10-Q 1 f10q0918_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 September 30, 2018

 

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 January 31, 2019 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 September 30, 2018 (unaudited) and December 31, 2017 1
   
Statements of Operations (unaudited) for the three and nine months ended September 30, 2018 and September 30, 2017 2
   
Statements of Changes in Net Assets (unaudited) for the nine months ended September 30, 2018 and September 30, 2017 3
   
Statements of Cash Flows (unaudited) for the nine months ended September 30, 2018 and September 30, 2017 4
   
Schedule of Investments as of September 30, 2018 (unaudited) 5
   
Schedule of Investments as of December 31, 2017 8
   
Notes to Financial Statements (unaudited) as of September 30, 2018 11
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 36
   
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 48
   
Item 5. Other Information 48
   
Item 6. Exhibits 48
   
SIGNATURES 49

 

-i -

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

PRINCETON CAPITAL CORPORATION
  
STATEMENTS OF ASSETS AND LIABILITIES

 

  

September 30, 2018

(unaudited)

   December 31, 2017 
         
ASSETS        
Control investments at fair value (cost of $26,498,029 and $25,204,690, respectively)  $18,350,676   $17,273,360 
Non-control/non-affiliate investments at fair value (cost of $27,731,920 and $27,652,557, respectively)   22,386,825    21,677,400 
Investment in U.S. Treasury Bill (cost of $33,993,686 and $0, respectively)   33,994,220    - 
Total investments at fair value (cost of $88,223,635 and $52,857,247, respectively)   74,731,721    38,950,760 
Cash   715,689    2,084,262 
Due from portfolio companies   330,326    275,829 
Interest receivable   344,301    270,718 
Taxes receivable   15,673    314,590 
Prepaid expenses   28,799    52,221 
Total assets   76,166,509    41,948,380 
           
LIABILITIES          
Accrued management fees   223,908    94,282 
Due to affiliates   67,500    13,602 
Accounts payable (Note 2)   624,083    239,021 
Insurance loan payable   -    26,806 
Short term payable for securities purchased   33,647,373    - 
Interest payable   7,459    - 
Tax expense payable   3,750    36,141 
Deferred fee income   39,002    23,002 
Accrued expenses and other liabilities   102,280    107,987 
Total liabilities   34,715,355    540,841 
           
Net assets  $41,451,154   $41,407,539 
           
NET ASSETS          
Common Stock, par value $0.001 per share (250,000,000 shares authorized; 120,486,061 shares issued and outstanding at September 30, 2018 and December 31, 2017)  $120,486   $120,486 
Paid-in capital   64,868,884    64,868,884 
Accumulated undistributed net realized loss   (745,622)   (637,266)
Distributions in excess of net investment income   (9,300,680)   (9,038,078)
Accumulated unrealized loss on investments   (13,491,914)   (13,906,487)
Total net assets  $41,451,154   $41,407,539 
Net asset value per share  $0.344   $0.344 

 

See notes to financial statements (unaudited).

 

- 1 -

 

 

PRINCETON CAPITAL CORPORATION
  
STATEMENTS OF OPERATIONS (Unaudited)

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2018   2017   2018   2017 
INVESTMENT INCOME                
Interest income from non-control/non-affiliate investments  $ 434,271   $ 347,149   $ 1,165,076   $ 1,009,732 
Interest income from control investments   109,205    7,654    267,153    19,139 
Other income from non-control/non-affiliate investments   10,872    14,188    34,000    19,009 
Other income from affiliate investments   -    -    -    18,882 
Other income from non-investment sources   665    1,669    2,209    1,819 
Total investment income   555,013    370,660    1,468,438    1,068,581 
                     
OPERATING EXPENSES                    
Management fees   100,462    110,740    321,453    323,131 
Professional fees (Note 2)   189,081    93,078    568,740    330,820 
Administration fees   105,000    92,283    309,000    260,893 
Valuation fees   178,610    -    178,610    74,200 
Directors’ fees   38,625    52,125    129,375    124,500 
Consulting fees   -    -    -    30,000 
Insurance expense   33,716    34,209    87,755    85,032 
Interest expense   24,840    12,477    40,195    62,124 
Other general and administrative expenses   23,334    29,838    79,301    66,685 
Total operating expenses   693,668    424,750    1,714,429    1,357,385 
                     
Net investment loss before tax   (138,655)   (54,090)   (245,991)   (288,804)
Income tax expense   1,250    7,684    16,611    25,798 
Net investment loss after taxes   (139,905)   (61,774)   (262,602)   (314,602)
                     
Net realized gain (loss) on:                    
Non-control/non-affiliate investments   (108,356)   -    (108,356)   - 
Affiliate investments   -    589,111    -    589,111 
Total net realized gain (loss)   (108,356)   589,111    (108,356)   589,111 
Net change in unrealized gain (loss) on:                    
Non-control/non-affiliate investments   173,214    1,934,559    630,062    2,760,032 
Affiliate investments   -    (589,110)   -    (1,079,929)
Control investments   (42,430)   (895,758)   (216,023)   (3,049,914)
U.S. Treasury Bills   (970)   -    534    (699)
Total net change in unrealized gain (loss) on investments   129,814    449,691    414,573    (1,370,510)
Total net realized gain (loss) and change in unrealized gain (loss) on investments   21,458    1,038,802    306,217    (781,399)
Net increase (decrease) in net assets resulting from operations  $(118,447)  $977,028   $43,615   $(1,096,001)
                     
Net investment income (loss) per share                    
Basic  $(0.001)  $(0.001)  $(0.002)  $(0.003)
Diluted  $(0.001)  $(0.001)  $(0.002)  $(0.003)
Net increase (decrease) in net assets resulting from operations per share                    
Basic  $(0.001)  $0.008   $0.000   $(0.009)
Diluted  $(0.001)  $0.008   $0.000   $(0.009)
Weighted average shares of common stock outstanding                    
Basic   120,486,061    120,486,061    120,486,061    120,486,061 
Diluted   120,486,061    120,486,061    120,486,061    120,486,061 

 

See notes to financial statements (unaudited).

 

- 2 -

 

  

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

 

   Nine Months Ended
September 30,
 
   2018   2017 
Decrease in net assets resulting from operations:        
Net investment loss  $(262,602)  $(314,602)
Net realized gain (loss) on investments   (108,356)   589,111 
Net change in unrealized gain (loss) on investments   414,573    (1,370,510)
Net increase (decrease) in net assets resulting from operations   43,615    (1,096,001)
           
Total increase (decrease) in net assets   43,615    (1,096,001)
Net assets at beginning of period   41,407,539    43,985,319 
Net assets at end of period  $41,451,154   $42,889,318 
           
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)

 

   Nine Months Ended
September 30,
 
   2018   2017 
Cash flows from operating activities:        
Net increase (decrease) in net assets resulting from operations  $43,615   $(1,096,001)
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   

(2,138,225

)   (2,773,258)
Escrow payment on securities sold   

(108,356

)     
U.S. Treasury Bills   (118,972,831)   (45,998,007)
Proceeds from sales, repayments, or maturity of investments in:          
Portfolio investments   879,891    6,178,782 
U.S. Treasury Bills   85,000,000    98,396,260 
Net realized (gain) loss on investments   108,356    (589,111)
Net change in unrealized (gain) loss on investments   (414,573)   1,370,510 
Increase in investments due to PIK   (136,595)   (33,717)
Amortization of fixed income premium or discounts   1,372    13,138 
Changes in other assets and liabilities:          
Due from portfolio companies   (54,497)   (93,879)
Interest receivable   (73,583)   (16,933)
Prepaid expenses   23,422    (72,494)
Note receivable   -    500,000 
Deferred tax asset   314,590    4,926 
Taxes receivable   (15,673)   - 
Accrued management fees   129,626    (109,421)
Accounts payable   385,062    (180,102)
Due to affiliates   53,898    (29,302)
Interest payable   7,459    - 
Tax expense payable   (32,391)   (13,788)
Deferred fee income   16,000    8,263 
Accrued expenses and other liabilities   (5,707)   (175,719)
Net cash provided by (used in) operating activities   (34,989,140)   55,290,147 
           
Cash flows from financing activities:          
Insurance loan payable   (26,806)   52,717 
Short term payable for securities purchased   33,647,373    (52,398,253)
Term loan – related party   -    (365,000)
Net cash provided by (used in) financing activities   33,620,567    (52,710,536)
           

Net increase (decrease) in cash and restricted cash

   (1,368,573)   2,579,611 
Cash and restricted cash at beginning of period   2,084,262    533,949 
Cash and restricted cash at end of period  $715,689   $3,113,560 
           
Supplemental disclosure of cash flow financing activities:          
Interest expense paid  $47,654   $57,637 
Income tax paid  $49,002   $39,586 

  

See notes to financial statements (unaudited).

 

- 4 -

 

 

PRINCETON CAPITAL CORPORATION

 

SCHEDULE OF INVESTMENTS as of September 30, 2018 (Unaudited)

 

Investments  Headquarters / Industry 

Principal Amount/

Shares/% Ownership

   Amortized Cost   Fair
Value (1)
   % of Net Assets 
Portfolio Investments (6)                   
Control investments                   
Advantis Certified Staffing Solutions, Inc.  Houston, TX                
Second Lien Loan, 6.0% Cash, due 11/30/2021 (2) (5)   Staffing  $4,500,000   $4,500,000   $3,147,284    7.60%
Unsecured loan, 5%, due 12/31/2018     $813,225    813,225    769,047    1.86%
Unsecured loan, 5%, due 12/31/2018     $90,000    90,000    85,111    0.21%
Unsecured loan 8%, due 12/31/2018     $150,000    150,000    142,911    0.34%
Unsecured loan 8%, due 12/31/2018     $110,000    110,000    104,801    0.25%
Unsecured loan 10.75%, due 12/31/2018     $175,000    175,000    167,862    0.40%
Common Stock – Series A (5)      225,000    10,150    1,191    0.00%
Common Stock – Series B (5)      9,500,000    428,571    50,294    0.12%
Warrant for 250,000 Shares of Series A Common Stock, exercise price $0.01 per share, expires 1/1/2027 (5)      1    11,278    1,324    0.00%
Warrant for 700,000 Shares of Series A Common Stock, exercise price $0.01 per share, expires 1/1/2027 (5)      1    -    3,706    0.01%
Total           6,288,224    4,473,531    10.79%
Integrated Medical Partners, LLC  Milwaukee, WI                    
Second Lien Term Loan, 12.0% Cash, 6% PIK due, 3/1/2019 (3) (8)  Medical Business Services  $1,120,261    1,120,261    1,098,115    2.65%
Preferred Membership, Class A units (5)      800    4,196,937    1,562,422    3.77%
Preferred Membership, Class B units (5)      760    29,586    7,559    0.02%
Common Units (5)      14,082    -    14    0.00%
Total           5,346,784    2,668,110    6.44%
PCC SBH Sub, Inc.  Karnes City, TX                    
Unsecured loan, 12% Cash, due 2/15/2018  Energy Services  $14,000    14,000    14,000    0.03%
Common stock (5)      100    2,525,481    2,004,387    4.84%
Total           2,539,481    2,018,387    4.87%
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    7,187,075    17.33%
Revolving Loan, 8% Cash, due 12/31/2018 (7)     $1,821,000    1,821,000    1,927,444    4.65%
Rockfish Holdings, LLC                       

Warrant for Membership Interest, exercise price $0.001 per 1% membership interest, expires 7/28/2028 (5)

      10.000%   414,960    7,613    0.02%
Membership Interest – Class A (5)      99.997%   3,734,636    68,516    0.17%
Total           12,323,540    9,190,648    22.17%
Total control investments           26,498,029    18,350,676    44.27%
                        
Non-control/non-affiliate investments                       
ECM Energy Services, Inc.  Waynesburg, PA                    
Revolving Loan Participation, Second Lien, US Prime Rate + 1%, (5.25% floor) and 7.2% collateral management fee, overall floor of 12.0%, due 2/11/2019 (9)  Energy Services  $1,000,000    1,000,000    1,000,000    2.41%
Great Value Storage, LLC  Austin, TX                    

First Lien Loan, 12.0% cash, 2.0% PIK, due 12/31/2018 (3)

  Storage Company Property Management  $6,766,005    6,773,495    6,702,541    16.17%
Lone Star Brewery Development, Inc.  Houston, TX                    
Second Lien Loan, 12.0% in cash, 2.0% PIK, due 2/13/2020 (2), (3), (5)  Real Estate Development  $8,076,135    8,076,135    7,450,000    17.98%

 

See notes to financial statements (unaudited).

 

- 5 -

 

  

PRINCETON CAPITAL CORPORATION

 

SCHEDULE OF INVESTMENTS as of September 30, 2018 (Unaudited) (Continued)

 

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

% of Net Assets

 
Non-control/non-affiliate investments (continued)                   
Performance Alloys, LLC  Houston, TX                
Second Lien Loan, 6.0% cash, due 5/31/2020  Nickel Pipe,  $6,750,000   $6,750,000   $6,369,371    15.37%
Membership Interest – Class B (5)  Fittings & Flanges   25.97%   5,131,090    863,713    2.08%
Total           11,881,090    7,233,084    17.45%
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           27,731,920    22,386,825    54.01%
Total Portfolio Investments           54,229,949    40,737,501    98.28%
                        
United States Treasury                       
U. S. Treasury Bill 0.0%, 7/5/2018      34,000,000    33,993,686    33,994,220    82.01 
                        
Total Investments          $88,223,635   $74,731,721    180.29%

 

(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 as of September 30, 2018.
(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 September 30, 2018, less than 1% of the total fair value of investments represents non-qualifying assets.
(5)Investment is non-income producing as of September 30, 2018.
(6)Represents an illiquid investment. At September 30, 2018, 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 September 30, 2018, the commitment was fully funded.
(8)Represents investment in Dominion Medical Management, Inc., a wholly owned subsidiary of Integrated Medical Partners, LLC. 
(9)Represents a participation in a revolving loan from Capital Foundry Funding, LLC to ECM Energy Services, Inc. This participation revolving loan commitment is $1,000,000 and as of September 30, 2018, the commitment was fully funded.

 

See notes to financial statements (unaudited).

 

- 6 -

 

 

PRINCETON CAPITAL CORPORATION

 

SCHEDULE OF INVESTMENTS as of September 30, 2018 (Unaudited) (Continued)

 

The following tables show the fair value of our portfolio of investments (excluding U.S. Treasury Bills, if any) by geography and industry as of September 30, 2018.

 

   September 30,
2018
 
Geography  Investments at Fair Value   Percentage of Net Assets 
         
United States  $40,736,301    98.28%
Canada   1,200    0.00 
Total  $40,737,501    98.28%

 

   September 30,
2018
 
Industry  Investments at Fair Value   Percentage of Net Assets 
         
Casual Dining  $9,190,648    22.17%
Real Estate Development   7,450,000    17.98 
Nickel Pipe, Fittings and Flanges   7,233,084    17.45 
Storage Company Property Management   6,702,541    16.17 
Staffing   4,473,531    10.79 
Energy Services   3,018,387    7.28 
Medical Business Services   2,668,110    6.44 
Security   1,200    0.00 
Total  $40,737,501    98.28%

 

See notes to financial statements (unaudited).

 

- 7 -

 

 

PRINCETON CAPITAL CORPORATION

 

SCHEDULE OF INVESTMENTS as of December 31, 2017

  

Investments  Headquarters / Industry 

Principal Amount/

Shares/

% Ownership

   Amortized Cost   Fair
Value (1)
   % of Net Assets 
Portfolio Investments (6)                   
Control investments                   
Advantis Certified Staffing Solutions, Inc.  Houston, TX                    
Second Lien Loan, 6.0% Cash, due 11/30/2021 (2) (5)   Staffing  $4,500,000   $4,500,000   $3,826,477    9.24%
Unsecured loan, 5%, due 10/31/2017     $89,225    89,225    76,839    0.19%
Unsecured loan, 5%, due 12/31/2017     $69,000    69,000    59,422    0.14%
Unsecured loan, 5%, due 12/31/2017     $125,000    125,000    107,648    0.26%
Unsecured loan, 5%, due 12/31/2017     $30,000    30,000    25,836    0.06%
Unsecured loan, 5%, due 12/31/2017     $105,000    105,000    90,425    0.22%
Unsecured loan, 5%, due 12/31/2017     $200,000    200,000    172,237    0.42%
Unsecured loan, 5%, due 12/31/2017     $150,000    150,000    129,178    0.31%
Unsecured loan, 5%, due 12/31/2017     $45,000    45,000    38,753    0.09%
Common Stock – Series A (5)     $225,000    10,150    3,713    0.01%
Common Stock – Series B (5)     $9,500,000    428,571    156,757    0.38%
Warrant for 250,000 Shares of Series A Common Stock, exercise price $0.01 per share, expires 1/1/2027 (5)      1    11,278    4,125    0.01%
Warrant for 700,000 Shares of Series A Common Stock, exercise price $0.01 per share, expires 1/1/2027 (5)      1    -    11,551    0.03%
Total           5,763,224    4,702,961    11.36%
Integrated Medical Partners, LLC  Milwaukee, WI                    
Unsecured Loan, 6.0% Cash, due 9/30/2019 (8)  Medical Business  $451,922    451,922    437,085    1.06%
Unsecured Loan, 6.0% Cash, due 5/20/2018 (8)  Services  $100,000    100,000    81,389    0.19%
Preferred Membership, Class A units (5)      800    4,196,937    1,844,856    4.46%
Preferred Membership, Class B units (5)      760    29,586    34,514    0.08%
Common Units (5)      14,082    -    307    0.00%
Total           4,778,445    2,398,151    5.79%
PCC SBH Sub, Inc.  Karnes City, TX                    
Unsecured loan, 12% Cash, due 2/15/2018  Energy Services  $14,000    14,000    14,000    0.03%
Common stock (5)      100    2,525,481    1,570,755    3.79%
Total           2,539,481    1,584,755    3.82%
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    6,637,883    16.03%
Revolving Loan, 8% Cash, due 6/29/2017 (2), (5), (7)     $1,621,000    1,621,000    1,663,335    4.02%
Rockfish Holdings, LLC                       

Warrant for Membership Interest, exercise price $0.001 per 1% membership interest, expires 7/28/2018 (5)

      10.000%   414,960    257,647    0.62%
Membership Interest – Class A (5)      89.400%   3,734,636    28,628    0.07%
Total           12,123,540    8,587,493    20.74%
Total control investments           25,204,690    17,273,360    41.71%
                        
Non-control/non-affiliate investments                       
ECM Energy Services, Inc.  Waynesburg, PA                    
Revolving Loan, US Prime Rate + 1%, (5.25% floor) and 7.2% collateral management fee, overall floor of 12.0%, due 2/11/2019 (9)  Energy Services  $1,000,000    1,000,000    1,000,000    2.42%
Great Value Storage, LLC  Austin, TX                    

First Lien Loan, 12.0% cash, 2.0% PIK, due 12/31/2018 (3)

  Storage Company Property Management  $6,664,416    6,694,132    6,664,000    16.09%

 

See notes to financial statements (unaudited).

 

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PRINCETON CAPITAL CORPORATION

 

SCHEDULE OF INVESTMENTS as of as of December 31, 2017 (Continued)

 

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

% of

Net Assets

 
Non-control/non-affiliate investments (continued)                   
                    
Lone Star Brewery Development, Inc.  Houston, 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   $7,500,000    18.11%
                        
Performance Alloys, LLC  Houston, TX                    
Second Lien Loan, 6.0% cash, due 5/31/2020  Nickel Pipe,  $6,750,000    6,750,000    6,339,459    15.31%
Membership Interest – Class B (5)  Fittings & Flanges   25.97%   5,131,090    172,741    0.42%
Total           11,881,090    6,512,200    15.73%
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           27,652,557    21,677,400    52.35%
Total Portfolio Investments           52,857,247    38,950,760    94.06%
                        
Total Investments          $52,857,247   $38,950,760    94.06%

 

(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 as of December 31, 2017.
(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, 2017, less than 1% of the total fair value of investments represents non-qualifying assets.
(5)Investment is non-income producing as of December 31, 2017.
(6)Represents an illiquid investment. At December 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 December 31, 2017, the commitment was fully funded.
(8)Represents investment in Dominion Medical Management, Inc., a wholly owned subsidiary of Integrated Medical Partners, LLC. 
(9)Represents a participation in a revolving loan from Capital Foundry Funding, LLC to ECM Energy Services, Inc. This participation revolving loan commitment is $1,000,000 and as of December 31, 2017, the commitment was fully funded.

 

See notes to financial statements (unaudited).

 

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PRINCETON CAPITAL CORPORATION

 

SCHEDULE OF INVESTMENTS as of December 31, 2017 (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, 2017.

 

   December 31,
2017
 
Geography  Investments at Fair Value   Percentage of Net Assets 
         
Canada  $38,949,560    94.06%
United States   1,200    0.00 
Total  $38,950,760    94.06%

 

   December 31,
2017
 
Industry  Investments at Fair Value   Percentage of Net Assets 
         
Casual Dining  $8,587,493    20.74%
Real Estate Development   7,500,000    18.11 
Storage Company Property Management   6,664,000    16.09 
Nickel Pipe, Fittings & Flanges   6,512,200    15.73 
Staffing   4,702,961    11.36 
Energy Services   2,584,755    6.24 
Medical Business Services   2,398,151    5.79 
Security   1,200    0.00 
Total  $38,950,760    94.06%

  

See notes to financial statements (unaudited).

 

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PRINCETON CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

September 30, 2018 (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 Princeton, New Jersey. 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. Since inception, Regal One had been involved in several industries. 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 & 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 December 31, 2017, Princeton Advisory Group acted as the Company’s investment advisor pursuant to the terms of the PAG Investment Advisory Agreement.

 

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PRINCETON CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

September 30, 2018 (Unaudited)

 

On December 27, 2017, the Board determined that it would be in the best interests of the Company and its stockholders to terminate the PAG Investment Advisory Agreement and sent a formal Notice of Termination to Princeton Advisory Group notifying Princeton Advisory Group of its termination as the Company’s investment advisor, effective as of December 31, 2017 at 11:59 p.m. Eastern Time. Also on December 27, 2017, the Board approved (specifically in accordance with Rule 15a-4(b)(1)(ii) of the Investment Company Act) and authorized the Company to enter into an Interim Investment Advisory Agreement between the Company and House Hanover, LLC, a Delaware limited liability company (“House Hanover”) (the “Interim Investment Advisory Agreement”), in accordance with Rule 15a-4 of the Investment Company Act. The effective date of the Interim Investment Advisory Agreement was January 1, 2018.

 

On April 5, 2018, the Board, including a majority of the independent directors, conditionally approved the Investment Advisory Agreement between the Company and House Hanover (the “House Hanover Investment Advisory Agreement”) subject to the approval of the Company’s stockholders at the 2018 Annual Meeting of Stockholders. The House Hanover Investment Advisory Agreement replaced the Interim Investment Advisory Agreement. On May 30, 2018, the Company’s stockholders approved the House Hanover Investment Advisory Agreement. The effective date of the House Hanover Investment Advisory Agreement was May 31, 2018.

 

Since January 1, 2018, House Hanover has acted as our investment advisor under the Interim Investment Advisory Agreement (from January 1, 2018 until May 31, 2018) and the House Hanover Investment Advisory Agreement (since May 31, 2018).

 

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying financial statements 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. It is likely that changes in these estimates will occur in the near term. The Company’s estimates are inherently subjective in nature and actual results could differ materially from such estimates.

 

The reported amounts for the three and nine months ended September 30, 2018 may not be indicative of the results ultimately achieved for the year ended December 31, 2018 which will be presented in the Company’s annual report on form 10-K.

 

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 September 30, 2018, the Company had control investments in Advantis Certified Staffing Solutions, Inc., PCC SBH Sub, Inc., Rockfish Seafood Grill, Inc., Rockfish Holdings, LLC and Integrated Medical Partners, LLC as defined under the 1940 Act. As of December 31, 2017, the Company had control investments in Advantis Certified Staffing Solutions, Inc., PCC SBH Sub, Inc., Rockfish Seafood Grill, Inc., Rockfish Holdings, LLC and Integrated Medical Partners, LLC as defined under the 1940 Act.

 

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PRINCETON CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

September 30, 2018 (Unaudited)

 

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, in Note 1, and elsewhere in this Form 10-Q, changed on January 1, 2018 from Princeton Advisory Group to House Hanover);
   
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, in Note 1, and elsewhere in this Form 10-Q, changed on January 1, 2018 from Princeton Advisory Group to House Hanover), 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.

 

- 13 -

 

 

PRINCETON CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

September 30, 2018 (Unaudited)

 

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.

 

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.

 

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PRINCETON CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

September 30, 2018 (Unaudited)

 

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

 

The Company’s 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.

 

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.

 

As of September 30, 2018 and December 31, 2017, there was no restricted cash.

 

U.S. Treasury Bills

 

At the end of each fiscal quarter, we may take proactive steps to be 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.

 

- 15 -

 

 

PRINCETON CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

September 30, 2018 (Unaudited)

 

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 from investment sources, includes annual fees and monitoring fees from our portfolio investments and are included in other income from non-control/non-affiliate investments and other income from affiliate investments. Income from such sources for the three and nine months ended September 30, 2018 was $10,872 and $34,000, respectively. Income from such sources for the three and nine months ended September 30, 2017 was $14,188 and $37,891 respectively.

 

Other income from non-investment sources is generally comprised of interest income earned on cash in the Company’s bank account. Income from such sources for the three and nine months ended September 30, 2018 was $665 and $2,209, respectively. Income from such sources for the three and nine months ended September 30, 2017 was $1,669 and $1,819, respectively.

 

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. For the three and nine months ended September 30, 2018 PIK interest was $51,325 and $136,595, respectively. PIK interest for the three and nine months ended September 30, 2017 PIK interest was $33,717 and $99,555, respectively. 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 and nine months ended September 30, 2018 and 2017 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. Up until the agreements to settle in December 2017, it was undeterminable as to 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 and nine months ended September 30, 2018 and 2017, the Company was not invoiced any legal fees by these two law firms related to this lawsuit. 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. In addition, as of December 31, 2017, the Company reduced accounts payable by $1,060,039 as a result of the settlements. Other legal fees invoiced to the Company for the three and nine months ended September 30, 2018 and 2017, were incurred in the normal operating course of business and are included in professional fees on the Statement 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 2017 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 RIC for the 2017 tax year and will be taxed as a corporation under Subchapter C of the Code. The failure to qualify as a RIC, however, did not impact the 2017 tax year as the Company incurred tax losses. As a result of the losses incurred for the year ended December 31, 2017, the Company intends to carry forward the net operating losses to future periods in which the Company generates taxable income to reduce its tax liability.

 

The Company does not expect to meet the qualifications of a RIC for the 2018 tax year and will be taxed as a corporation under Subchapter C of the Code. However, in the event that the Company does meet the qualifications of a RIC for the 2018 tax year, it may not be in the best interests of the Company’s stockholders to elect to be taxed as a RIC for the 2018 tax year due to the net operating losses and capital loss carryforwards the Company currently has. Management will make a determination that is in the best interests of the Company and its stockholders.

 

- 16 -

 

 

PRINCETON CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

September 30, 2018 (Unaudited)

 

In order to qualify as a RIC, among other things, the Company is required to distribute to its stockholders on a timely basis at least 90% of investment company taxable income, as defined by the Code, for each year. So long as the Company achieves its status as a RIC, it generally will not pay corporate-level U.S. federal and state income taxes on any ordinary income or capital gains that it distributes at least annually to its stockholders as dividends. Rather, any tax liability related to income earned by the Company will represent obligations of the Company’s investors and will not be reflected in the 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.

 

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 and nine months ended September 30, 2018 and 2017 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 and nine months ended September 30, 2018 and 2017, 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 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 January 2016, the FASB issued ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities," to generally require equity investments be measured at fair value with changes in fair value recognized in net income, simplify the impairment assessment of equity investments without readily-determinable fair value, and change disclosure and presentation requirements regarding financial instruments and other comprehensive income, and clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets. In February 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic 825-10). The amendments in ASU 2018-03 make technical corrections to certain aspects of ASU 2016-01 on recognition of financial assets and financial liabilities. For public entities, the guidance in ASU 2016-01 and amendments in ASU 2018-03 are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Adoption of ASU 2016-01 and ASU 2018-03 did not have a material impact on the Company's financial statements.

 

- 17 -

 

 

PRINCETON CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

September 30, 2018 (Unaudited)

  

In March 2018, the FASB issued ASU 2018-05, “Income Taxes (Topic 740); Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118”. This ASU provides accounting and disclosure guidance relating to the Tax Cuts and Jobs Act pursuant to the issuance of SEC Staff Accounting Bulletin No. 118. The guidance allows a company to report provisional amounts when reasonable estimates are determinable for certain income tax effects relating to the Act. These provisional amounts may give rise to new current or deferred taxes based on certain provisions within the Act, as well as adjustments to existing current or deferred taxes that existed prior to the Act’s enactment date. Adoption of ASU 2018-05 did not have a material impact on the Company's financial statements.

 

In August 2018, the FASB issued ASU 2018-13 (“ASU 2018-13”), Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in ASU 2018-13 on this update eliminate, add and modify certain disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The amendments are effective for fiscal years beginning after December 15, 2019. Early adoption is permitted upon issuance of this update. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this update and delay adoption of the additional disclosures until their effective date. Management is evaluating the new guidance, but does not expect the adoption of this guidance to have a material impact on the Company's financial statements.

 

The SEC recently completed a project to streamline disclosure requirements in regulations S-X and S-K, as part of release 33-10532. The SEC adopted amendments to certain of its disclosure requirements that have become redundant, duplicative, overlapping, outdated, or superseded, in light of other SEC disclosure requirements and U.S. GAAP.  Management is evaluating the new guidance, but does not expect the adoption of this guidance to have a material impact on the Company's 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 September 30, 2018 and September 30, 2017 and the nine months ended September 30, 2018 and September 30, 2017.

 

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
   2018   2017   2018   2017 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
Per Share Data (1):                
Net increase (decrease) in net assets resulting from operations  $(118,447)  $977,028   $43,615   $(1,096,001)
Weighted average shares outstanding for period                    
Basic   120,486,061    120,486,061    120,486,061    120,486,061 
Diluted     120,486,061    120,486,061    120,486,061    120,486,061 
Basic and diluted net increase (decrease) in net assets resulting from operations per common share                    
Basic  $(0.001)  $0.008   $0.000   $(0.009)
Diluted  $(0.001)  $0.008   $0.000   $(0.009)

 

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

 

- 18 -

 

 

PRINCETON CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

September 30, 2018 (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 September 30, 2018 and December 31, 2017, respectively:

 

   As of September 30, 2018 
   Level 1   Level 2   Level 3   Total 
Portfolio Investments                    
First Lien Loans  $-   $-   $15,817,060   $15,817,060 
Second Lien Loans   -    -    19,064,770    19,064,770 
Unsecured Loans   -    -    1,283,732    1,283,732 
Equity   -    -    4,571,939    4,571,939 
Total Portfolio Investments   -    -    40,737,501    40,737,501 
U.S. Treasury Bill   33,994,220    -    -    33,994,220 
Total Investments  $33,994,220   $-   $40,737,501   $74,731,721 

 

   As of December 31, 2017 
   Level 1   Level 2   Level 3   Total 
Portfolio Investments                    
First Lien Loans  $-   $-   $14,965,218   $14,965,218 
Second Lien Loans   -    -    18,665,936    18,665,936 
Unsecured Loans   -    -    1,232,812    1,232,812 
Equity   -    -    4,086,794    4,086,794 
Total Portfolio Investments   -    -    38,950,760    38,950,760 
Total Investments  $-   $-   $38,950,760   $38,950,760 

  

During the nine months ended September 30, 2018 and the year ended December 31, 2017, 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.

 

Changes in Level 3 assets measured at fair value for the nine months ended September 30, 2018 are as follows:

 

  

First Lien

Loans

   Second Lien Loans   Unsecured Loans   Equity   Total 
Fair value at beginning of period  $14,965,218   $18,665,936   $1,232,812   $4,086,794   $38,950,760 
Amortization   (22,227)   -    -    -    (22,227)
Purchases of investments   200,000    600,000    1,338,225    -    2,138,225 
Sales of investments   -    -    (879,891)   -    (879,891)
Payment-in-kind interest   101,590    35,005    -    -    136,595 
Change in unrealized gain (loss) on investments   572,479    (721,427)   77,842    485,145    414,039 
Transfer due to restructuring   -    485,256    (485,256)   -    - 
Fair value at end of period  $15,817,060   $19,064,770   $1,283,732   $4,571,939   $40,737,501 
Change in unrealized gain (loss) on Level 3 investments still held as of September 30, 2018  $572,479   $(721,427)  $(68,493)  $485,145   $267,704 

 

- 19 -

 

 

PRINCETON CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

September 30, 2018 (Unaudited)

 

Changes in Level 3 assets measured at fair value for the year ended December 31, 2017 are as follows:

 

  

First Lien

Loans

   Second Lien Loans   Unsecured Loans   Equity   Total 
Fair value at beginning of year  $16,301,261   $17,250,000   $276,922   $11,778,757   $45,606,940 
Amortization   (20,628)   -    -    -    (20,628)
Purchases of investments   267,000    1,000,000    1,385,147    450,001    3,102,148 
Sales of investments   -    -    (282,922)   (5,895,860)   (6,178,782)
Payment-in-kind interest   33,717    -    -    -    33,717 
Realized gain   -    -    -    589,111    589,111 
Change in unrealized gain (loss) on investments   909,349    415,936    (146,335)   (5,360,696)   (4,181,746)
Transfer due to restructuring   (2,525,481)   -    -    2,525,481    - 
Fair value at end of year  $14,965,218   $18,665,936   $1,232,812   $4,086,794   $38,950,760 
Change in unrealized gain (loss) on Level 3 investments still held as of December 31, 2017  $123,865   $415,936   $(146,335)  $(4,280,765)  $(3,887,299)

 

The following table provides quantitative information regarding Level 3 fair value measurements as of September 30, 2018:

 

Description  Fair Value   Valuation Technique 

Unobservable Inputs

  Range (Average) 
               
First Lien Loans  $15,817,060   Discounted Cash Flow  Discount Rate   19.4%-29.6% (24.7%) 
Total   15,817,060            
                 
Second Lien Loans   11,614,770   Discounted Cash Flow  Discount Rate   9.2%-25.4% (18.0%) 
    7,450,000   Market Approach  Real Estate Appraisal Values   N/A 
Total   19,064,770            
                 
Unsecured Loans   1,269,732   Discounted Cash Flow  Discount Rate   31.2%
    14,000   Market Approach  Real Estate Appraisal Values   N/A 
Total   1,283,732            
                 
Equity   2,566,352   Discounted Cash Flow  Discount Rate   10.2%-15.3% (11.7%) 
        Market Approach  Enterprise Value/Revenue Multiples   0.2x-1.1x (0.7x) 
        Market Approach  Enterprise Value/EBITDA Multiples   7.4x-10.0x (8.6x) 
        Market Approach  Enterprise Value/EBITDA Multiples   15.0x
        Black-Scholes Option
Pricing Model
  Volatility   24.3%-28.4% (24.7%) 
           Discount for lack of marketability   5.0%-30.0% (13.4%) 
    2,004,387   Market Approach  Real Estate Appraisal Values   N/A 
Total   4,570,739            
Total Level 3 Investments  $40,736,301            

 

The Company’s remaining Level 3 investments aggregating approximately $1,200 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 September 30, 2018. 

 

- 20 -

 

 

PRINCETON CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

September 30, 2018 (Unaudited)

  

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

 

Description  Fair Value   Valuation Technique  Unobservable Inputs  Range (Average) 
               
First Lien Loans  $6,664,000     Discounted Cash Flow   Discount Rate   11.80%-13.80% (12.80%) 
    8,301,218    Discounted Cash Flow   Discount Rate   12.20%
         Market Approach   Enterprise Value/Revenue Multiple   0.6x-0.9x (0.75x) 
         Market Approach   Real Estate Appraisal Values   N/A 
Total   14,965,218            
                 
Second Lien Loans   7,500,000    Market Approach   Real Estate Appraisal Values   N/A 
    1,000,000    Discounted Cash Flow   Discount Rate   11.80%
    3,826,477    Discounted Cash Flow   Discount Rate   14.90%
         Market Approach   Enterprise Value / Revenue & EBITDA Multiples   0.2x
    6,339,459    Discounted Cash Flow   Discount Rate   10.10%
         Market Approach   Enterprise Value/Revenue Multiple   8.5x
Total   18,665,936            
                 
Unsecured Loans   1,218,812    Discounted Cash Flow   Discount Rate   11.60-14.90%(13.25%) 
         Market Approach   Enterprise Value / Revenue & EBITDA Multiples   0.20x– 19.10x (9.65x) 
    14,000    Market Approach   Real Estate Appraisal Values   N/A 
Total   1,232,812            
                 
Equity   2,516,039    Black-Scholes Option Pricing Model   Volatility   22.40%-32.80% (27.60%) 
           Discount for lack of marketability   5.00%-30.00% (17.50%) 
         Market Approach   Enterprise Value / Revenue & EBITDA Multiples   0.20x – 19.10x (9.65x) 
         Income Approach   Discount Rate   10.10% - 14.9% (12.50%) 
    1,570,755    Market Approach   Real Estate Appraisal Values   N/A 
Total   4,086,794            
Total Level 3 Investments  $38,950,760            

  

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.

 

- 21 -

 

 

PRINCETON CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

September 30, 2018 (Unaudited)

 

NOTE 6 – RELATED PARTY TRANSACTIONS

 

Transition of Investment Advisory Agreements

 

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 managed our day-to-day operations and provided investment advisory services to us until the PAG Investment Advisory Agreement was terminated effective December 31, 2017.

 

As disclosed elsewhere in this 10-Q (including Note 1), House Hanover has served as the Company’s investment advisor since January 1, 2018 pursuant to the Interim Investment Advisory Agreement and the House Hanover Investment Advisory Agreement.

 

Since the transition of investment advisors occurred during the periods covered under the financial statements included in this Form 10-Q, we have disclosed the material terms of both the PAG Investment Advisory Agreement and the House Hanover Investment Advisory Agreement below, beginning with the PAG Investment Advisory Agreement.

 

PAG Investment Advisory Agreement

 

Under the PAG Investment Advisory Agreement, the administrative services of the Company were provided by Princeton Advisory Group. Inc. 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 from June 9, 2016 until December 31, 2017, served 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 former President, Director 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.

 

- 22 -

 

 

PRINCETON CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

September 30, 2018 (Unaudited)

 

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 and nine months ended September 30, 2017 were $110,740 and $323,131. As of September 30, 2018 and December 31, 2017, management fees of $19,282 and $94,282 were payable to Princeton Advisory Group.

 

Incentive Fee

 

The Company is not obligated to pay Princeton Advisory Group an incentive fee.

 

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);

 

- 23 -

 

 

PRINCETON CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

September 30, 2018 (Unaudited)

 

  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.

 

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. As disclosed elsewhere in this Form 10-Q (including Note 1), the PAG Investment Advisory Agreement was terminated as of December 31, 2017.

 

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 and Sub-Administration Agreement

 

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

 

- 24 -

 

 

PRINCETON CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

September 30, 2018 (Unaudited)

 

Princeton Advisory Group engaged Conifer Asset Solutions LLC (the “Sub-Administrator”) to provide certain administrative services to us. As of December 15, 2016, Conifer Asset Solutions LLC’s parent company, Conifer Financial Services, LLC, was acquired by SS&C Technologies Holdings, Inc. In exchange for provided services, the Administrator pays the Sub-Administrator an asset-based fee with an annual minimum as adjusted for any reimbursement of expenses. The minimum annual fee rate is $125,000 through June 9, 2017 and increases to a minimum annual fee rate of $150,000 from June 10, 2017 through December 31, 2017. 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 $52,929 and $159,039 for the three and nine months ended September 30, 2017, respectively, and sub-administration fees were $39,354 and $101,854 for the three and nine months ended September 30, 2017, respectively, as shown on the Statements of Operations under administration fees.

 

House Hanover Investment Advisory Agreement

 

Effective as of January 1, 2018, House Hanover serves as our investment advisor. House Hanover is registered as an investment advisor under the 1940 Act.

 

Material Changes in Investment Advisory Agreements

 

The terms and conditions of the House Hanover Investment Advisory Agreement and the PAG Investment Advisory Agreement are substantially similar, including all management fees payable by the Company. Neither the House Hanover Investment Advisory Agreement nor the PAG Investment Advisory Agreement, contain an incentive fee component, as would be typical of many external investment advisory agreements.

 

The terms and conditions of the House Hanover Investment Advisory Agreement and the Interim Investment Advisory Agreement are substantially similar, except that (i) the Interim Investment Advisory Agreement did not require approval in accordance with Rule 15a-4 of the 1940 Act and (ii) the duration of the House Hanover Investment Advisory Agreement is one year from the effective date (May 31, 2018) and thereafter shall continue automatically for successive annual periods, provided that such continuance is specifically approved at least annually by (a) the vote of the Board, or by the vote of a majority of the outstanding voting securities of the Company and (b) the vote of a majority of the members of the Board who are not parties to the House Hanover Investment Advisory Agreement or “interested persons” (as such term is defined in Section 2(a)(19) of the 1940 Act) of any such party, in accordance with the requirements of the 1940 Act, as opposed to a 150-day limitation on the term, as set forth in the Interim Investment Advisory Agreement.

 

Advisory Services

 

House Hanover is registered as an investment adviser under the 1940 Act and serves as the Company’s investment advisor pursuant to the House Hanover Investment Advisory Agreement in accordance with the 1940 Act. House Hanover is owned by and an affiliate of Mr. Mark DiSalvo, the Company’s Interim President, Interim Chief Executive Officer, and a director of the Company. 

 

Subject to supervision by the Company’s Board, House Hanover oversees the Company’s day-to-day operations and provide the Company with investment advisory services. Under the terms of the House Hanover Investment Advisory Agreement, House Hanover, 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, closes, services and monitors 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, assists 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. House Hanover’s services under the House Hanover 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. At the request of the Company, House Hanover, upon any transition of the Company’s investment advisory relationship to another investment advisor or upon any internalization, shall provide reasonable transition assistance to the Company and any successor investment advisor.

 

- 25 -

 

 

PRINCETON CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

September 30, 2018 (Unaudited)

  

Management Fee

 

Pursuant to the House Hanover Investment Advisory Agreement, the Company pays House Hanover a base management fee for investment advisory and management services. The cost of the base management fee is ultimately borne by the Company’s stockholders. The House Hanover Investment Advisory Agreement does not contain an incentive fee component.

 

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. The Board 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 House Hanover 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 House Hanover or House Hanover will be obligated to refund the decreased amount, as applicable.

 

Management fees under the Interim Investment Advisory Agreement and House Hanover Investment Advisory Agreement for the three and nine months ended September 30, 2018 were $100,462 and $321,453, respectively. As of September 30, 2018 and December 31, 2017, management fees of $204,626 and $0 were payable to House Hanover.

 

Incentive Fee

 

The Company is not obligated to pay House Hanover an incentive fee.

 

Payment of Expenses

 

House Hanover bears 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 House Hanover. However, House Hanover, subject to approval by the Board of the Company, is 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 House Hanover Investment Advisory Agreement, House Hanover 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 House Hanover Investment Advisory Agreement.

 

Except as provided in the preceding paragraph the Company reimburses House Hanover all direct and indirect costs and expenses incurred by it during the term of the House Hanover 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 House Hanover in excess of $50,000 in the aggregate in any calendar quarter will require advance approval by the Board 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 House Hanover 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;

 

- 26 -

 

 

PRINCETON CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

September 30, 2018 (Unaudited)

 

  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 House Hanover);
     
  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 House Hanover) 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.

 

Duration and Termination

 

Unless terminated earlier as described below, the House Hanover 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 Company’s directors who are neither parties to the House Hanover Investment Advisory Agreement nor “interested persons” (as defined under the 1940 Act) of any such party. The House Hanover 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 House Hanover. The House Hanover Investment Advisory Agreement automatically terminates in the event of its “assignment,” as defined in the 1940 Act.

 

Indemnification

 

The House Hanover 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 House Hanover Investment Advisory Agreement, House Hanover 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 House Hanover’s services under the House Hanover 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.

 

- 27 -

 

 

PRINCETON CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

September 30, 2018 (Unaudited)

  

At all times during the term of the House Hanover Investment Advisory Agreement and for one year thereafter, House Hanover 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 the Company.

 

Administration Services and Service Agreement

 

House Hanover is entitled to reimbursement of expenses under the House Hanover Investment Advisory Agreement for administrative services performed for the Company.

 

On January 1, 2018, Princeton Capital Corporation directly entered into a service agreement with SS&C Technologies Holdings, Inc. (the “Sub-Administrator”) to provide certain administrative services to the Company. In exchange for provided services, the Company pays the Sub-Administrator an asset-based fee with a $150,000 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 $67,500 and fees to the Sub-Administrator were $37,500 for the three months ended September 30, 2018, as shown on the Statements of Operations under administration fees. Administration fees were $196,500 and fees to the Sub-Administrator were $112,500 for the nine months ended September 30, 2018, 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 September 30, 2018, none of the portfolio companies had accepted our offer for such services.

 

Other Related Party Transactions

 

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, former CEO, President and Director of the Company, as Lender, in order to fund capital to one of its portfolio companies, Rockfish Seafood Grill, Inc. 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 September 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.

 

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.

 

- 28 -

 

 

PRINCETON CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

September 30, 2018 (Unaudited)

 

NOTE 7 – FINANCIAL HIGHLIGHTS

 

   Three Months Ended   Three Months Ended 
   September 30,
2018
   September 30,
2017
 
   (Unaudited)   (Unaudited) 
Per Share Data (1):           
Net asset value at beginning of period  $0.345   $0.348 
Net investment loss   (0.001)   (0.001)
Realized gain (loss)   (0.001)   0.005 
Change in unrealized gain   0.001    0.004 
Net asset value at end of period  $0.344   $0.356 
Total return based on net asset value (2)   0.3%   2.3%
Weighted average shares outstanding for period, basic   120,486,061    120,486,061 
Ratio/Supplemental Data:          
Net assets at end of period  $41,451,154   $42,889,318 
Average net assets  $41,568,327   $41,922,796 
Annualized ratio of net operating expenses to average net assets (3)   6.7%   4.1%
Annualized ratio of net investment loss to average net assets(3)   (1.3)%   (0.6)%
Annualized ratio of net operating expenses excluding management fees, incentive fees, and interest expense to average net assets (3)   5.5%   2.9%
Annualized ratio of net increase in net assets resulting from operations to average net assets(3)   (1.1)%   9.3%
Portfolio Turnover   0.51%   5.75%

 

   Nine Months Ended   Nine Months Ended 
   September 30,
2018
   September 30,
2017
 
   (Unaudited)   (Unaudited) 
Per Share Data (1):        
Net asset value at beginning of period  $0.344   $0.365 
Net investment loss   (0.002)   (0.003)
Realized gain (loss)   (0.001)   0.005 
Change in unrealized gain (loss)   0.003    (0.011)
Net asset value at end of period  $0.344   $0.356 
Total return based on net asset value (2)   0.0%   (2.5)%
Weighted average shares outstanding for period, basic   120,486,061    120,486,061 
Ratio/Supplemental Data:          
Net assets at end of period  $41,451,154   $42,889,318 
Average net assets  $41,404,525   $42,560,454 
Annualized ratio of net operating expenses to average net assets (3)   8.3%   4.3%
Annualized ratio of net investment loss to average net assets(3)   (1.3)%   (1.0)%
Annualized ratio of net operating expenses excluding management fees, incentive fees, and interest expense to average net assets (3)   4.4%   3.1%
Annualized ratio of net increase (decrease) in net assets resulting from operations to average net assets(3)    0.2%   (3.4)%
Portfolio Turnover   0.52%   0.01%

 

- 29 -

 

 

PRINCETON CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

September 30, 2018 (Unaudited)

 

   Year Ended December 31, 
   2017   2016   2015   2014   2013 
Per Share Data (1):                    
Net asset value at beginning of year  $0.365   $0.400   $0.254   $0.564   $0.174 
Net investment income (loss)   0.008    (0.004)   (0.013)   (0.144)   (0.062)
Change in unrealized gain (loss)   (0.035)   (0.019)   (0.081)   (0.358)   0.388 
Realized gain (loss)   0.006    (0.012)   0.002    0.192    0.064 
Change in capital share transactions   -    -    0.238    -    - 
Net asset value at end of year  $0.344   $0.365   $0.400   $0.254   $0.564 
Total return based on net asset value (2)   (5.8)%   (8.8)%   (36.2)%   (55.0)%   224.1%
Weighted average shares outstanding for year, basic   120,486,061    120,486,061    97,402,398    1,816,534    1,816,534 
Ratio/Supplemental Data:                         
Net assets at end of year  $41,407,539   $43,985,319   $48,225,563   $462,022   $1,025,493 
Average net assets  $42,634,685   $46,991,446   $45,472,971   $743,758   $671,498 
Annualized ratio of net operating expenses to average net assets   3.4%   5.8%   9.5%   35.2%   16.6%
Annualized ratio of net investment income (loss) to average net assets   2.4%   (1.1)%   (2.7)%   (35.2)%   (16.6)%
Annualized ratio of net operating expenses excluding management fees, incentive fees, and interest expense to average net assets   2.8%   4.3%   8.0%   35.2%   16.2%
Annualized ratio of net increase (decrease) in net assets resulting from operations to average net assets   (6.0)%   (9.0)%   (19.5)%   (75.8)(4)%   105.4 (4)%
Portfolio Turnover   7.0%   1.1%   0.7%   31.2(4)%   14.7 (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 are not annualized. 
(4) 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 September 30, 2018. 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 was reduced to $107,324.

 

Legal Proceedings

 

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 99.1 to the 8-K filed on January 22, 2016:

 

On January 19, 2016, the Company, Princeton Advisory Group, Inc., Gregory J. Cannella, Munish Sood, former CEO, President and Director of the Company, 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.

  

- 30 -

 

 

PRINCETON CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

September 30, 2018 (Unaudited)

 

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.

 

As a result of the allegations contained in the complaints filed by the United States of America against Munish Sood, the former President, Chief Executive Officer, and director of the Company, and others captioned U.S. v. Lamont Evans, et al. and U.S. v. James Gotto, et al., in the Southern District of New York., on September 27, 2017 and as previously disclosed, the Board authorized and directed its Audit Committee (which consists of the Board’s three independent board members) to conduct an independent investigation into whether such events impacted the Company, and the extent to which any officer or employee of the Company may have been involved, and whether any corporate funds may have been utilized in the conduct alleged.

 

Mr. Sood resigned from his positions as a director, Chief Executive Officer, and President, effective September 27, 2017. The Company has been informed that Mr. Sood plead guilty to charges of bribery and fraud in August of 2018.

 

From time to time, the Company may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of the Company’s rights under contracts with its portfolio companies. The Company is not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us.

 

NOTE 9 – UNCONSOLIDATED SIGNIFICANT SUBSIDIARIES

 

The Company’s investments are primarily in private small and lower middle-market companies. In accordance with Rules 3.09 and 4.08(g) of Regulation S-X, the Company must determine which of its unconsolidated controlled portfolio companies are considered “significant subsidiaries”, if any. In evaluating these investments, there are three tests utilized to determine if any of the Company’s control investments are considered significant subsidiaries; the investment test, the asset test, and the income test. Rule 3.09 of Regulation S-X, as interpreted by the SEC, requires the Company to include separate audited financial statements of any unconsolidated majority-owned subsidiary in an annual report if any of the three tests exceed 20% of the Company’s total investments at fair value, total assets or total income. Rule 4-08(g) of Regulation S-X requires summarized financial information of an unconsolidated subsidiary in an annual report if any of the three tests exceeds 10% of the Company’s total investments at fair value, total assets or total income and summarized financial information in a quarterly report if any of the three tests exceeds 20% of the Company’s total amounts.

 

The Company has determined that Rockfish Seafood Grill, Inc., Advantis Certified Staffing Solutions, Inc. and PCC SBC Sub, Inc. three of its majority owned control investments were considered significant subsidiaries at the 20% level at September 30, 2018.

 

Additionally, Integrated Medical Partners, LLC, an unconsolidated portfolio company that was a control investment, but which was not majority-owned by the Company was also considered a significant subsidiary at the 20% level at September, 30, 2018.

    

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PRINCETON CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

September 30, 2018 (Unaudited)

 

The following tables show the summarized financial information for Rockfish Seafood Grill, Inc., Advantis Certified Staffing Solutions, Inc., Integrated Medical Partners, LLC, Inc., and PCC SBC Sub, Inc. (numbers in thousands):

 

Nine Months Ended

September 30, 2018

(unaudited)

  Rockfish Seafood Grill, Inc.   Integrated Medical Partners, LLC   Advantis Certified Staffing Solutions, Inc.   PCC SBH Sub, Inc. 
Balance Sheet                
Current Assets  $462   $1,757   $3,524   $240 
Noncurrent Assets   3,134    5,559    1,684    2,384 
Current Liabilities   2,595    3,784    5,645    148 
Noncurrent Liabilities   10,834    2,111    8,748    - 

 

Nine Months Ended

September 30, 2018

(unaudited)

  Rockfish Seafood Grill, Inc.   Integrated Medical Partners, LLC   Advantis Certified Staffing Solutions, Inc.   PCC SBH Sub, Inc. 
Income Statement                    
Net Revenue  $15,344   $9,427   $14,382   $170 
Gross Profit   10,700    2,511    3,599    170 
Net Income (Loss)   (1,216)   (1,090)   (1,017)   34 

 

NOTE 10 – SUBSEQUENT EVENTS

 

Portfolio Activity

 

On October 29, 2018, the Company issued a Notice of Default on its loan to Great Value Storage for non-payment of interest due on September 30, 2018.

 

On November 15, 2018, the Company received payment in full in the amount of $1,000,000 on its participation in the loan from Capital Foundry Funding, LLC to ECM Energy Services, Inc.

 

Additional Subsequent Events

 

Effective November 27, 2018, the Company entered into a confidential settlement agreement with a former vendor/provider of services in which the Company received $1.1 million on December 4, 2018. Furthermore, the Company was released of the responsibility of outstanding Accounts Payable and Accrued Expenses totaling approximately $279,172 to this vendor/provider of services, which would also forgive the related receivables Due From Portfolio Companies totaling approximately $84,418.

 

Late Filings

 

As set forth in the Company’s Form 12b-25 filing on November 15, 2018, the Company has not timely made its Form 10-Q filing for the period ending September 30, 2018 due to its inability to do so without undue effort or expense.

 

- 32 -

 

 

PRINCETON CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

September 30, 2018 (Unaudited)

 

Schedule 12-14

 

The table below represents the fair value of control and affiliate investments at December 31, 2017 and any amortization, purchases, sales, and realized and change in unrealized gain (loss) made to such investments, as well as the ending fair value as of September 30, 2018.

 

Portfolio Company/Type of Investment  Principal Amount/Shares/ Ownership % at
September 30,
2018
   Amount of Interest and Dividends Credited in Income   Fair Value at
December 31,
2017
   Purchases(2)   Sales   Change in Unrealized Gains/Losses   Fair Value at
September 30,
2018
 
Control Investments                            
Advantis Certified Staffing Solutions, Inc.                            
Second Lien Loan, 6.0% Cash, due 11/30/2021(1)  $4,500,000   $-   $3,826,477   $-   $-   $(679,193)  $3,147,284 
Unsecured loan 5%, due 10/31/2017  $-    -    76,839    -    (89,224)   12,385    - 
Unsecured loan 5%, due 12/31/2017  $-    -    59,422    -    (69,000)   9,578    - 
Unsecured loan 5%, due 12/31/2017  $-    -    107,648    -    (125,000)   17,352    - 
Unsecured loan 5%, due 12/31/2017  $-    -    25,836    -    (30,000)   4,164    - 
Unsecured loan 5%, due 12/31/2017  $-    -    90,425    -    (105,000)   14,575    - 
Unsecured loan 5%, due 12/31/2017  $-    -    172,237    -    (200,000)   27,763    - 
Unsecured loan 5%, due 12/31/2017  $-    -    129,178    -    (150,000)   20,822    - 
Unsecured loan 5%, due 12/31/2017  $-    -    38,753    -    (45,000)   6,247    - 
Unsecured loan, 5%, due 12/31/2018  $813,225    30,301    -    813,225    -    (44,178)   769,047 
Unsecured loan, 5%, due 12/31/2018  $90,000    3,058    -    90,000    -    (4,889)   85,111 
Unsecured loan, 8%, due 12/31/2018  $150,000    7,101    -    150,000    -    (7,089)   142,911 
Unsecured loan, 8%, due 12/31/2018  $110,000    3,833    -    110,000    -    (5,199)   104,801 
Unsecured loan, 10.75%, due 12/31/2018  $175,000    6,082    -    175,000    -    (7,138)   167,862 
Common Stock – Series A(1)   225,000    -    3,713    -    -    (2,522)   1,191 
Common Stock – Series B(1)   9,500,000    -    156,757    -    -    (106,463)   50,294 
Warrant for 700,000 Shares of Series A Common Stock, exercise price $0.01 per share, expires 1/1/2027(1)   1    -    4,125    -    -    (2,801)   1,324 
Warrant for 250,000 Shares of Series A Common Stock, exercise price $0.01 per share, expires 1/1/2027(1)     1    -    11,551    -    -    (7,845)   3,706 
Rockfish Seafood Grill, Inc.                                   
First Lien Loan, 8% Cash, 6.0% PIK, due 3/31/2018(1)  $6,352,944    -    6,637,883    -    -    549,192    7,187,075 
Revolving Loan, 8% Cash, due 12/31/2018  $1,821,000    103,918    1,663,335    200,000    -    64,109    1,927,444 
Rockfish Holdings, LLC                                   
Warrant for Membership Interest, exercise  price $0.001 per 1% membership interest, expires 7/28/2018(1)   10.000%   -    257,647    -    -    (250,034)   7,613 
Membership Interest – Class A(1)   99.997%   -    28,628    -    -    39,888    68,516 
Integrated Medical Partners, LLC                                   
Unsecured Loan, 6.0% Cash, due 9/30/2019  $-    6,017    437,085    -    -    (437,085)   - 
Unsecured Loan, 6.0% Cash, due 5/20/2018  $-    860    81,389    -    (66,667)   (14,722)   - 

 

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PRINCETON CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

September 30, 2018 (Unaudited)

 

                                    
Portfolio Company/Type of Investment  Principal Amount/Shares/ Ownership % at
September 30,
2018
   Amount of Interest and Dividends Credited in Income   Fair Value at
December 31,
2017
   Purchases(2)   Sales   Change in Unrealized Gains/Losses   Fair Value at
September 30,
2018
 
Second Lien Term Loan, 12.0% Cash, 6% PIK due, 3/1/2019  $1,120,261    104,709    -    635,005    -    463,110    1,098,115 
Preferred Membership – Class A units(1)   800    -    1,844,856    -    -    (282,434)   1,562,422 
Preferred Membership – Class B units(1)   760    -    34,514    -    -    (26,955)   7,559 
Common Units(1)   14,082    -    307    -    -    (293)   14 
PCC SBH Sub, Inc.                                   
Unsecured loan, 12% Cash, due 2/15/2018(1)  $14,000    1,274    14,000    -    -    -    14,000 
Common Stock(1)   100    -    1,570,755    -    -    433,632    2,004,387 
Total Control Investments       $267,153   $17,273,360   $2,173,230   $(879,891)  $(216,023)  $18,350,676 

   

(1) Non-income producing security.

(2) Includes PIK interest and common stock issued in exchange for investments.

 

- 34 -

 

 

PRINCETON CAPITAL CORPORATION

NOTES TO FINANCIAL STATEMENTS

September 30, 2018 (Unaudited)

 

The table below represents the fair value of control and affiliate investments at December 31, 2016 and any amortization, purchases, sales, and realized and change in unrealized gain (loss) made to such investments, as well as the ending fair value as of September 30, 2017.

 

 

Portfolio Company/Type of Investment

  Principal Amount/Shares/ Ownership % at
September 30,
2017
   Amount of Interest and Dividends Credited in Income   Fair Value at
December 31,
2016
   Purchases(2)   Sales   Transfers from Restructuring   Change in Unrealized Gains/Losses   Fair Value at
 September 30,
2017
 
Control Investments                                
Advantis Certified Staffing Solutions, Inc.                                
Second Lien Loan  $4,500,000   $-   $-   $-   $-   $4,500,000   $(617,547)  $3,882,453 
Unsecured Loan  $618,225    3,858    -    618,225    -    -    -    618,225 
Common Stock – Series A   225,000    -    -    10,150    -    -    (3,871)   6,279 
Common Stock – Series B   9,500,000    -    -    428,571    -    -    (163,454)   265,117 
Warrants   2    -    -    11,278    -    16,510    (1,276)   26,512 
Rockfish Seafood Grill, Inc.                                        
First Lien Loan (1)  $6,352,944    -    6,549,261    -    -    -    302,534    6,851,795 
Revolving Loan (1)  $1,621,000    -    1,481,000    140,000    -    -    -    1,621,000 
Rockfish Holdings, LLC                                        
Warrant (1)   10%   -    102,826    -    -    -    845,307    948,133 
Membership Interest (1)   99.997%   -    925,407    -    -    -    (820,056)   105,351 
Integrated Medical Partners, LLC                                        
Unsecured Loan (1)  $451,922    13,988    276,922    451,922    (276,922)   -    -    451,922 
Preferred Membership – Class A (1)   800    -    3,337,779    -    -    -    (1,505,518)   1,832,261 
Preferred Membership – Class B (1)   760    -    365,884    -    -    -    (284,217)   81,667 
Common Stock (1)   14,082    -