---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2017

or

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

SIGULER GUFF SMALL BUSINESS CREDIT OPPORTUNITIES FUND, INC.

(Exact name of registrant as specified in its charter)

Commission File Number: 814-01157

 

825 Third Avenue, 10th Floor, New York, NY 10022

(Address of principal executive offices) (Zip code)

(212) 332-5100

(Registrant’s telephone number, including area code)

NOT APPLICABLE

(Former name or former address, if changed since last report)

 

---

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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, or a smaller reporting company.  See definition of “large accelerated filer” and “smaller reporting company” in Rule 12b-2 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

APPLICABLE ONLY TO CORPORATE ISSUERS

As of May 12, 2017 there were 100,000 shares of the registrant’s common stock outstanding.

 

---

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue” or “believe” or the negatives thereof or other variations thereon or comparable terminology. You should read statements that contain these words carefully because they discuss our plans, strategies, prospects and expectations concerning our business, operating results, financial condition and other similar matters. We believe that it is important to communicate our future expectations to our investors. Our forward-looking statements include information in this report regarding general domestic and global economic conditions, our future financing plans, our ability to operate as a business development company (“BDC”) and the expected performance of, and the yield on, our portfolio companies. There may be events in the future, however, that we are not able to predict accurately or control. The factors listed under “Risk Factors” as well as any cautionary language in this report, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. The occurrence of the events described in these risk factors and elsewhere in this report could have a material adverse effect on our business, results of operation and financial position. Any forward-looking statement made by us in this report speaks only as of the date of this report. Factors or events that could cause our actual results to differ from our forward-looking statements may emerge from time to time, and it is not possible for us to predict all of them. You are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the U.S. Securities and Exchange Commission (the “SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Under Section 21E(b)(2)(B) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 do not apply to statements made in periodic reports we file under the Exchange Act, such as this quarterly report on Form 10-Q.

The following factors are among those that may cause actual results to differ materially from our forward-looking statements:

 

·

our future operating results;

·

changes in political, economic or industry conditions, the interest rate environment or conditions affecting the financial and capital markets;

·

uncertainty surrounding the strength of the U.S. economic recovery;

·

our business prospects and the prospects of our portfolio companies;

·

the impact of investments that we expect to make;

·

the impact of increased competition;

·

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 current prospective portfolio companies to achieve their objectives;

·

the relative and absolute performance of our investment adviser;

·

our expected financings and investments;

 

·

the use of borrowed money to finance a portion of our investments;

·

our ability to make distributions;

·

the adequacy of our cash resources and working capital including our ability to raise additional capital;

·

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

·

the impact of future acquisitions and divestitures;

·

the effect of changes in tax laws and regulations and interpretations thereof;

·

our ability to maintain our status as a BDC and a qualifying regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”);

·

actual and potential conflicts of interest with Siguler Guff Advisers, LLC (“Siguler Guff Advisers” or the “Investment Manager”) and its affiliates;

·

general price and volume fluctuations in the financial markets;

·

the ability of the Investment Manager to attract and retain highly talented professionals; and

·

the impact on our business of new legislation.

PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS.

 

		March 31, 2017				December 31, 2016
Assets
Portfolio Investments at fair value:
Non-controlled, non-affiliated portfolio investments (cost, March 31, 2017: $30,033,703; December 31, 2016: $23,211,946)		$	30,033,703			$	23,211,946
Cash			89,678				122,577
Interest receivable			158,825				108,702
Net deferred tax asset			15,577				94,837
Total Assets		$	30,297,783			$	23,538,062
Liabilities
Due to Affiliates		$	5,323,015			$	5,323,799
Accrued expenses and other liabilities			201,028				208,409
Taxes payable			154,976				96,758
Total Liabilities			5,679,019				5,628,966
Net Assets		$	24,618,764			$	17,909,096
Commitments and Contingencies (Note 8)
Components of Net Assets
Common stock, $0.001 par value, 10,000,000 shares authorized, 100,000 issued and 100,000 outstanding at March 31, 2017 and December 31, 2016			100				100
Paid-in capital in excess of par			24,061,258				17,686,258
Accumulated undistributed net investment income/(loss)			557,406				222,738
Total Net Assets		$	24,618,764			$	17,909,096
Net Asset Value Per Share		$	246.19			$	179.09

Portfolio Investment		Industry		Interest Rate			Maturity		Principal / Shares				Fair Value
Senior Subordinated Notes (121%)  (1)
United States
C&M Technologies Group, Inc.		Industrial Equipment & Components			12.00	%	09/30/2022		$	3,906,320			$	3,837,984
Earthlite, LLC  (2)		Business Equipment			11.00	%	07/11/2022		$	1,339,496				1,315,359
Gatekeeper Systems, Inc.  (2)		Security and Protection Services			11.00	%	03/02/2022		$	2,253,714				2,217,264
La Tavola, LLC  (2)		Commercial Retail			11.00	%	06/01/2021		$	3,442,570				3,393,675
Medsurant Holdings, LLC		Healthcare Services			12.25	%	06/18/2021		$	2,745,902				2,699,801
Northeastern Bus Rebuilders Inc.  (2)		Business Services			10.00	%	06/05/2022		$	5,265,338				5,189,657
Rudy's Food Products, Inc.  (2)		Processed & Packaged Goods			11.00	%	07/05/2021		$	5,388,086				5,298,070
S.R. Smith, LLC		Consumer / Sporting Goods			11.00	%	03/27/2022		$	2,490,205				2,459,130
Trachte, LLC  (2)		Manufacturing			11.00	%	04/13/2021		$	3,447,120				3,399,423
Total Senior Subordinated Notes (Cost: $29,810,363)													$	29,810,363
Money Market Fund (1%)
United States
Western Asset Institutional U.S. Treasury Reserves (Cost: $223,340)		U.S. Treasury Bills and Notes								223,340			$	223,340
Total United States (Cost: $30,033,703)													$	30,033,703
Total Portfolio Investments (Cost: $30,033,703)													$	30,033,703

Portfolio Investment		Industry		Interest Rate			Maturity		Principal / Shares				Fair Value
Senior Subordinated Notes (129%)  (1)
United States
Earthlite, LLC  (2)		Business Equipment			11.00	%	07/11/2022		$	1,339,496			$	1,314,575
Gatekeeper Systems, Inc.  (2)		Security and Protection Services			11.00	%	03/02/2022		$	1,942,640				1,910,130
La Tavola, LLC  (2)		Commercial Retail			11.00	%	06/01/2021		$	3,433,977				3,382,949
Medsurant Holdings, LLC		Healthcare Services			12.25	%	06/18/2021		$	2,745,902				2,698,054
Northeastern Bus Rebuilders Inc.  (2)		Business Services			10.00	%	06/05/2022		$	5,265,338				5,187,086
Rudy's Food Products, Inc.  (2)		Processed & Packaged Goods			11.00	%	07/05/2021		$	5,361,235				5,267,650
Trachte, LLC  (2)		Manufacturing			11.00	%	04/13/2021		$	3,438,524				3,388,650
Total Senior Subordinated Notes (Cost: $23,149,094)													$	23,149,094
Money Market Fund (0%)
United States
Western Asset Institutional U.S. Treasury Reserves (Cost: $62,852)		U.S. Treasury Bills and Notes								62,852			$	62,852
Total United States (Cost: $23,211,946)													$	23,211,946
Total Portfolio Investments (Cost: $23,211,946)													$	23,211,946

		For the Three Months Ended March 31, 2017				For the Three Months Ended March 31, 2016
Investment Income
Non-Controlled, Non-Affiliated Investments:
Interest income		$	699,680			$	290,434
Payment-in-kind interest income			49,384				13,705
Total Investment Income			749,064				304,139
Expenses
Investment Management Fee			91,055				43,165
Directors fees			41,250				41,250
Professional fees			33,737				81,913
Other general and administrative			1,865				1,487
Total Expenses			167,907				167,815
Investment Management Fee Waived (Note 7)			-				(19,817	)
Total Net Expenses			167,907				147,998
Net Investment Income/(Loss) before income tax (benefit)/expense			581,157				156,141
Income tax (benefit)/expense (Note 2)			246,489				(30,269	)
Net Investment Income/(Loss) after income tax (benefit)/expense			334,668				186,410
Net Increase/(Decrease) in Net Assets Resulting from Operations		$	334,668			$	186,410
Net Investment Income/(Loss) and Net Increase/(Decrease) in Net Assets Resulting from Operations Per Share (Basic and Diluted)		$	3.35			$	1.86
Weighted average shares outstanding			100,000				100,000

		For the Three Months Ended March 31, 2017				For the Three Months Ended March 31, 2016
Net Increase/(Decrease) in Net Assets Resulting from Operations
Net investment income/(loss) after income tax benefit/(expense)		$	334,668			$	186,410
Net Increase/(Decrease) in Net Assets Resulting from Operations			334,668				186,410
Capital Stock Transactions
Contributions from stockholder			6,375,000				3,094,703
Net Increase in Net Assets From Capital Stock Transactions			6,375,000				3,094,703
Total Increase in Net Assets
Net assets at beginning of period			17,909,096				6,467,902
Net assets at end of period		$	24,618,764			$	9,749,015
Capital Share Activity
Shares issued			-				-
Shares redeemed			-				-
Net Increase/(Decrease) in Shares Outstanding			-				-
Undistributed Net Investment Income/(Loss)		$	557,406			$	(338,779	)

		For the Three Months Ended March 31, 2017				For the Three Months Ended March 31, 2016
Cash Flows From Operating Activities
Net Increase/(Decrease) in Net Assets Resulting from Operations		$	334,668			$	186,410
Adjustments to reconcile Net Increase/(Decrease) in Net Assets
Resulting from Operations to Net Cash Used in Operating Activities:
Purchases of Portfolio Investments			(6,757,904	)			(3,069,360	)
Payment-in-kind interest income			(49,384	)			(13,705	)
Accretion of discount on notes			(14,469	)			(11,885	)
Decrease/(Increase) in interest receivable			(50,123	)			(9,709	)
Decrease/(Increase) in net deferred tax asset			79,260				(70,300	)
(Decrease)/Increase in due to Affiliates			(784	)			(126,249	)
(Decrease)/Increase in accrued expenses and other liabilities			(7,381	)			36,250
(Decrease)/Increase in taxes payable			58,218				40,031
Net Cash Used in Operating Activities			(6,407,899	)			(3,038,517	)
Cash Flows From Financing Activities
Payment of receivable from stockholder			-				25,000
Contributions from stockholder			6,375,000				3,069,703
Net Cash Provided by Financing Activities			6,375,000				3,094,703
Net (Decrease)/Increase in Cash			(32,899	)			56,186
Cash
Beginning of period			122,577				102,615
End of period		$	89,678			$	158,801
Supplemental cash flow information
Income Taxes Paid		$	109,011			$	-

		Assets at Fair Value as of March 31, 2017
		Level 1				Level 2				Level 3				Total
Senior Subordinated Notes		$	-			$	-			$	29,810,363			$	29,810,363
Money Market Fund			223,340				-				-				223,340
Total Portfolio Investments		$	223,340			$	-			$	29,810,363			$	30,033,703

		Assets at Fair Value as of December 31, 2016
		Level 1				Level 2				Level 3				Total
Senior Subordinated Notes		$	-			$	-			$	23,149,094			$	23,149,094
Money Market Fund			62,852				-				-				62,852
Total Portfolio Investments		$	62,852			$	-			$	23,149,094			$	23,211,946

							Unobservable Input as of March 31, 2017
Investment Type		Fair Value1			Primary Valuation Technique		Input		Range
Senior Subordinated Notes		$	18,323,592		Discounted Cash Flow		Discount Rate			10.0% - 14.0	%
Total		$	18,323,592

							Unobservable Input as of December 31, 2016
Investment Type		Fair Value1			Primary Valuation Technique		Input		Range
Senior Subordinated Notes		$	14,737,303		Discounted Cash Flow		Discount Rate			10.0% - 14.0	%
Total		$	14,737,303

		Senior Subordinated Notes
		March 31, 2017				March 31, 2016
Beginning Balance		$	23,149,094			$	6,833,511
Purchases			6,597,416				3,069,360
Accretion/Payment-in-kind interest income			63,853				25,590
Ending Balance		$	29,810,363			$	9,928,461

		For the Three Months Ended March 31, 2017				For the Year Ended December 31, 2016
Federal income taxes:
Current		$	144,565			$	79,211
Deferred			(13,599	)			(83,598	)
State income taxes:
Current			10,411				17,547
Deferred			(1,978	)			(11,239	)
Total		$	139,399			$	1,921

Current:		For the Three Months Ended March 31, 2017				For the Three Months Ended March 31, 2016
Federal		$	144,565			$	35,851
State			22,664				4,180
Total Current			167,229				40,031
Deferred:
Federal			69,999				(63,067	)
State			9,261				(7,233	)
Total Deferred			79,260				(70,300	)
Total Net (Benefit)/Expense		$	246,489			$	(30,269	)

		For the Three Months Ended March 31, 2017				For the Year Ended December 31, 2016
Deferred Tax Assets:
Accrued Professional Fees		$	13,580			$	76,718
Organizational Expenses			119,262				120,277
Debt Issuance Costs			84,905				66,828
Total Deferred Tax Assets		$	217,747			$	263,823
Valuation Allowance			(202,170	)			(168,986	)
Net Deferred Income Taxes		$	15,577			$	94,837

		For the Three Months Ended March 31, 2017				For the Year Ended December 31, 2016
Computed "Expected" Tax Rate			34.00	%			34.00	%
State Income Taxes, Net of Federal Income Tax Benefit			3.62	%			2.93	%
Deferred Tax Asset Valuation Allowance Impact			4.79	%			(2.53	)%
Effective Tax Rate			42.41	%			34.40	%

		For the Three Months Ended March 31, 2017				For the Three Months Ended March 31, 2016
Total Return1			1.87	%			1.95	%
Per Share Amounts:
Net Asset Value, Beginning of Year/Period		$	179.09			$	64.68
Net Increase/(Decrease) in Net Assets Resulting from Operations			3.35				1.86
Contributions from Stockholder			63.75				30.95
Net Asset Value, End of Period		$	246.19			$	97.49
Net Assets, End of Period		$	24,618,764			$	9,749,015
Average Net Assets		$	19,564,798			$	8,854,866
Ratios / Supplemental Data:
Ratio of net investment income/(loss) after income tax (benefit)/expense to average net assets			1.71	%			2.11	%
Ratio of total expenses to average net assets before Investment Management Fee Waived			0.86	%			1.90	%
Ratio of total expenses to average net assets after Investment Management Fee Waived			0.86	%			1.67	%
Common Shares Outstanding, End of Period			100,000				100,000
Portfolio Turnover Rate			0.00	%			0.00	%

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

Siguler Guff Small Business Credit Opportunities Fund, Inc. (“SBCOF” or the “Fund”) is a non-diversified closed-end management investment company electing status as a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”).  The Fund is a wholly-owned subsidiary of Siguler Guff Small Business Credit Opportunities Fund, LP, a Delaware limited partnership (the “Partnership”).  The Partnership is the Fund’s sole direct shareholder and makes capital contributions to the Fund as needed for the Fund to make investments or pay its expenses, to the extent that the Partnership has available capital and in accordance with the Partnership’s governing documents.  The Fund’s investment objective is to achieve attractive risk-adjusted returns by generating current income from debt investments and capital appreciation from equity investments.

The Fund is a specialty finance investment company providing financing and advisory services to carefully selected companies in the lower middle market, which Siguler Guff Advisers (the “Investment Manager”) defines as privately-owned companies with between $2 to 15 million of earnings before income tax, depreciation and amortization (“EBITDA”), and between $10 to 100 million of revenue. The Fund’s investments generally take the form of mezzanine debt, “unitranche” loans with a first lien on the company’s assets, as well as second lien loans.  The Partnership generally seeks to purchase equity securities alongside the Fund’s investments into those same companies, generally with an aggregate cost of up to 20% of the value of the investment.  The Partnership also may extend mezzanine financing in forms other than subordinated loans, such as convertible loans and preferred stock. The Fund commenced investment operations on October 13, 2015, and its portfolio as of March 31, 2017 (excluding cash and cash equivalents) consisted of 9 investments comprising the healthcare services, manufacturing, processed and packaged goods, business equipment, business services, commercial retail, consumer and sporting goods, industrial equipment and components, and security and protection services industries.

 

The Investment Manager will seek to increase the diversification of the Fund’s portfolio so as to make it possible (commencing with the fiscal year ending December 31, 2017) to meet the regulated investment company (“RIC”) diversification requirements under Section 851(b) of the Internal Revenue Code (the “Code”), although there is no assurance that the Fund will meet the RIC requirements at that time.  Until the Fund meets the requirements to qualify as a RIC, it will be taxed as an ordinary corporation on its taxable income for that year, regardless whether that income is distributed to the Partnership as the Fund’s sole direct shareholder, and all distributions out of earnings and profits will be taxable to investors as ordinary dividend income (i.e., the Fund will be subject to a double layer of tax).

CRITICAL ACCOUNTING POLICIES

The Investment Manager has identified the most critical accounting estimates upon which the financial statements depend and determined the critical accounting estimates by considering accounting policies that involve the most complex or subjective decisions or assessments.  The critical accounting policies relate to the valuation of investments, the recognition of income and expense, and income taxes.

Valuation of Portfolio Investments

The Financial Accounting Standards Board Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  A liability’s fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor.  Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available or reliable, fair valuation techniques are applied.  These techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the investments or market and the investments’ complexity.

Assets and liabilities recorded at fair value in the Fund’s consolidated financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value.  Hierarchical levels, defined by ASC 820 and directly related to the amount of subjectivity associated with the inputs used in the fair valuation of these assets and liabilities, are as follows:

·

Level 1 - Unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

·

Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data at the measurement date for substantially the full term of the assets or liabilities.

·

Level 3 - Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.  Consideration is given to the risk inherent in the fair valuation technique and the risk inherent in the inputs to the model.

 

Under ASC 820, the Fund performs detailed valuations of its debt investments for which quotations are not readily available on an individual basis, using bond yield, market and income approaches as appropriate. In certain instances, the Fund may use alternative methodologies, including recent purchase transactions, asset liquidation, expected recovery model or other alternative approaches to estimate the fair value.

Investments where market quotations for securities of the same issue are readily available on an exchange are marked to market at fair value at the closing price on the financial statement date.  Financial instruments with readily available quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment inherent in measuring fair value.

Under the bond yield approach, the Fund uses bond yield models to determine the present value of the future cash flow streams of its debt investments. The Fund reviews various sources of transactional data, including private mergers and acquisitions involving debt investments with similar characteristics, and assesses the information in the valuation process.

Under the market approach, the Fund estimates the enterprise value of the portfolio companies in which it invests. There is no one methodology to estimate enterprise value and, in fact, for any one portfolio company, enterprise value is best expressed as a range of fair values, from which the Fund derives a single estimate of enterprise value. To estimate the enterprise value of a portfolio company, the Fund analyzes various factors, including the portfolio company’s historical and projected financial results. Typically, private companies are valued based on multiples of EBITDA, cash flows, net income or revenues. The Fund generally requires portfolio companies to provide annual audited and quarterly or monthly unaudited financial statements, as well as annual projections for the upcoming fiscal year.

Under the income approach, the Fund generally prepares and analyzes discounted cash flow models based on projections of the future free cash flows of the business.

The fair value of the Fund’s portfolio investments at March 31, 2017 and December 31, 2016 was determined in good faith by the Fund’s Board of Directors. The Board of Directors is ultimately and solely responsible for the valuation of the portfolio investments at fair value as determined in good faith pursuant to the Fund’s valuation policy and a consistently applied valuation process.

The following table summarizes the level of the Fund’s assets measured at fair value as of March 31, 2017 and December 31, 2016.

 

 

At March 31, 2017 and December 31, 2016, 100% of the Fund’s portfolio investments have been classified within Level 3, with the exception of the Money Market Fund.  Assumptions used by the Fund due to the lack of observable inputs may significantly impact fair value determinations and therefore the Fund’s results of operations.  The following table summarizes the significant unobservable inputs the Fund used to value investments categorized within Level 3.  The below table is not intended to be all-inclusive, but instead captures the significant unobservable inputs relevant to the determination of fair values:

Not reflected in the table above are Level 3 investments that have been primarily based upon recent transactions totaling $11,486,771 as of March 31, 2017.

Not reflected in the table above are Level 3 investments that have been primarily based upon recent transactions totaling $8,411,791 as of December 31, 2016.

Critical factors in determining the fair value of investments include payment history, collateral position, financial strength of borrower, financial performance relative to covenants, likelihood of sale or acquisition of the borrower, and length of expected holding period of the loan, as well as the general interest rate environment. The actual value realized from investments may differ from management’s estimates and such differences could be material.   In addition, such differences would impact the carrying value of investments presented in the financial statements, as well as, the Fund’s change in net assets resulting from operations.

Income and Expense

Interest income is recorded on an accrual basis to the extent that such amounts are expected to be collected.  The Fund stops accruing interest on investments when it is determined that interest is no longer collectible.  Fees received upon closing a transaction generally are treated as a reduction in the cost basis of the investment.  Any resulting discount, or closing fee received, from recording the loan or otherwise purchasing a security at a discount, is accreted into interest income over the life of the loan using the effective-yield method.

The Fund has investments in debt securities which contain payment-in-kind (“PIK”) interest provisions.  PIK interest is computed at the contractual rate specified in each investment agreement and added to the principal balance of the investment and recorded as income.  The Fund stops accruing PIK interest on investments when it is determined that PIK interest is no longer collectible.

Expenses include investment management fees, legal fees, directors’ fees, audit and tax expenses, and other general and administrative expenses.  Expenses are recognized on an accrual basis.

 

Income Taxes

During the period ended March 31, 2017 and the year ended December 31, 2016, the Fund did not qualify to be treated as a RIC for federal income tax purposes.  As such, the Fund will be treated as a corporation for U.S. federal income tax purposes.  It is anticipated that, by the end of the third year of its investment operations, the Fund will seek to meet the requirements, including diversification, gross income, and distribution requirements, to qualify for the special pass-through status available to RICs under the Code, and thus to be relieved of federal income tax on that part of its net investment income and realized capital gains that it distributes.  Unless and until the Fund meets these requirements, it will be taxed as a corporation on its taxable income for that year even if that income is distributed to the Partnership (its sole stockholder), and all distributions out of its earnings and profits will be taxable as dividends to the investors of the Partnership; thus, such income will be subject to two layers of tax (although corporate Limited Partners may be entitled to a dividends-received deduction).  There is no assurance that the Fund will meet the requirements to qualify as a RIC or be able to maintain such status.

The Fund accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements.  Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.  The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

The Fund recognizes deferred tax assets to the extent that it believes these assets are more likely than not to be realized.  In making such a determination, the Fund considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations.

As of March 31, 2017 and December 31, 2016, the Fund concluded that it was more likely than not that an amount of the deferred tax assets, relating to the period after RIC qualification, would not be utilized. Therefore, the Fund recorded a valuation allowance against a portion of its deferred tax assets, for the period ending March 31, 2017 and for the year ending December 31, 2016, representing the portion of deferred tax assets for which the Fund is not expected to realize a benefit after the Fund meets RIC qualification. If the Fund determines that it would be able to realize deferred tax assets in the future in excess of their net recorded amount, it would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

The Fund records uncertain tax positions in accordance with FASB ASC 740, Income Taxes (“ASC 740”) on the basis of a two-step process whereby (1) it determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than not recognition threshold, it recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.  The Fund has determined that there are no uncertain tax positions that would have a material impact to the financial statements of the Fund, and therefore, no provisions are required to be recorded by the Fund. The Fund does not anticipate significant increases to uncertain tax positions in the next twelve months. The Fund will recognize any interest and penalties, if applicable, for any uncertain tax positions as a component of income tax expense.  No interest or penalties were recorded during the periods ended March 31, 2017 or accrued for as of March 31, 2017 and December 31, 2016.

 

Results of Operations – For the three months ended March 31, 2017 and three months ended March 31, 2016

Total investment income for the three months ended March 31, 2017 was $749,064 and for the three months ended March 31, 2016 was $304,139, which primarily consisted of interest income on investments held during the reporting period.  The average outstanding principal amount of loans made by the Fund (calculated on a monthly basis) during the three months ended March 31, 2017 was $25,291,454, and during the three months ended March 31, 2016 was $9,308,459.

As of the three months ended March 31, 2017, and the three months ended March 31, 2016, all investments held by the Fund incorporated fixed interest rates.  The weighted average interest rate on outstanding loans was 12.14% for the three months ended March 31, 2017 and 12.05% for the three months ended March 31, 2016.  Interest is calculated using the effective interest method, and rates earned by the Fund will fluctuate based on factors including, but not limited to, pre-payments of outstanding loans, defaults or uncollectibility of payments, and changes in interest rates.

Total Fund expenses for the three months ended March 31, 2017 was $167,907.  This amount consisted of investment management fees of $91,055, directors’ fees of $41,250, professional fees of $33,737, and other general and administrative expenses of $1,865. There was an income tax expense of $246,489 for the three months ended March 31, 2017.  Total Fund expenses for the three months ended March 31, 2016 was $147,998. This amount consisted of investment management fees of $23,348 (gross fees of $43,165 less waived fees of $19,817), professional fees of $81,913, directors’ fees of $41,250, and other general and administrative expenses of $1,487.  There was an income tax benefit of $30,269 for the three months ended March 31, 2016.

The Fund’s investment management fee, amounting to $91,055 for the three months ended March 31, 2017 was computed and paid quarterly in arrears in an amount equal to 1.25% per annum of the Fund’s Invested Capital, as measured as of the close of business on the last business day of each quarterly period. On November 9, 2016, the Independent Directors of the Fund’s Board approved amendments to the Investment Management Agreement which included the reduction of the management fee from 1.75% to 1.25% of Invested Capital.  Prior to the Independent Director approval of the management fee reduction, the Investment Manager elected to voluntarily waive all management fees greater than 1.25% per annum of the Fund’s invested capital, retroactive to the inception of the Fund. The Fund’s investment management fee amounted to $23,348 (gross fees of $43,165 less waived fees of $19,817) for the three months ended March 31, 2016.   “Invested Capital” means the cost basis of the Fund’s portfolio investments (excluding cash and cash equivalents) that have not been written off or disposed of, including portfolio investments acquired with borrowed funds.

The Fund’s professional fees for the three months ended March 31, 2017 and three months ended March 31, 2016 were comprised of legal, audit, tax and other professional fees. Other general and administrative expenses included miscellaneous other expenses related to the operation of the Fund.

Net investment income for the three months ended March 31, 2017 was $334,668.  Net investment income for the three months ended March 31, 2016 was $186,410.  The increase in net investment income was due to the increase in the number of investments that pay interest during the period.  The Fund is continuing to make investments in income-producing assets and seeking additional capital commitments from investors; if the Fund is unsuccessful, fixed expenses will continue to be incurred and will be allocated to existing investors in the Fund.

 

There was no realized/unrealized gains or losses from investments during the three months ended March 31, 2017 and three months ended March 31, 2016.  Net increase in net assets resulting from operations for the three months ended March 31, 2017 was $334,668.  Net increase in net assets resulting from operations for the three months ended March 31, 2016 was $186,410.

Financial Condition, Liquidity, and Capital Resources

During the three months ended March 31, 2017 and March 31, 2016, the Fund was wholly owned by the Partnership. The Partnership is expected, but not required, to make further contributions of capital to the Fund in an aggregate amount that will not exceed the Partnership’s limited partners’ capital commitments to the Partnership.  From inception of the Partnership through March 31, 2017, the Partnership had received subscriptions for capital in the amount of $59,010,000, of which $39,094,125 had been called and of which $24,061,358 was contributed to the Fund.  As of March 31, 2017, $19,915,875 of capital remained uncalled by the Partnership.

At March 31, 2017, the Fund had adequate resources consisting of cash on hand, a Money Market Fund and expected future capital contributions from the Partnership that could be used to fund future obligations.  The Fund, based upon the investments held at March 31, 2017, expects to receive approximately $3,500,000 in scheduled interest payments over the next year.  The future capital contributions and scheduled interest payments are sufficient to meet the requirements of anticipated investments and operational expenses of the Fund over the next year.

For the three months ended March 31, 2017, 0.4% of the Fund’s net assets consisted of cash.  For the year ended December 31, 2016, 0.7% of the Fund’s net assets consisted of cash.  During the three months ended March 31, 2017 and year ended December 31, 2016, the Fund invested in senior subordinated notes. There were no distributions made by the Fund during the three months ended March 31, 2017 and year ended December 31, 2016. The principal balance and fair value of loans in the Fund’s investment portfolio at March 31, 2017 and December 31, 2016 was $30,278,751 and $29,810,363, and $23,527,112 and $23,149,094, respectively.

The Fund’s consolidated financial statements include portfolio investments held at a fair value of $30,033,703 at March 31, 2017 and $23,211,946 at December 31, 2016. The portfolio investments represent 122% of net assets at March 31, 2017 and 129% of net assets at December 31, 2016 and their fair values have been determined in good faith by the Fund’s Board of Directors. Because of the inherent uncertainty of fair valuation, the determined values may differ significantly from the values that would have been used had a ready market existed for the investments, and the differences could be material. Because the Fund’s investments consist of privately negotiated transactions, investments in these assets are considered to be illiquid.

Contractual Obligations

The Fund has entered into certain contracts under which it has future commitments. Payments under the Investment Management Agreement, pursuant to which Siguler Guff Advisers has agreed to serve as the Fund’s investment adviser, are equal to a percentage of the net invested capital of the Fund, including assets acquired with borrowed funds, if any.  The Investment Management Agreement will continue in effect until June 8, 2017.  Thereafter, regardless of the dissolution of the Fund, the Investment Management Agreement shall continue automatically for successive periods of a year each June, if not terminated. Either party may terminate the Investment Management Agreement without penalty on least 60 days’ written notice to the other party.  The Fund has also entered into a Custodian Agreement, pursuant to which Citibank N.A. has agreed to serve as the Fund’s custodian. The Fund pays the custodian such fees as have been agreed between the Fund and the custodian, as described in the Custodian Agreement which the Fund has determined are commercially reasonable in its sole discretion.

 

Effect of Certain Investments and Investment Practices. The Fund’s activities generally may be unlike the typical activities engaged in by most investment companies that seek to qualify as RICs for federal income tax purposes. Certain aspects of these activities may at times make it more difficult for the Fund to satisfy the requirements for qualifying as a RIC than is the case for other investment companies. For example, because the Fund generally will call capital from the Partnership on an “as needed” basis and will have relatively few investments in its early period of operations, the Fund will not be holding substantial amounts of “cash and cash items” that could be counted towards the Fund’s RIC diversification requirements. As noted above, it is anticipated that the Fund will not meet the RIC requirements (and in particular the diversification requirement) until the third year of its investment operations, and there is no assurance that the Fund will meet the requirements to qualify as a RIC within that timeframe.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Fund is subject to financial market risks, including changes in interest rates.  Changes in interest rates may affect both the cost of funding and our interest income from portfolio investments.  The Fund’s risk management processes and procedures are designed to identify and analyze risk, to set appropriate policies and limits and to continually monitor these risks and limits by means of administrative and information systems and other policies and programs.  Our investment income will be affected by changes in various interest rates, including LIBOR and prime rates, to the extent our debt investments include floating interest rates.  In addition, our investments are carried at fair value as determined in good faith by our Board of Directors.  Our valuation methodology utilizes discount rates in part in valuing our investments, and changes in those discount rates may have an impact on the valuation of our investments.

The Fund’s business activities entail various elements of risk.  The Fund considers the principal types of market risk to be interest rate risk, credit risk and valuation risk.  Accordingly, the Fund’s risk management procedures are designed to identify and analyze the Fund’s risks, to set appropriate policies and limits and to continually monitor these.

The Fund intends to manage its risk by maintaining a portfolio that is diverse by industry, size of investment, and borrowers. The Fund has limited exposure to public market price fluctuations as the Fund invests in the debt of private business enterprises. The equity investment accompanying most debt investments (which, if it becomes publicly-traded, is subject to enhanced market risk) is generally made by the Partnership.

The Fund’s sensitivity to changes in interest rates is regularly monitored and analyzed by measuring the characteristics of assets and liabilities.  The Fund uses various methods to assess interest rate risk in terms of the potential effect on interest income and investment valuation.  The Fund’s valuation methodology utilizes discount rates as part of valuing its investments and changes in those discount rates, and interest rates in general, would be expected to have an impact on the valuation of investments.  Assuming no changes in investment and capital structure, a hypothetical increase in discount rates of 100 basis points would decrease the Fund’s net assets resulting from operations by an estimated $1,099,000. The Fund had no outstanding borrowings as of March 31, 2017. Should the Fund elect to use leverage, its sensitivity to changes in interest rates and other risks would be substantially greater. The Fund intends to manage credit risk through diversification, and continually monitors the financial condition of its borrowers and reports thereon to the Fund’s Board of Directors.

 

ITEM 4.

CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

At the end of the period covered by this report, Management carried out an evaluation under the supervision and with the participation of its President and the Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, the President and Chief Financial Officer concluded that the Fund’s disclosure controls and procedures were effective in ensuring that information required to be disclosed was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and in providing reasonable assurance that information required to be disclosed by the Fund in such reports was accumulated and communicated to the Fund’s management, including its President and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

Changes in Internal Control over Financial Reporting

During the three months ended March 31, 2017, there were no changes in the Fund’s internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Fund’s internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS.

The Fund is not currently a party to any legal proceedings.

ITEM 1A.

RISK FACTORS.

The risks described in the Annual Report on Form 10-K and Quarterly 10-Q are not the only risks facing the Fund.  Additional risks and uncertainties not currently known to the Fund or the Investment Manager or that the Fund or the Investment Manager currently believe to be insignificant may materially affect the Fund’s business and financial condition in the future.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

Prior to the Fund’s commencement of operations on October 13, 2015, the Fund sold 100,000 shares to the Fund’s sole shareholder, the Partnership, for $25,000 on September 19, 2014.  No other shares of the Funds have been sold; however, the Fund received paid in capital during the period from October 13, 2015, commencement of operations, through March 31, 2017, which is expected to be used for fund investments and operations.  The Fund may receive additional paid in capital from the Partnership in the future.

 

Purchases of Equity Securities

This table provides certain information with respect to purchases of securities registered under Section 12 of the Exchange Act made by the Fund or its affiliates during the first fiscal quarter of 2017:

 

 

There will be no dividend payments made until the final closing of the Fund.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.

Not applicable.

ITEM 4.

MINE SAFETY DISCLOSURES.

Not applicable.

 

ITEM 5.

OTHER INFORMATION.

(a)

As reported in Form 8-K filed with the Securities and Exchange Commission (“SEC”) on May 11, 2017, Jun Isoda, the Principal Accounting Officer of the Siguler Guff Small Business Credit Opportunities Fund, Inc. (“SBCOF” or the “Fund”), assumed the principal financial and accounting responsibilities of the Fund.  On the same date, Michael Ruggeri resigned as the Chief Financial Officer and Treasurer of the Fund.  Mr. Isoda joined the Fund’s Investment Manager Siguler Guff Advisers, LLC (“Investment Manager” or the “Firm”), in November 2007, and is responsible for managing the accounting and financial reporting functions of all multi-manager funds and direct investment products of the Firm, and oversight of all accounting and finance related communications with existing and prospective investors.  Mr. Isoda is actively involved in various operational and investment-related processes within the Firm, including strategic planning, due diligence and evaluating the financial controls of the Firm’s existing and prospective managers.  He also serves on the Firm’s Operations, Allocation, Valuation, and Compliance Committees.  The Board of Directors of the Fund, including the Independent Directors (“Directors”), voted to appoint Mr. Isoda Chief Financial Officer and Treasurer of the Fund at a meeting of the Directors on May 9, 2017.

(b)

No material changes have been made to the procedures with respect to the recommendation and nomination of members to the Fund’s Board of Directors.

ITEM 6.

EXHIBITS.

 

Exhibit	Description
3(i)	Articles of Incorporation of the Fund as filed with the Maryland Secretary of State on July 7, 2014, incorporated by reference to the Fund’s Form 10 filed with the SEC on July 21, 2014.
3(ii)	Bylaws of the Fund, incorporated by reference to the Fund’s Form 10 filed with the SEC on July 21, 2014.
31.1-31.2	Certifications pursuant to Section 302 of The Sarbanes-Oxley Act of 2002, filed herewith.
32.1-32.2	Certifications pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, filed herewith.

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf of the undersigned thereunto duly authorized.

 

 

---