SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
For the fiscal year ended
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TABLE OF CONTENTS
Contents
FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements that involve substantial risks and uncertainties. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about our Company, our current and prospective portfolio investments, our industry, our beliefs and opinions, and our assumptions. Words such as “anticipates,” “expects,” “intends,” “plans,” “will,” “may,” “continue,” “believes,” “seeks,” “estimates,” “would,” “could,” “should,” “targets,” “projects,” “outlook,” “potential,” “predicts” and variations of these words and similar expressions are intended to identify forward-looking statements. 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 investments in such portfolio companies
·Such an economic downturn could disproportionately impact the companies that we intend to target for investment, potentially causing us to experience a decrease in investment opportunities and diminished demand for capital from these companies
· A contraction of available credit and/or an inability to access the equity markets could impair our lending and investment activities
·Interest rate volatility could adversely affect our results, particularly if we elect to use leverage as part of our investment strategy
·To the extent we invest in foreign companies or invest in companies that have significant foreign exposure, factors such as currency fluctuations and geopolitical events could adversely affect the results of our investments, including risks related to payments denominated in foreign currency rather than U.S. dollars
·Our future operating results
·Our business prospects and the prospects of our portfolio companies
·Our contractual arrangements and relationships with third parties
·The ability of our portfolio companies to achieve their objectives
·Competition with other entities and affiliates for investment opportunities
·The speculative and illiquid nature of our investments
·The use of borrowed money to finance a portion of our investments
·The adequacy of our financing sources and working capital
·The loss of key personnel
·The timing of cash flows, if any, from the operations of our portfolio companies
·The ability to locate suitable investments for us and to monitor and administer our investments
·The ability to attract and retain highly talented professionals
·Our ability to qualify and maintain our qualification as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), and as a BDC
·The effect of legal, tax and regulatory changes
·The other risks, uncertainties and other factors we identify under “Item 1A. Risk Factors” and elsewhere in this Registration Statement
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 Statement should not be regarded as a representation by us that our plans and objectives will be achieved.. These forward-looking statements apply only as of the date of this Quarterly Statement. Moreover, we assume no duty and do not undertake to update the forward-looking statements. Because we are an investment company, the forward-looking statements and projections contained in this Quarterly Statement are excluded from the safe harbor protection provided by Section 21E of the Exchange Act.
Item 1.Business
X1 Capital Inc. (“X1” or “X1 Capital” or the “Company”) formed on July 25, 2023 as a corporation under the laws of the State of Maryland. The Company is structured as a closed-end management investment company. The Company has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, for tax purposes, the Company intends to 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 is internally managed.
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). We will remain an emerging growth company until the last day of our fiscal year following the fifth anniversary of a future IPO, or until the earliest of (i) the last day of the first fiscal year in which we have total annual gross revenue of $1.235 billion or more, (ii) December 31 of the fiscal year in which we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (together with the rules and regulations promulgated thereunder, the “Exchange Act”), (which would occur if the market value of our common stock held by non-affiliates exceeds $700.0 million, measured as of the last business day of our most recently completed second fiscal quarter, and we have been publicly reporting for at least 12 months), or (iii) the date on which we have issued more than $1.0 billion in non-convertible debt during the preceding three-year period. For so long as we remain an emerging growth company under the JOBS Act, we will be subject to reduced public company reporting requirements.
We anticipate in the future to conduct a private offering (the “Private Offering”) of our common shares to investors in reliance on exemptions from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). We anticipate commencing our loan origination and investment activities contemporaneously with the initial drawdown from investors in the Private Offering (the “Initial Drawdown”). The initial closing of the Private Offering will occur as soon as practicable in the sole discretion of X1 Capital upon the receipt of aggregate commitments totaling at least $10 million (the “Initial Close”).
The Company expects to invest in private companies. The Company intends to primarily invest in directly originated senior secured term loans including first lien senior secured term loans (including uni-tranche loans), second lien senior secured term loans, mezzanine debt, unsecured loans, other subordinated loans, and covenant-lite loans of private companies. The Company intends to invest to a lesser degree in equity investments in private companies.
Board of Directors
Our Board of Directors will have ultimate authority as to our investments, but we expect it will delegate authority to X1 Capital management to select and monitor our investments, subject to the supervision of the Board of Directors. Pursuant to our Articles of Amendment, the Board of Directors will initially consist of three members.
James Hickey is our founder and CEO, and member of our Board of Directors. Mr. Hickey also serves as Managing Director of state-registered RIA Crimson Wealth Management Inc., and Managing Director of the consulting firm Alternative Risk Strategies LLC. Mr. Hickey brings a unique combination of experience including Chief Investment Strategist at Avantax, a broker-dealer & registered investment advisor (“BD-RIA”) platform with roughly $80 billion in assets and Managing Director of Alternatives at Spearhead Capital, an RIA focusing on ultra-high net worth clients. In addition, Mr. Hickey has served as CEO and CIO for RiverRock Funds and Vice President and Portfolio Manager for the quantitative investment firm FDO Partners. Mr. Hickey also co-founded the insurance company Touchstone Health. Mr. Hickey graduated undergraduate with High Honors from Harvard University. Mr. Hickey has his MBA from the University of Pennsylvania, Wharton. Mr. Hickey also is a CFA Charterholder.
On November 1st, 2024, Richard Chang resigned as a Board Member. Ladislas Mysyrowicz replaced him on our Board of Directors. Mr. Mysyrowicz is CEO of Growth Lending (which is the trading name for Boost&Co Ltd.), which is a UK-based non-bank lender. Prior to Growth Lending, Mr. Mysyrowicz was a Partner at ETV Capital. Mr. Mysyrowicz
began his career at McKinsey. Mr. Mysyrowicz’s undergraduate degree is Electrical and Electronic Engineering from ETH Zurich.
Professor Steven Kelts serves on the Board of Directors. Professor Kelts is a professor at Princeton University at the School of Public and International Affairs and is affiliated with the University Center for Human Values (UCHV). He is also an ethics advisor to the Responsible A.I. Institute. Professor Kelts received his Ph.D. in Political Science from Stanford University and his B.A. from Harvard University in Government and Philosophy.
Management Expense
X1 Capital is an internally managed BDC so there is no formal management fee. At this time, there are no employees being paid a salary, and X1 Capital is not incurring any material expenses. Alternative Risk Strategies LLC (“ARS”), a consulting firm owned by James Hickey and Shay Girard, has paid all formation expenses to-date and will pay for all expenses of the Company until the initial close of the Private Offering (“Initial Close”).
After the end of the fiscal year, on November 1, 2024, The Company signed a consulting agreement with ARS. Additionally, starting November 1st, 2024, Growth Lending LLC will reimburse ARS for expenses until the Initial Close.
After the Initial Close, the Company will be responsible for all of its expenses including professional fees, regulatory fees, salaries, and overhead. The Company anticipates hiring additional staff for investment support, operations support, and compliance support. As part of the Initial Close, the Board will approve an initial budget. While details of the initial budget remain to be resolved because the Company needs to know the size of the Initial Close, the Board will not approve a budget where overhead (including salaries & benefits, director compensation, rent, utilities, IT, etc.…) exceeds 0.5% of assets under management per quarter. To the extent expenses exceed 0.5%, the additional costs will be borne by ARS. Finally, independent directors will not receive any compensation until the Company has raised at least $25 million, and currently no formal agreement exists to compensate independent directors.
Incentive Fee
As X1 Capital is an internally managed BDC, there is no formal incentive fee like an externally managed BDC. At this time, there is no formal incentive plan in place. Any future incentive plan will require Board approval.
Additional Fund Expenses
While the Company is not currently incurring expenses, since all expenses are paid by ARS (and indirectly Growth Lending after November 1st, 2024), the Company will incur expenses after the Initial Close. These future expenses include, but are not limited to:
·Expenses related to the Initial Close
·Future offering expenses
·Calculating our net asset value (including the cost and expenses of any independent valuation firm)
·Fees and expenses payable to third parties, including agents, consultants or other advisers, in connection with monitoring financial and legal affairs for us and in providing administrative services, monitoring our investments and performing due diligence on our prospective portfolio companies or otherwise relating to, or associated with, evaluating and making investments
·Interest payable on debt, if any, incurred to finance our investments
·Sales and purchases of our common stock and other securities
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·Investment advisory and management fees
·Transfer agent and custodial fees
·Federal and state registration fees
·All costs of registration and listing our securities 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 by the SEC, the Financial Industry Regulatory Authority or other regulators
·Costs of any reports, proxy statements or other notices to stockholders, including printing costs;
·Any fidelity bond, directors’ and officers’ errors and omissions liability insurance, and any other insurance premiums
·Direct costs and expenses of administration, including printing, mailing, long distance telephone, copying, secretarial and other staff, independent auditors and outside legal costs
·All other expenses incurred by us in connection with administering our business
Our primary competitors for investments include public and private funds, other BDCs, commercial and investment banks, commercial financing companies and, to the extent they provide an alternative form of financing, family offices, private equity and hedge funds. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. For example, we believe some competitors may have access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC or to the distribution and other requirements we must satisfy to maintain our qualification as a RIC.
For additional information concerning the competitive risks we face, see “Item 1A. Risk Factors — Risks Related to Our Business and Structure — We may face increasing competition for investment opportunities.”
Managerial Assistance
As a BDC, we will offer, and must provide upon request, managerial assistance to our portfolio companies. This assistance could involve, among other things, monitoring the operations of our portfolio companies, participating in board and management meetings, consulting with and advising officers of portfolio companies and providing other organizational and financial guidance. We may also receive fees or expense reimbursement for these services.
Staffing
We currently have one senior executive, James Hickey, who serves as CEO, CFO, and CCO. As we grow, we intend to hire additional staff.
Item 1A.Risk Factors
An investment in our securities involves certain risks relating to our structure and investment objective. The risks set forth below are not the only risks we face, and we may face other risks that we have not yet identified, which we do not currently deem material or which are not yet predictable. If any of the following risks occur, our business, financial condition and results of operations could be materially adversely affected. In such case, our net asset value and the price of our common stock could decline, and you may lose all or part of your investment.
We have no operating history as a BDC.
The Company was formed on July 25, 2023 and has no operating history as a BDC. As a result, we are subject to many of the business risks and uncertainties associated with recently formed businesses, including the risk that we will not achieve our investment objective and that the value of your investment could decline substantially. As a BDC, we will be subject to the regulatory requirements of the SEC, in addition to the specific regulatory requirements applicable to BDCs under the 1940 Act and RICs under the Code. From time to time, X1 Capital may pursue investment opportunities in which it has more limited experience. We may also be unable to replicate the historical performance of employees of X1 Capital. In addition, we may be unable to generate sufficient revenue from our operations to make or sustain distributions to our stockholders.
We have no prior experience managing a BDC or a RIC.
We have no experience managing a BDC or a RIC. Therefore, we may not be able to successfully operate our business or achieve our investment objective. As a result, an investment in shares of our common stock may entail more risk than shares of common stock of a comparable company with a substantial operating history.
The 1940 Act and the Code impose numerous constraints on the operations of BDCs and RICs that do not apply to the other types of investment vehicles. For example, under the 1940 Act, BDCs are required to invest at least 70% of their total assets primarily in securities of qualifying U.S. private or thinly traded companies. Moreover, qualification for RIC tax treatment under Subchapter M of the Code requires, among other things, satisfaction of source-of-income, diversification and other requirements. The failure to comply with these provisions in a timely manner could prevent us from qualifying as a BDC or RIC or could force us to pay unexpected taxes and penalties, which could be material. X1 Capital’s lack of experience in managing a portfolio of assets under such constraints may hinder its ability to take advantage of attractive investment opportunities and, as a result, achieve our investment objective.
Our investment portfolio will be recorded at fair value, with our Board of Directors having final responsibility for overseeing, reviewing and approving, in good faith, its estimate of fair value and, as a result, there will be uncertainty as to the value of our portfolio investments.