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GSVC > SEC Filings for GSVC > Form 10-Q on 12-Nov-2013All Recent SEC Filings

Show all filings for GSV CAPITAL CORP.

Form 10-Q for GSV CAPITAL CORP.


12-Nov-2013

Quarterly Report


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

Forward-Looking Statements

This quarterly report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about GSV Capital, our current and prospective portfolio investments, our industry, our beliefs, and our assumptions. Words such as "anticipates," "expects," "intends," "plans," "will," "may," "continue," "believes," "seeks," "estimates," "would," "could," "should," "targets," "projects," and variations of these words and similar expressions are intended to identify forward-looking statements.

The forward looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties, including statements as to:

our future operating results;

our business prospects and the prospects of our portfolio companies;

the impact of investments that we expect to make;

our contractual arrangements and relationships with third parties;

the dependence of our future success on the general economy and its impact on the industries in which we invest;

the ability of our portfolio companies to achieve their objectives;

our expected financings and investments;

the adequacy of our cash resources and working capital; and

the timing of cash flows, if any, from the operations of our portfolio companies.

These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including without limitation:

an economic downturn could impair our portfolio companies' ability to continue to operate, which could lead to the loss of some or all of our equity investments in such portfolio companies,

an economic downturn could disproportionately impact the market sectors in which a significant portion of our portfolio is concentrated, causing us to suffer losses in our portfolio,

an inability to access the equity markets could impair our investment activities,

interest rate volatility could adversely affect our results, particularly if we opt to use leverage as part of our investment strategy, and

the risks, uncertainties and other factors we identify in "Risk Factors" and elsewhere in this quarterly report on Form 10-Q and in our filings with the SEC.

Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this quarterly report on Form 10-Q should not be regarded as a representation by us that our plans and objectives will be achieved. These risks and uncertainties include those described or identified in "Risk Factors" and elsewhere in this quarterly report on Form 10-Q. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this quarterly report on Form 10-Q.


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The following analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included in the annual report on Form 10-K for the year ended December 31, 2012 and this quarterly report on Form 10-Q.

Overview

We are an externally managed, non-diversified closed-end management investment company that has elected to be treated as a business development company under the 1940 Act. Our investment objective is to maximize our portfolio's total return, principally by seeking capital gains on our equity and equity-related investments. We invest principally in the equity securities of what we believe to be rapidly growing venture capital-backed emerging companies. We acquire our investments through direct investments with prospective portfolio companies, secondary marketplaces for private companies and negotiations with selling stockholders. We may also invest on an opportunistic basis in select publicly-traded equity securities or certain non-U.S. companies that otherwise meet our investment criteria. Our investment activities are managed by GSV Asset Management, and GSV Capital Service Company provides the administrative services necessary for us to operate.

Our investment philosophy is premised on a disciplined approach of identifying high-growth emerging companies across several key industry themes which may include, among others, social mobile, cloud computing, and big data, internet commerce, sustainability and education technology. Our investment adviser's investment decisions are based on a disciplined analysis of available information regarding each potential portfolio company's business operations, focusing on the company's growth potential, the quality of recurring revenues and cash flow and cost structures, as well as an understanding of key market fundamentals. Many of the companies that our investment adviser evaluates have financial backing from top tier venture capital funds or other financial or strategic sponsors.

We seek to deploy capital primarily in the form of non-controlling equity and equity-related investments, including common stock, warrants, preferred stock and similar forms of senior equity, which may or may not be convertible into a portfolio company's common equity, and convertible debt securities with a significant equity component. We used substantially all of the net proceeds of our initial public offering and follow-on offerings for the above purposes.

In May 2011 we completed our initial public offering of 3,335,000 shares of our common stock at an offering price of $15.00 per share. We completed a follow-on offering of 2,185,000 shares of our common stock in September 2011 at an offering price of $14.15 per share, a follow-on offering of 6,900,000 shares of our common stock in February 2012 at an offering price of $15.00 per share and a follow on offering of 6,900,000 shares of our common stock in May 2012 at an offering price of $16.25 per share. In the aggregate, we have raised approximately $277.7 million in equity capitalization. Our shares are currently listed on the NASDAQ Capital Market under the symbol "GSVC".

Investments

The fair value of our investments can be expected to fluctuate in future periods due to changes in our investments and changes in the fair value of the investments. The investments made during the nine months ended September 30, 2013 include:

Investments totaling $2,879,293 in SugarCRM Inc., a customer relationship management company, comprising an investment of $1,499,999, plus transaction costs, on January 16, 2013 and an investment of $1,379,294, plus transaction costs, on April 1, 2013.

Investments totaling $599,999 in AlwaysOn, Inc., a social media company, comprising an investment of $200,000, plus transaction costs, on February 4, 2013, an investment of $200,000, plus transaction costs, on February 28, 2013, an investment of $24,999, plus transaction costs, on April 26, 2013 and an investment of $175,000, plus transaction costs, on May 24, 2013.

Investments totaling $775,863 in CUX, Inc. (d/b/a CorpU), a corporate education company, comprising an investment of $517,244, plus transaction costs, on February 25, 2013 and an investment of $258,619, plus transaction costs, on May 31, 2013.


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An investment of $1,000,000, plus transaction costs, in Fullbridge, Inc., a business education company, on March 22, 2013.

An investment of $1,733,923, plus transaction costs, in ZocDoc Inc., an online medical scheduling company, on April 4, 2013.

An investment of $750,000, plus transaction costs, in AliphCom Inc. (d/b/a Jawbone), an audio electronics company, on May 17, 2013.

An investment of $430,950, plus transaction costs, in Dailybreak, Inc., a social advertising company, on May 31, 2013.

An investment of $1,000,000, plus transaction costs, in Solexel, Inc., a solar power company, on June 6, 2013.

An investment of $180,000, plus transaction costs, in oDesk Corporation, an online marketplace company, on June 11, 2013.

An investment of $9,999,999, plus transaction costs, in Coursera Inc., an online education company, on June 18, 2013.

An investment of $600,000, plus transaction costs, in NestGSV, Inc., an Incubator company, on July 15, 2013.

An investment of $1,099,997, plus transaction costs, in Dataminr, Inc., a Social Media Analytics company, on July 26, 2013.

An investment of $225,000, plus transaction costs, in Kno, Inc., a Digital Textbooks Company, on August 1, 2013.

An investment of $1,000,000, plus transaction costs, in Strategic Data Command, LLC, a software development company, on August 15, 2013.

An investment of $1,500,000, plus transaction costs, in Whittle Schools, an education technology company, on August 30, 2013.

An investment of $250,000, plus transaction costs, in Sinolending Ltd, a Chinese P2P lending company, on September 4, 2013.

An investment of $400,000, plus transaction costs, in Totus Solutions Inc, a LED lighting company, on September 30, 2013.

The fair value, as of September 30, 2013, of all of our portfolio investments was $252,983,446. We also held $28,443,204 in unrestricted cash on September 30, 2013.

Results of Operations
Comparison of the three months ended September 30, 2013 and 2012 Investment Income

For the three months ended September 30, 2013, we had investment income of $2,644, or $0.00 per share, which consisted of $2,256 of interest income from our portfolio investments and $388 of dividend income primarily from our CUX, Inc preferred shares as well as our money market investments.

For the three months ended September 30, 2012, we had investment income of $13,928, or $0.00 per share, which consisted of $7,063 of interest income from our portfolio investments and $6,865 of dividend income from our money market investments.

The decrease in investment income for the three months ended September 30, 2013 relative to the three months ended September 30, 2012 was primarily due to us no longer carrying fixed income investments during the three months ended September 30, 2013.


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Operating Expenses

For the three months ended September 30, 2013, we had $3,016,433 in total operating expenses consisting primarily of investment management fees, administration fees, the loss on fair value adjustment for embedded derivative, interest expense on the Convertible Notes, in addition to legal, audit and consulting fees. The investment advisory fee for the three months ended September 30, 2013, was $1,298,858, representing the base management fee as provided in our investment advisory agreement. Costs incurred under our administration agreement for the three months ended September 30, 2013, were $678,283. The loss on fair value adjustment for embedded derivative was $421,000 for the three months ended September 30, 2013. The interest expense on the Convertible Notes was $191,188. Professional fees, consisting of legal, valuation, and audit and consulting fees, were $198,932 for the three months ended September 30, 2013.

For the three months ended September 30, 2012, we had $2,348,496 in total operating expenses consisting primarily of investment management fees and administration fees, in addition to legal, audit and consulting fees. The investment advisory fee for the three months ended September 30, 2012, was $1,351,169, representing the base management fee as provided in our investment advisory agreement. Costs incurred under our administration agreement for the three months ended September 30, 2012, were $543,171. Professional fees, consisting of legal, valuation, and audit and consulting fees, were approximately $242,683 for the three months ended September 30, 2012.

The increase in total operating expenses for the three months ended September 30, 2013 relative to the three months ended September 30, 2012 was mostly due to an increase in administration fees incurred. These fees increased due to an increase in our gross and net asset values during the same periods, which impact the fees incurred. Refer to note 2 for further details regarding the calculations of these fees.

Net Increase (Decrease) in Net Assets

For the three months ended September 30, 2013, we had a net change in unrealized appreciation of $8,892,104 or $0.46 per share resulting from appreciation of our investments, including our investments in Twitter Inc., Control4 Corporation, Facebook Inc., and Palantir Technologies. Net realized loss was $162,569, or $0.01 per share during the three months ended September 30, 2013, and resulted from sale of investment in Facebook Inc. Net investment loss was $3,013,789, or $0.16 per share, for the three months ended September 30, 2013, resulting primarily from operating expenses incurred during the quarter. Net increase in net assets resulting from operations was $5,715,746, or $0.29 per share, for the three months ended September 30, 2013.

For the three months ended September 30, 2012, we had a net change in unrealized depreciation of $4,665,272, or $0.24 per share, resulting from of our investment in Facebook, Inc. Net realized loss was $0.00 or $0.00 per share during the three months ended September 30, 2012. Net investment loss was $2,334,568, or $0.12 per share, for the three months ended September 30, 2012, resulting primarily from operating expenses incurred during the quarter. Net decrease in net assets resulting from operations was $6,999,840, or $0.36 per share, for the three months ended September 30, 2012.

The per share figures noted above are based on a weighted-average of 19,320,100 and 19,320,100 shares outstanding for the three months ended September 30, 2013 and 2012, respectively.

Comparison of the nine months ended September 30, 2013 and 2012 Investment Income

For the nine months ended September 30, 2013, we had investment income of $22,902, or $0.00 per share, which consisted of $2,256 of interest income from our portfolio investments and $20,646 of dividend income primarily from our CUX, Inc preferred shares as well as our money market investments.

For the nine months ended September 30, 2012, we had investment income of $242,087, or $0.02 per share, which consisted of $222,047 of interest income from our portfolio investments and $20,040 of dividend income from our money market investments.

The decrease in investment income for the nine months ended September 30, 2013 relative to the nine months ended September 30, 2012 was primarily due to us no longer carrying fixed income investments during the nine months ended September 30, 2013.


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Operating Expenses

For the nine months ended September 30, 2013, we had $7,991,327 in total operating expenses consisting primarily of investment management fees and administration fees, the loss on fair value adjustment for embedded derivative, interest expense on the Convertible Notes in addition to legal, audit and consulting fees. The investment advisory fee for the nine months ended September 30, 2013, was $3,828,835, representing the base management fee as provided in our investment advisory agreement. Our base management fee was significantly higher than the same period in 2012 as a result of the increase in our gross assets. Costs incurred under our administration agreement for the nine months ended September 30, 2013, were $2,276,152. The loss on fair value adjustment for embedded derivative was $421,000 for the nine months ended September 30, 2013. The interest expense on the Convertible Notes as $191,188. Professional fees, consisting of legal, valuation, and audit and consulting fees, were $656,796 for the nine months ended September 30, 2013.

For the nine months ended September 30, 2012, we had $5,750,776 in total operating expenses consisting primarily of investment management fees and administration fees, in addition to legal, audit and consulting fees. The investment advisory fee for the nine months ended September 30, 2012, was $3,099,186, representing the base management fee as provided in our investment advisory agreement. Costs incurred under our administration agreement for the nine months ended September 30, 2012, were $1,490,966. Professional fees, consisting of legal, valuation, and audit and consulting fees, were approximately $597,089 for the nine months ended September 30, 2012.

The increase in total operating expenses for the nine months ended September 30, 2013 relative to the nine months ended September 30, 2012 was mostly due to an increase in management fees as well as administration fees incurred. These fees increased due to an increase in our gross and net asset values during the same periods, which impact the fees incurred. Refer to note 2 for further details regarding the calculations of these fees.

Net Increase (Decrease) in Net Assets

For the nine months ended September 30, 2013, we had a net change in unrealized appreciation of $19,545,712 or $1.01 per share resulting from appreciation of our investments, including our investments in Twitter, Inc., Control4 Corporation, Palantir Technologies, Inc., and Facebook Inc., as well as the reclassification of the losses on our investments in Top Hat 430, Inc., Serious Energy, Inc., and AltEgo, LLC from unrealized loss to realized loss on investments. Net realized loss was $9,837,093, or $0.51 per share, and resulted from sales of investments in Groupon Inc., and Zynga, Inc., as well as the write-off of our investments in Top Hat 430, Inc., Serious Energy, Inc., and AltEgo, LLC. Net investment loss was $7,968,425, or $0.41 per share, for the nine months ended September 30, 2013, resulting primarily from operating expenses incurred during the quarter. Net decrease in net assets resulting from operations was $1,740,194, or $0.09 per share, for the nine months ended September 30, 2013.

For the nine months ended September 30, 2012, we had a net change in unrealized depreciation of $5,668,589, or $0.38 per share. The change in unrealized depreciation is primarily a result of our investment in Facebook, Inc. We had a net realized loss of $1,380,519, or $0.09 per share, resulting primarily from our investment in PJB Fund LLC, which resulted from fluctuating share prices of Zynga, Inc. Net investment loss was $5,508,689, or $0.37 per share, for the nine months ended September 30, 2012, resulting primarily from operating expenses incurred during the period. Net decrease in net assets resulting from operations was $12,557,797, or $0.84 per share, for the nine months ended September 30, 2012.

The per share figures noted above are based on a weighted-average of 19,320,100 and 15,013,896 shares outstanding for the nine months ended September 30, 2013 and 2012, respectively.

Liquidity and Capital Resources

At September 30, 2013, we had investments in 46 portfolio companies with costs totaling $245,188,384, and unrestricted cash in the amount of $28,443,204.

We completed a follow-on offering of 6,900,000 shares of our common stock in February 2012 at an offering price of $15.00 per share and on May 11, 2012, we priced a subsequent follow-on equity offering of


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6,900,000 shares of our common stock at an offering price of $16.25 per share resulting in approximately $105.4 million in equity capitalization. Our shares are currently listed on the NASDAQ Capital Market under the symbol "GSVC".

Our primary use of cash is to make investments and to pay our operating expenses. We used substantially all of the proceeds of the offerings to invest in portfolio companies as of September 30, 2013, except for amounts retained for purposes of funding our ongoing expenses.

Our current policy is to maintain cash and marketable security reserves in an amount sufficient to pay our operating expenses, including investment management fees, incentive fees and costs incurred under the administration agreement, for approximately two years. For a description of the investment advisory and administration services we receive, see "Related Party Transactions and Certain Relationships". We incurred approximately $1,298,858 and $3,828,835 in investment management fees and $678,283 and $2,276,152 in costs incurred under the administration agreement for the three and nine months ended September 30, 2013, respectively. We incurred approximately $1,351,169 and $3,099,186 in investment management fees and $543,171 and $1,490,966 in costs incurred under the administration agreement for the three and nine months ended September 30, 2012, respectively.

As of September 30, 2013, the fair value of our portfolio investments was equal to the cost of the investments, net of unrealized depreciation representing transaction costs and any fair value adjustments. Fair value adjustments may include subsequent financing rounds, discounts due to lack of marketability, senior management changes or any other developments that factor into our valuations. The fair value of our investments can be expected to fluctuate in future periods due to changes in our investments and changes in the fair value of the investments.

On August 6, 2013, we executed a non-binding term sheet with SVB for the Proposed SVB Facility of $18 million. As set forth in the term sheet, the Proposed SVB Facility would be secured by substantially all of our assets, including interests in our portfolio companies, and have a three-year term with an interest rate of WSJ Prime plus 4.75%, with an interest rate floor of 8.00%. Our term sheet with SVB is non-binding, and the final terms and conditions of the Proposed SVB Facility, including term and interest rate, remain subject to satisfactory completion of SVB's due diligence and credit approval process and the negotiation of final definitive agreements acceptable to both parties. We cannot be certain when or if we will be successful in closing on the proposed credit facility contemplated in the term sheet. SVB's obligation to lend under the Proposed SVB Facility would terminate if we compete with SVB in providing loans, directly or indirectly, to our portfolio companies or any of their subsidiaries.

Contractual Obligations

[[Image Removed]]   [[Image Removed]]      [[Image Removed]]      [[Image Removed]]      [[Image Removed]]      [[Image Removed]]
                                                     Payments Due By Period
                                                      (dollars in millions)
                           Total                Less than             1 - 3 years            3 - 5 years             More than
                                                  1 year                                                              5 years
Convertible Notes   $           69.0       $           -          $           -          $           -          $           69.0
Total               $           69.0       $           -          $           -          $           -          $           69.0

Off-Balance Sheet Arrangements

As of September 30, 2013, we had no off-balance sheet arrangements, including any risk management of commodity pricing or other hedging practices. However, we may employ hedging and other risk management techniques in the future.

Distribution Policy

The timing and amount of our dividends, if any, will be determined by our board of directors. Any dividends to our stockholders will be declared out of assets legally available for distribution. We intend to focus on making capital gains-based investments from which we will derive primarily capital gains. As a consequence, we do not anticipate that we will pay dividends on a quarterly basis or become a predictable distributor of dividends, and we expect that our dividends, if any, will be much less consistent than the


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dividends of other business development companies that primarily make debt investments. However, if there are earnings or realized capital gains to be distributed, we intend to declare and pay a dividend at least annually.

During the taxable year ended December 31, 2012, we were taxed as a C Corporation subject to federal and state corporate income taxes. We may elect to be treated as a RIC under Subchapter M of the Code, beginning with our 2013 taxable year if management determines that it is in the best interests of the Company and the Company is able to satisfy the requirements to be treated as a RIC. However, if we are not certified by the SEC as "principally engaged in the furnishing of capital to other corporations which are principally engaged in the development or exploitation of inventions, technological improvements, new processes, or products not previously generally available" for our 2013 taxable year, we will not be eligible to elect to be treated as a RIC for our 2013 taxable year. We currently intend to apply for this certification, but no assurance can be given that we will receive it, or that we will otherwise qualify as a RIC for our 2013 taxable year. If we opt not to elect to be taxed as a RIC or are unable to qualify as a RIC, we will continue to be taxed as a C corporation under the Code for our 2013 taxable year. To obtain and maintain RIC tax treatment, we must, among other things, distribute at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, for each taxable year. See "Material U.S. Federal Income Tax Considerations." There is no assurance that we will achieve results that will permit the payment of any cash distributions and, to the extent that we issue senior securities, we will be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the terms of any of our borrowings. In addition, although it is currently its intention to do so, at the present time, the Company cannot assure you whether it will elect to be treated as a RIC for its 2013 taxable year. If it opts not to do so, the Company will continue to be taxed as a C corporation under the Code for its 2013 taxable year.

Our current intention is to make any distributions out of assets legally available therefrom in additional shares of our common stock under our dividend reinvestment plan, unless you elect to receive your dividends and/or long-term capital gains distributions in cash. Under the dividend reinvestment plan, if a stockholder owns shares of common stock registered in its own name, the stockholder will have all cash distributions automatically reinvested in additional shares of common stock unless the stockholder opts out of our dividend reinvestment plan by delivering a written notice to our dividend paying agent prior to the record date of the next dividend or distribution. See "Dividend Reinvestment Plan." Any distributions reinvested under the plan will nevertheless remain taxable to the U.S. stockholder, although no cash . . .

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