods ending after December 15, 2016 and for annual periods and interim periods thereafter. Adoption of ASU 2014-15 did not have a material effect on its financial position or results of operations.

 

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”). ASU 2015-17 requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. As a result, each jurisdiction will now only have one net noncurrent deferred tax asset or liability. ASU 2015-17 is effective for public business entities in fiscal years beginning after December 15, 2016, including interim periods within those years. Adoption of ASU 2015-17 did not have a material impact on its Financial Statements.

 

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”). ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those years. The Company early adopted ASU 2016-18 as shown on the Statement of Cash Flows.

 

In May 2014, the FASB issued a converged standard to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability within industries, across industries, and across capital markets. The core principle of the new guidance is that an entity will recognize revenue to depict the transfer of goods or services to customers in an amount that the entity expects to be entitled to in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606) –Deferral of the Effective Date, formally amending the effective date of the new revenue recognition guidance. The amended guidance defers the effective date of the new guidance to interim reporting periods within annual reporting periods beginning after December 15, 2017. Public business entities are permitted to apply the new guidance early, but not before the original effective date (i.e., interim periods within annual periods beginning after December 15, 2016). Adoption of ASU 2015-14 did not have a material impact on its Financial Statements.

 

 - 17 - 

 

PRINCETON CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

March 31, 2017 (Unaudited)

 

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606) –Principal versus Agent Considerations (Reporting Revenue Gross Versus Net) (“ASU 2016-08”). The amended guidance affects entities that enter into contracts with customers to transfer goods or services in exchange for consideration. Under ASU 2016-08, when another party is involved in providing goods or services to a customer, an entity must determine whether the nature of its promise is to provide the specified good or service itself (that is, the entity is a principal) or to arrange for the good or service to be provided by the other party (that is, the entity is an agent). An entity is a principal if it controls the specified good or service before that good or service is transferred to a customer. The amended guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customer. ASU 2016-08 affects the guidance in the new revenue standard issued in May 2014 and has the same effective date which is described above. Adoption of ASU 2016-08 did not have a material impact on its Financial Statements.

 

NOTE 3 – CONCENTRATION OF CREDIT RISK

 

In the normal course of business, the Company maintains its cash balances in financial institutions, which at times may exceed federally insured limits.  The Company is subject to credit risk to the extent any financial institution with which it conducts business is unable to fulfill contractual obligations on its behalf.  Management monitors the financial condition of such financial institutions and does not anticipate any losses from these counterparties.

 

NOTE 4 – NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS PER COMMON SHARE

 

The following information sets forth the computation of basic and diluted net increase (decrease) in net assets resulting from operations per common share for the three months ended March 31, 2017 and March 31, 2016.

 

  

Three Months Ended

March 31,

 
   2017   2016 
   (Unaudited)   (Unaudited) 
Per Share Data (1):        
Net increase (decrease) in net assets resulting from operations  $(2,158,678)  $2,086,704 
Weighted average shares outstanding for period          
Basic   120,486,061    120,486,061 
Diluted     120,486,061    120,486,061 
Basic and diluted net increase (decrease) in net assets resulting from operations per common share          
Basic  $(0.018)  $0.017 
Diluted  $(0.018)  $0.017 

 

 

(1)Per share data based on weighted average shares outstanding.

 

 - 18 - 

 

PRINCETON CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

March 31, 2017 (Unaudited)

 

NOTE 5 – FAIR VALUE OF INVESTMENTS

 

The Company’s assets recorded at fair value have been categorized based upon a fair value hierarchy in accordance with ASC Topic 820 – Fair Value Measurements and Disclosures (“ASC 820”). See Note 2 for a discussion of the Company’s policies.

 

The following table presents information about the Company’s assets measured at fair value as of March 31, 2017 and December 31, 2016, respectively:

 

   As of March 31, 2017 (Unaudited) 
   Level 1   Level 2   Level 3   Total 
Portfolio Investments                    
First Lien Loans  $-   $-   $14,832,500   $14,832,500 
Second Lien Loans   -    -    17,250,000    17,250,000 
Unsecured Loans   -    -    296,922    296,922 
Equity   -    -    11,469,239    11,469,239 
Total Portfolio Investments   -    -    43,848,661    43,848,661 
U.S. Treasury Bill   45,998,007    -    -    45,998,007 
Total Investments  $45,998,007   $-   $43,848,661   $89,846,668 

 

   As of December 31, 2016 
   Level 1   Level 2   Level 3   Total 
Portfolio Investments                    
First Lien Loans  $-   $-   $16,301,261   $16,301,261 
Second Lien Loans   -    -    17,250,000    17,250,000 
Unsecured Loans   -    -    276,922    276,922 
Equity   -    -    11,778,757    11,778,757 
Total Portfolio Investments   -    -    45,606,940    45,606,940 
U.S. Treasury Bill   52,398,952    -    -    52,398,952 
Total Investments  $52,398,952   $-   $45,606,940   $98,005,892 

  

During the three months ended March 31, 2017 and the year ended December 31, 2016, there were no transfers between Level, 1, Level 2 or Level 3.

 

The following table presents additional information about Level 3 assets measured at fair value. Both observable and unobservable inputs may be used to determine the fair value of positions that the Company has classified within the Level 3 category.  As a result, the unrealized gains and losses for assets within the Level 3 category may include changes in fair value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long-dated volatilities) inputs.

 

 - 19 - 

 

PRINCETON CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

March 31, 2017 (Unaudited)

 

Changes in Level 3 assets measured at fair value for the three months ended March 31, 2017 are as follows:

 

  

First Lien

Loans

   Second Lien Loans   Unsecured Loans   Equity   Total 
Fair value at beginning of period  $16,301,261   $17,250,000   $276,922   $11,778,757   $45,606,940 
Amortization   (2,782)   -    -    -    (2,782)
Purchases of investments   172,655    -    20,000    -    192,655 
Sales of investments   -    -    -    -    - 
Payment-in-kind interest   -    -    -    -    - 
Realized gain (loss)   -    -    -    -    - 
Change in unrealized gain (loss) on investments   886,847    -    -    (2,834,999)   (1,948,152)
Transfer due to restructuring   (2,525,481)   -    -    2,525,481    - 
Fair value at end of period  $14,832,500   $17,250,000   $296,922   $11,469,239   $43,848,661 
Change in unrealized gain (loss) on Level 3 investments still held as of March 31, 2017  $886,847   $-   $-   $(2,834,999)  $(1,948,152)

 

Changes in Level 3 assets measured at fair value for the year ended December 31, 2016 are as follows:

 

  

First Lien

Loans

   Second Lien Loans   Unsecured Loans   Equity   Total 
Fair value at beginning of year  $16,064,535   $21,386,494   $371,922   $10,876,569   $48,699,520 
Amortization   (16,161)   -    -    -    (16,161)
Purchases of investments   463,211    -    280,000    -    743,211 
Sales of investments   (50,000)   -    -    (500,000)   (550,000)
Payment-in-kind interest   473,818    -    -    -    473,818 
Realized gain (loss)   -    (1,454,270)   (375,000)   367,383    (1,461,887)
Change in unrealized gain (loss) on investments   (634,142)   2,448,866    -    (4,096,285)   (2,281,561)
Transfer due to restructuring   -    (5,131,090)   -    5,131,090    - 
Fair value at end of year  $16,301,261   $17,250,000   $276,922   $11,778,757   $45,606,940 
Change in unrealized gain (loss) on Level 3 investments still held as of December 31, 2016  $(634,141)  $463,275   $-   $(4,197,583)  $(4,368,449)

 

 - 20 - 

 

PRINCETON CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

March 31, 2017 (Unaudited)

 

The following table provides quantitative information regarding Level 3 fair value measurements as of March 31, 2017:

 

Description  Fair Value   Valuation Technique 

Unobservable 

Inputs

  Range (Average) 
               
First Lien Loans  $6,564,000   Discounted Cash Flow  Discount Rate   14.00%
    8,268,500   Discounted Cash Flow  Discount Rate   12.50%
        Market Approach  Enterprise Value/Revenue Multiple   0.6x-1.1x (0.85x) 
Total   14,832,500            
                 
Second Lien Loans   6,000,000   Discounted Cash Flow  Discount Rate   90.00%
    4,500,000   Discounted Cash Flow  Discount Rate   14.20%
        Market Approach  Enterprise Value / Revenue & EBITDA Multiples   0.2x-6.0x (3.1x) 
    6,750,000   Discounted Cash Flow  Discount Rate   7.80%
        Market Approach  Enterprise Value/Revenue Multiple   8.6x-10.8x (9.7x) 
Total   17,250,000            
                 
Unsecured Loans   276,922   Discounted Cash Flow  Discount Rate   12.40%
        Market Approach  Enterprise Value / Revenue & EBITDA Multiples   1.10x– 23.40x (12.25x) 
Total   276,922            
                 
Equity   3,833,379   Black-Scholes Option
 
Pricing Model
  Volatility   23.00%-33.90% (28.45%) 
           Discount for lack of marketability   5.00%-31.00% (18.00%)  
        Market Approach  Enterprise Value / Revenue & EBITDA Multiples   0.2x – 23.4x (11.8x) 
        Income Approach  Discount Rate   7.8% - 14.2% (11.00%) 
    1,740,000   Market Approach  Real Estate Appraisal Values   N/A 
Total   5,573,379            
Total Level 3 Investments  $37,932,801            

 

The Company’s remaining Level 3 investments aggregating approximately $5,915,860 have been valued using unadjusted third party transactions.  As a result, there were no unobservable inputs that have been internally developed by the Company in determining the fair values of these investments as of March 31, 2017. 

 

 - 21 - 

 

PRINCETON CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

March 31, 2017 (Unaudited)

 

The following table provides quantitative information regarding Level 3 fair value measurements as of December 31, 2016:

 

Description  Fair Value   Valuation Technique 

Unobservable 

 Inputs

  Range (Average) 
               
First Lien Loans  $6,531,000   Discounted Cash Flow  Discount Rate   14.00%
    8,030,261   Discounted Cash Flow  Discount Rate   12.20%
        Market Approach  Enterprise Value/Revenue Multiple   0.6x-0.9x (0.75x) 
    1,740,000   Market Approach  Real Estate Appraisal Values   N/A 
Total   16,301,261            
                 
Second Lien Loans   6,000,000   Discounted Cash Flow  Discount Rate   68.00%
    4,500,000   Discounted Cash Flow  Discount Rate   14.10%
        Market Approach  Enterprise Value / Revenue & EBITDA Multiples   0.6X
    6,750,000   Discounted Cash Flow  Discount Rate   9.00%
        Market Approach  Enterprise Value/Revenue Multiple   8.6X
Total   17,250,000            
                 
Unsecured Loans   276,922   Discounted Cash Flow  Discount Rate   12.60%
        Market Approach  Enterprise Value / Revenue & EBITDA Multiples   1.10x– 20.60x (10.85x) 
Total   276,922            
                 
Equity   11,778,757   Black-Scholes Option
 
Pricing Model
  Volatility   22.50%-39.50% (31.00%) 
           Discount for lack of marketability   5.00%-32.00% (18.50%)  
        Market Approach  Enterprise Value / Revenue & EBITDA Multiples   0.4x – 20.6x (10.5x) 
        Income Approach  Discount Rate   9.4% - 14.1% (11.75%) 
Total   11,778,757            
Total Level 3 Investments  $45,606,940            

 

The primary significant unobservable input used in the fair value measurement of the Company’s debt securities (first lien loans, second lien loans and unsecured loans), including income-producing investments in funds, is the discount rate. Significant increases (decreases) in the discount rate in isolation would result in a significantly lower (higher) fair value measurement. In determining the discount rate, for the income (discounted cash flow) or yield approach, the Company considers current market yields and multiples, portfolio company performance, leverage levels and credit quality, among other factors in its analysis. Changes in one or more of these factors can have a similar directional change on other factors in determining the appropriate discount rate to use in the income approach.

 

The primary significant unobservable inputs used in the fair value measurement of the Company’s equity investments are the EBITDA multiple and revenue multiple, which is used to determine the Enterprise Value. Significant increases (decreases) in the Enterprise Value in isolation would result in a significantly higher (lower) fair value measurement. To determine the Enterprise Value for the market approach, the Company considers current market trading and/or transaction multiples, portfolio company performance (financial ratios) relative to public and private peer companies and leverage levels, among other factors. Changes in one or more of these factors can have a similar directional change on other factors in determining the appropriate multiple to use in the market approach.

 

The primary unobservable inputs used in the fair value measurement of the Company’s equity investments, when using an option pricing model to allocate the equity value to the investment, are the discount rate for lack of marketability and volatility. Significant increases (decreases) in the discount rate in isolation would result in a significantly lower (higher) fair value measurement. Significant increases (decreases) in the volatility in isolation would result in a significantly higher (lower) fair value measurement. Changes in one or more factors can have a similar directional change on other factors in determining the appropriate discount rate or volatility to use in the valuation of equity using an option pricing model.

 

 - 22 - 

 

PRINCETON CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

March 31, 2017 (Unaudited)

 

NOTE 6 – RELATED PARTY TRANSACTIONS

 

Investment Advisory Agreement with Princeton Advisory Group

 

Our board of directors, including a majority of our independent directors, conditionally approved the PAG Investment Advisory Agreement between the Company and Princeton Advisory Group at its meeting held on January 18, 2016, subject to the approval of the Company’s stockholders at the 2016 Annual Meeting of Stockholders. On June 9, 2016, the Company’s stockholders approved the PAG Investment Advisory Agreement. The effective date of the PAG Investment Advisory Agreement was June 9, 2016. At a Special Meeting of the Board held on June 27, 2017, the Board, including a majority of the independent directors of the Board, voted to renew the PAG Investment Advisory Agreement for another one year term, pursuant to the requirements of Section 9(c) of the PAG Investment Advisory Agreement and Section 15(c) of the 1940 Act. Subject to the overall supervision of our board of directors and in accordance with the 1940 Act, Princeton Advisory Group manages our day-to-day operations and provides investment advisory services to us. The PAG Investment Advisory Agreement was terminated on December 31, 2017, as disclosed in Note 10.

 

Under the PAG Investment Advisory Agreement, the administrative services of the Company are provided by Princeton Advisory Group and subject to reimbursement of administrative related expenses under the PAG Investment Advisory Agreement.

 

Advisory Services

 

Princeton Advisory Group is registered as an investment adviser under the 1940 Act, and as of June 9, 2016, serves as the Company’s investment advisor pursuant to the PAG Investment Advisory Agreement in accordance with the 1940 Act. Princeton Advisory Group is owned by and an affiliate of Mr. Munish Sood, the Company’s President and Chief Executive Officer.

 

Subject to supervision by the Company’s Board of Directors, Princeton Advisory Group oversees the Company’s day-to-day operations and provides the Company with investment advisory services. Under the terms of the PAG Investment Advisory Agreement, Princeton Advisory Group, among other things: (i) determines the composition and allocation of the portfolio of the Company, the nature and timing of the changes therein and the manner of implementing such changes; (ii) identifies, evaluates and negotiates the structure of the investments made by the Company; (iii) executes, monitors and services the Company’s investments; (iv) determines the securities and other assets that the Company shall purchase, retain, or sell; (v) performs due diligence on prospective portfolio companies; (vi) provides the Company with such other investment advisory, research and related services as the Company may, from time to time, reasonably require for the investment of its funds; and (vii) if directed by the Board, will assist in the execution and closing of the sale of the Company’s assets or a sale of the equity of the Company in one or more transactions. Princeton Advisory Group’s services under the PAG Investment Advisory Agreement may not be exclusive and it is free to furnish similar services to other entities so long as its services to the Company are not impaired.

 

Management Fee

 

Pursuant to the PAG Investment Advisory Agreement, the Company pays Princeton Advisory Group a base management fee for investment advisory and management services. The cost of the base management fee will ultimately be borne by the Company’s stockholders. The PAG Investment Advisory Agreement does not include an incentive fee to Princeton Advisory Group.

 

The base management fee is calculated at an annual rate of 1.00% of the Company’s gross assets, including assets purchased with borrowed funds or other forms of leverage and excluding cash and cash equivalents net of all indebtedness of the Company for borrowed money and other liabilities of the Company. The base management fee is payable quarterly in arrears, and determined as set forth in the preceding sentence at the end of the two most recently completed calendar quarters prior to the quarter for which such fees are being calculated. The Board of Directors may retroactively adjust the valuation of the Company’s assets and the resulting calculation of the base management fee in the event the Company or any of its assets are sold or transferred to an independent third party or the Company or Princeton Advisory Group receives an audit report or other independent third party valuation of the Company. To the extent that any such adjustment increases or decreases the base management fee of any prior period, the Company will be obligated to pay the amount of increase to Princeton Advisory Group or Princeton Advisory Group will be obligated to refund the decreased amount, as applicable.

 

Management fees under the PAG Investment Advisory Agreement for the three months ended March 31, 2017 were $107,055. There were no management fees under PAG Investment Advisory Agreement for the three months ended March 31, 2016. Management fees under the Terminated Investment Advisory Agreement for the three months ended March 31, 2016 were $213,529. As of March 31, 2017 and December 31, 2016, management fees of $164,134 and $194,224, respectively, were payable to Princeton Advisory Group.

 

Incentive Fee

 

The Company will not pay Princeton Advisory Group an incentive fee.

 

 - 23 - 

 

PRINCETON CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

March 31, 2017 (Unaudited)

 

Payment of Expenses

 

Princeton Advisory Group will bear all compensation expense (including health insurance, pension benefits, payroll taxes and other compensation related matters) of its employees and bear the costs of any salaries or directors’ fees of any officers or directors of the Company who are affiliated persons (as defined in the 1940 Act) of Princeton Advisory Group. However, Princeton Advisory Group, subject to approval by the Board of Directors of the Company, will be entitled to reimbursement for the portion of any compensation expense and the costs of any salaries of any such employees to the extent attributable to services performed by such employees for the Company. During the term of the PAG Investment Advisory Agreement, Princeton Advisory Group will also bear all of its costs and expenses for office space rental, office equipment, utilities and other non-compensation related overhead allocable to performance of its obligations under the PAG Investment Advisory Agreement.

 

Except as provided in the preceding paragraph the Company will reimburse Princeton Advisory Group all direct and indirect costs and expenses incurred by it during the term of the PAG Investment Advisory Agreement for: (i) due diligence of potential investments of the Company, (ii) monitoring performance of the Company’s investments, (iii) serving as officers of the Company, (iv) serving as directors and officers of portfolio companies of the Company, (v) providing managerial assistance to portfolio companies of the Company, and (vi) enforcing the Company’s rights in respect of its investments and disposing of its investments; provided, however, that, any third party expenses incurred by Princeton Advisory Group in excess of $50,000 in the aggregate in any calendar quarter will require advance approval by the Board of Directors of the Company.

 

In addition to the foregoing, the Company will also be responsible for the payment of all of the Company’s other expenses, including the payment of the following fees and expenses:

 

organizational and offering expenses;

expenses incurred in valuing the Company’s assets and computing its net asset value per share (including the cost and expenses of any independent valuation firm);

subject to the guidelines approved by the Board of Directors, expenses incurred by Princeton Advisory Group that are payable to third parties, including agents, consultants or other advisors, in monitoring financial and legal affairs for the Company and in monitoring the Company’s investments and performing due diligence on the Company’s prospective portfolio companies or otherwise related to, or associated with, evaluating and making investments;

interest payable on debt, if any, incurred to finance the Company’s investments and expenses related to unsuccessful portfolio acquisition efforts;

offerings of the Company’s common stock and other securities;

administration fees;

transfer agent and custody fees and expenses;

U.S. federal and state registration fees of the Company (but not Princeton Advisory Group);

all costs of registration and listing the Company’s shares on any securities exchange;

U.S. federal, state and local taxes;

independent directors’ fees and expenses;

costs of preparing and filing reports or other documents required of the Company (but not Princeton Advisory Group) by the SEC or other regulators;

costs of any reports, proxy statements or other notices to stockholders, including printing costs;

the costs associated with individual or group stockholders;

the Company’s allocable portion of the fidelity bond, directors and officers/errors and omissions liability insurance, and any other insurance premiums;

direct costs and expenses of administration and operation of the Company, including printing, mailing, long distance telephone, copying, secretarial and other staff, independent auditors and outside legal costs;

and all other non-investment advisory expenses incurred by the Company regarding administering the Company’s business.

 

 - 24 - 

 

PRINCETON CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

March 31, 2017 (Unaudited)

 

Duration and Termination

 

Unless terminated earlier as described below, the PAG Investment Advisory Agreement will continue in effect for a period of one (1) year from its effective date. It will remain in effect from year to year thereafter if approved annually by the Company’s Board or by the affirmative vote of the holders of a majority of the Company’s outstanding voting securities, and, in either case, if also approved by a majority of the of Company’s directors who are neither parties to the PAG Investment Advisory Agreement nor “interested persons” (as defined under the 1940 Act) of any such party. The PAG Investment Advisory Agreement may be terminated at any time, without the payment of any penalty, (i) upon written notice, effective on the date set forth in such notice, by the vote of a majority of the outstanding voting securities of the Company or by the vote of the Company’s directors, or (ii) upon 60 days’ written notice, by Princeton Group. The PAG Investment Advisory Agreement automatically terminates in the event of its “assignment,” as defined in the 1940 Act.

 

Indemnification

 

The PAG Investment Advisory Agreement provides that, absent willful misfeasance, bad faith or negligence in the performance of their duties, or by reason of the material breach or reckless disregard of their duties and obligations under the PAG Investment Advisory Agreement (and to the extent specified in Section 36(b) of the Investment Company Act concerning loss resulting from a breach of fiduciary duty (as the same is finally determined by judicial proceedings) with respect to the receipt of compensation for services), Princeton Advisory Group and its officers, managers, employees and members are entitled to indemnification from the Company for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of Princeton Advisory Group’s services under the PAG Investment Advisory Agreement or otherwise as the Company’s investment advisor. The amounts payable for indemnification will be calculated net of payments recovered by the indemnified party under any insurance policy with respect to such losses.

 

At all times during the term of the PAG Investment Advisory Agreement and for one year thereafter, Princeton Advisory Group is obligated to maintain directors and officers/errors and omission liability insurance in an amount and with a provider reasonably acceptable to the Board of Directors of the Company.

 

Administration Services

 

Princeton Advisory Group is entitled to reimbursement of expenses under the PAG Investment Advisory Agreement for administrative services performed for the Company.

 

Sub-Administration Agreement

 

Princeton Advisory Group has engaged SS&C Technologies Holdings, Inc. (the “Sub-Administrator”) to provide certain administrative services to us. In exchange for provided services, the Administrator pays the Sub-Administrator an asset-based fee with a $200,000 annual minimum as adjusted for any reimbursement of expenses. This asset-based fee will vary depending upon our gross assets, as adjusted, as follows:

 

Gross Assets   Fee
first $150 million of gross assets  20 basis points (0.20%)
next $150 million of gross assets  15 basis points (0.15%)
next $200 million of gross assets  10 basis points (0.10%)
in excess of $500 million of gross assets  5 basis points (0.05%)

 

Administration fees were $53,181 and sub-administration fees were $31,250 for the three months ended March 31, 2017, as shown on the Statements of Operations under administration fees. Administration fees were $73,305 and sub-administration fees were $50,000 for the three months ended March 31, 2016, as shown on the Statements of Operations under administration fees.

 

Managerial Assistance

 

As a BDC, we offer, and must provide upon request, managerial assistance to our portfolio companies. This assistance could involve monitoring the operations of our portfolio companies, participating in board of directors and management meetings, consulting with and advising officers of portfolio companies and providing other organizational and financial guidance. As of March 31, 2017, none of the portfolio companies had accepted our offer for such services.

 

 - 25 - 

 

PRINCETON CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

March 31, 2017 (Unaudited)

 

Other Related Party Transactions

 

On March 30, 2016, the Company, as Borrower, entered into a Term Loan in the amount of $1,500,000 with Sema4, Inc. and Princeton Advisory Group, Inc., as Lenders in order to purchase certain assets to qualify as a RIC. Sema4, Inc. committed $1,000,000 and Princeton Advisory Group, Inc. committed $500,000. The loan was repaid in full with interest at a rate of 10.0% per annum on April 8, 2016. Sema4, Inc. is the general partner of CPP and CPPII, which own approximately 87% and 9% of our common stock, respectively. Sema4, Inc. is solely owed by Mark DiSalvo, a current director, Interim President, and Interim CEO of the Company as of the date of this filing. Princeton Advisory Group, Inc. is wholly owned by Munish Sood, a former Director, former President, and former CEO of the Company as of the date of this filing.

 

As disclosed in the Company’s Form 8-K filed with the SEC on June 30, 2016, on June 28, 2016, the Company, as Borrower, entered into a Term Loan in the amount of $390,000 with Munish Sood, as Lender, in order to purchase certain assets to qualify as a RIC. Mr. Sood is the Company’s Chief Executive Officer, President, and a director of the Company. The board of directors of the Company, by unanimous written consent, authorized and approved that the Company enter into the Loan Agreement. The loan was repaid in full with interest at a rate of 10.0% per annum on July 11, 2016.

 

As disclosed in the Company’s Form 8-K filed with the SEC on September 16, 2016, on September 12, 2016, the Company, as a Borrower, entered into a Term Loan in the amount of $225,000 with Munish Sood, as Lender, in order to fund capital to one of its portfolio companies, Rockfish Seafood Grill, Inc. Mr. Sood is the Company’s Chief Executive Officer, President and a director of the Company.  The board of directors of the Company, by unanimous written consent, authorized and approved that the Company enter into the Loan Agreement.  The loan will bear interest at a rate of 10.0% per annum and matures on December 12, 2016.  As disclosed in the Company’s Form 8-K filed with the SEC on October 27, 2016, on October 21, 2016, Munish Sood lent an additional $140,000 under this Term Loan. On March 29, 2017, Munish Sood, in order to purchase certain assets to qualify as a RIC, lent an additional $450,000 under this Term Loan and extended the maturity date to June 30, 2017. On April 10, 2017, the Company made a principal and interest payment totaling $450,984 on this Term Loan. The loan was repaid in full with interest on July 17, 2017. As of March 31, 2017, the amount outstanding on the loan was $815,000 as disclosed on the statements of assets and liabilities as term loan-related party.

  

As disclosed in the Company’s Form 8-K filed with the SEC on October 5, 2016, on September 29, 2016 the Company, as Borrower, entered into a Term Loan in the amount of $470,000 with Munish Sood, as Lender, in order to purchase certain assets to qualify as a RIC. Mr. Sood is the Company’s Chief Executive Officer, President, and a director of the Company. The board of directors of the Company, by unanimous written consent, authorized and approved that the Company enter into the Loan Agreement. The loan was repaid in full with interest at a rate of 10.0% per annum on October 7, 2016.

 

On June 28, 2017, Munish Sood made a non-interest bearing short term loan to Advantis Certified Staffing Solutions, Inc., one of the Company’s portfolio companies, in the amount of $89,225 for a short term working capital need. The loan was repaid without interest on July 5, 2017.

 

NOTE 7 – FINANCIAL HIGHLIGHTS

 

   Three Months Ended   Three Months Ended 
   March 31, 2017   March 31, 2016 
   (Unaudited)   (Unaudited) 
Per Share Data (1):          
Net asset value at beginning of period  $0.365   $0.400 
Net investment loss   (0.002)   (0.007)
Change in unrealized gain (loss)   (0.016)   0.025 
Net asset value at end of period  $0.347   $0.418 
Total return based on net asset value (2)   (4.9)%   4.5%
Weighted average shares outstanding for period, basic   120,486,061    120,486,061 
Ratio/Supplemental Data:          
Net assets at end of period  $41,826,641   $50,312,867 
Average net assets  $43,441,114   $54,865,986 
Annualized ratio of net operating expenses to average net assets (3)   5.2%   7.5%
Annualized ratio of net investment income (loss) to average net assets(3)   (2.0)%   (4.1)%
Annualized ratio of net operating expenses excluding management fees, incentive fees, and interest expense to average net assets (3)   4.0%   6.0%
Annualized ratio of net increase (decrease) in net assets resulting from operations to average net assets(3)   (20.2)%   17.3%
Portfolio Turnover   0.4%   0.4%

 

 - 26 - 

 

PRINCETON CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

March 31, 2017 (Unaudited)

 

 

  Year Ended December 31,
    2016     2015     2014     2013     2012  
Per Share Data (1):                              
Net asset value at beginning of period $ 0.400   $ 0.254   $ 0.564   $ 0.174    $ 0.204  
Net investment loss   (0.004)     (0.013)     (0.144)     (0.062)     (0.068)  
Change in unrealized gain (loss)   (0.019)     (0.081)     (0.358)     0.388     (0.004)  
Realized gain   (0.012)     0.002     0.192     0.064     0.042  
Change in capital share transactions   -     0.238     -     -     -  
Net asset value at end of period $ 0.365   $ 0.400   $ 0.254   $ 0.564    $ 0.174  
Total return based on net asset value (2)   (8.8) %   (36.2) %   (55.0) %   224.1 %   (14.7) %
Weighted average shares outstanding for period, basic   120,486,061     97,402,398     1,816,534     1,816,534     1,816,534  
Raito/Supplemental Data:                              
Net assets at end of period $ 43,985,319   $  48,225,563   $ 462,022   $ 1,025,493    $ 317,502  
Average net assets $ 46,991,446   $  45,472,971   $ 743,758   $ 671,498   $ 343,572  

Annualized ratio of net operating expenses to average net assets

  5.8 %   9.5 %   35.2 %   16.6  %   35.6 %
Annualized ratio of net investment income (loss) to average net assets   (1.1) %   (2.7) %   (35.2) %   (16.6) %   (35.6) %
Annualized ratio of net operating expenses
excluding management fees, incentive fees, and interest expense to average net assets
  4.3 %   8.0 %   35.2 %   16.2  %   34.6 %
Annualized ratio of net increase (decrease) in net assets resulting from operations to average net assets   (9.0) %   (19.5) %   (75.8)(4) %   105.4 (4) %   (15.2) (4) %
Portfolio Turnover   1.1 %   0.7 %   31.2  (4) %   14.7 (4) %   17.9  (4) %

 

 

(1) Financial highlights are based on weighted average shares outstanding.
(2) Total return based on net asset value is based upon the change in net asset value per share between the opening and ending net asset values per share in the period. The total returns are not annualized.
(3) Financial highlights for periods of less than one year are annualized and each of the ratios to average net assets are adjusted accordingly.  Non-recurring expenses were not annualized. For the three months ended March 31, 2016 the Company incurred $343,126 of legal fees that were deemed to be non-recurring.
(4) Unaudited

 

 - 27 - 

 

PRINCETON CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

March 31, 2017 (Unaudited)

 

NOTE 8 – COMMITMENTS AND CONTINGENCIES

 

In the normal course of business, the Company may enter into investment agreements under which it commits to make an investment in a portfolio company at some future date or over a specified period of time. The Company maintains sufficient assets to provide adequate cover to allow it to satisfy its unfunded commitment amount as of March 31, 2017. The unfunded commitment is accounted for under ASC 820. As of the date of this report, all commitments have been funded.

 

On June 2, 2015, the Company entered into a Lease Guaranty Agreement to guaranty a portion of a lease entered into by Rockfish Seafood Grill, Inc. The Company’s guaranty is limited to the total tenant improvement allowance and the total amount of commissions that the landlord provided in connection with the lease. The total guaranteed amount by the Company is approximately $292,701 and reduces proportionally after each of the first sixty months of the lease, which commenced in November 2015, so long as no uncured event of default exists. Through the date of filing, the guaranteed amount has reduced to approximately $209,769.

 

On or around September 8, 2015, a lawsuit was filed captioned Capital Link Fund I, LLC, et al. v. Capital Point Management, LP, et al., C.A. No. 11483-VCN in the Delaware Court of Chancery.

 

The following description of the settlement agreement is qualified in its entirety by reference to the full text of the Settlement Agreement, which is attached as Exhibit 99.1to the 8-K filed on January 22, 2016:

 

On January 19, 2016, the Company, Princeton Advisory Group, Inc., Gregory J. Cannella, Munish Sood, Thomas Jones, Jr. and Trennis L. Jones (together the “Independent Directors” and the Independent Directors together with the Company, Princeton Advisory Group, Inc., Cannella and Sood, the “Settling Defendants”) on the one hand, entered into a settlement agreement (“Settlement Agreement”) with Capital Link Fund I, LLC (“Capital Link”), CT Horizon Legacy Fund, LP (“CT Horizon”), CPP, and Sema4, Inc. (“Semaphore” and together with Capital Link, CT Horizon and CPP I, the “Plaintiffs” or the “Capital Point Parties”) on the other hand. CPP I is the Company’s largest stockholder.

 

Subject to the terms and conditions contained therein, the Settlement Agreement settles between the Plaintiffs and the Settling Defendants the disputes described in the lawsuit. No monies were paid or exchanged by any of the parties as a part of the settlement and none of the parties admitted any wrongdoing. For the avoidance of doubt, none of the following is a party to the Settlement Agreement: Alfred Jackson (“Jackson”), Martin Tuchman (“Tuchman”), Capital Point Management, LP (“CPM”), Capital Point Advisors, LP (“CPA”) or Princeton Investment Advisors, LLC (“PIA,” and, together with Jackson, Tuchman, CPM and CPA, collectively the “Non-Settling Defendants”). As part of the terms of the Settlement Agreement, Sood and Cannella waived any rights to indemnification they may have had against the Company as it relates to the lawsuit. Subsequently, pursuant to a written agreement among the Company, Jackson, CPM, CPA, and PIA, Jackson waived any rights to indemnification that he may have had against the Company.

 

On June 17, 2016, a Stipulation and Order of Dismissal of Claims (the “Dismissal Order”) against the Settling Defendants (which includes the Company) and Tuchman (collectively, the “Dismissed Defendants”) was entered in the Delaware Court of Chancery. The Dismissal Order, which was dated June 10, 2016, dismissed with prejudice the claims brought by the Plaintiffs against the Dismissed Defendants. The Dismissal Order did not dismiss the claims against Jackson, CPM, CPA or PIA.

 

On February 24, 2017, a Stipulation and Order of Dismissal of Claims (the “Dismissal Order II”) against Jackson, CPM, CPA and PIA was entered in the Delaware Court of Chancery. The Dismissal Order II, which was dated February 24, 2017, dismissed with prejudice the claims brought by the Plaintiffs against Jackson, CPM, CPA and PIA. Terms of any settlement were not disclosed and all claims with respect to the lawsuit have now been dismissed, signifying that the status quo order that included the Company has now been lifted.

 

Except as set forth under Note 10 and as a subsequent event to the period covered by this filing, there are no other legal proceedings against the Company or any of its officers or directors.