| 360 Funds | SEMI-ANNUAL REPORT |
The USX China Fund
NOTES TO THE FINANCIAL STATEMENTS
October 31, 2012 (Unaudited)
| 1. | ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES |
360 Funds (formerly known as the Parr Family of Funds), (the “Trust”), was organized on February 25, 2005 as a Delaware statutory trust. The Trust is registered as an open-end management investment company under the Investment Company Act of 1940 (the “1940 Act”). The sole series of shares of the Trust is The USX China Fund (the “Fund”). The Fund is a non-diversified Fund. As a non-diversified Fund, it may invest a significant portion of its assets in a small number of companies. The Fund’s investment objective is long term growth of capital. The Fund’s investment adviser is Matrix 360 Advisor, LLC (the “Adviser”). The Fund offers two classes of shares, Class A and Class C shares. The Class C shares commenced operations on July 1, 2005. The Class A shares commenced operations on September 23, 2005. Each class differs as to sales and redemption charges and ongoing fees. Income and realized/unrealized gains or losses are allocated to each class based on relative share balances.
The following is a summary of significant accounting policies consistently followed by the Fund. The policies are in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
a) Investment Valuation - Common stocks and other equity securities listed on a securities exchange or quoted on a national market system are valued at 4:00 p.m., New York time, on the day of valuation. Price information on listed stocks is taken from the exchange where the security is primarily traded. Equity securities that are traded on the NASDAQ National Market System, for which quotes are readily available, are valued at the official closing price. Securities that are listed on an exchange but which are not traded on the valuation date are valued at the most recent bid quotation. To the extent these securities are actively traded and valuation adjustments are not applied, they are categorized in level 1 of the fair value hierarchy described below. When an equity security is valued by an independent pricing service using factors other than market quotations or the market is considered inactive, it will be categorized in level 2. Money market funds are valued at their net asset value of $1.00 per share and are categorized as level 1. Securities with maturities of 60 days or less may be valued at amortized cost, which approximates fair value and would be categorized as level 2. The Fund normally uses pricing services to obtain market quotations. Securities and assets for which representative market quotations are not readily available or which cannot be accurately valued using the Fund’s normal pricing procedures are valued at fair value as determined in good faith under policies approved by the Trustees. Fair value pricing may be used, for example, in situations where (i) a portfolio security, such as a small-cap stock, is so thinly traded that there have been no transactions for that stock over an extended period of time or the validity of a market quotation received is questionable; (ii) the exchange on which the portfolio security is principally traded closes early; (iii) trading of the particular portfolio security is halted during the day and does not resume prior to the Fund’s net asset value calculation; or (iv) the security or warrant is a restricted security not registered under federal securities laws purchased through a private placement not eligible for resale. In addition, for securities that are halted for several days, pursuant to fair value procedures adopted by the Fund’s Board of Trustees, the Adviser will determine an adjustment to the price. The relevant inputs that the Adviser may consider in establishing the fair value include, but would not be limited to; the general market conditions in the Chinese reverse merger stock market and the overall financial market; disclosures related to the company’s auditors; the status of the company’s 8k, 10k, and other filings with the SEC and NASDAQ; participation by the company, CFO, investment banker, trader and research analysts in conferences, road shows, conference calls and 1-on-1 telephone calls or in-person meetings; channel checks and/or visitation to prove-up real business operations; comments from money managers, investment banks and research analysts; and, review of the Bloomberg Chinese Reverse Mergers Index (CHINARTO:IND). Consistent with the foregoing, the Trustees have adopted guidelines and instructions for the valuation of restricted securities held by the Fund focusing on such important factors, among others, as valuation, liquidity and availability of relevant information. These guidelines are implemented by the Fund’s Fair Value Committee, and the Adviser, subject to the review by the Fair Value Committee, reviews relevant market conditions for any restricted security held by the Fund on a daily basis to determine the appropriate value for such restricted security. Because a fair value determination is based on an assessment of the value of the security pursuant to the policies approved by the Fund’s Board of Trustees rather than a market price, the fair value price may differ substantially from the price at which the security may ultimately be traded or sold. The differences could be material. As of October 31, 2012, eighteen (18) securities held by the Fund were being fair valued.
| 360 Funds | SEMI-ANNUAL REPORT |
The USX China Fund
NOTES TO THE FINANCIAL STATEMENTS
October 31, 2012 (Unaudited)
| 1. | ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) |
b) Restricted Securities - The Fund may invest in restricted securities and warrants (“Restricted Securities”) through purchases of privately-offered securities of publicly traded companies located or doing business primarily in China. The Fund held no Restricted Securities at October 31, 2012.
The Adviser, subject to the oversight of the Fair Value Committee, determines the fair value price of Restricted Securities on a daily basis using, among other things, factors and criteria established by the Trustees. These factors and criteria include, without limitation, the nature and duration of the restrictions on the disposition of the Restricted Security; market trading in the applicable company’s publicly traded stock (the “Reference Stock”); government and economic matters affecting China; earnings per share; free cash flows; debt levels; revenue growth; and, information regarding the applicable company and its business. Using these factors and criteria, these instruments may be classified in either level 2 or level 3 of the fair value hierarchy. Using the Fair Value Pricing Instructions, The Adviser seeks to determine the price that is representative of the amount that the Fund might reasonably expect to receive for the Restricted Securities upon their current sale. Since the fair value of these Restricted Securities is determined pursuant to policies approved by the Trustees rather than by use of market prices, shareholders may receive more or less proceeds or shares from redemptions or purchases than they would if market prices were available for the Restricted Securities. Depending on the relative significance of valuation inputs, these instruments may be classified in either Level 2 or Level 3 of the fair value hierarchy.
In accordance with the authoritative guidance on fair value measurements and disclosure under GAAP, the Fund discloses fair value of its investments in a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The objective of a fair value measurement is to determine the price 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 (an exit price). Accordingly, the fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under GAAP are described below:
Level 1 – Quoted prices in active markets for identical securities.
Level 2 – Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.)
Level 3 – Significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments)
The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities.
| 360 Funds | SEMI-ANNUAL REPORT |
The USX China Fund
NOTES TO THE FINANCIAL STATEMENTS
October 31, 2012 (Unaudited)
| 1. | ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) |
The following is a summary of the inputs used, as of October 31, 2012 in valuing the Fund’s investments carried at fair value:
Security Classification (a) | | The USX China Fund | |
| Level 1 | | | |
| Common Stock | | $ | 654,263 | |
| Short Term Investments | | | 130,157 | |
| Total Level 1 | | | 784,420 | |
| | | | | |
| Level 2 | | | | |
Common Stock (b) | | | 20,629 | |
Warrants (b) | | | - | |
| Total Level 2 | | | 20,629 | |
| | | | | |
| Level 3 | | | | |
Common Stock (b) | | | 180,432 | |
Preferred Stock (b) | | | 116,944 | |
Warrants (b) | | | - | |
| Total Level 3 | | | 297,376 | |
| Total Investments | | $ | 1,102,425 | |
| | (a) | For a detailed break-out by major industry classification of all securities held by the Fund please refer to the Schedule of Investments. |
| | (b) | Certain securities and warrants are valued at fair value as determined by the Adviser using procedures approved by the Board of Trustees. The sale of certain of these securities is restricted until certain regulatory filings are approved. |
The following amounts were transfers in/(out) of Level 2 assets:
| | | Common Stock | | | Preferred Stock | | | Totals | |
| | | | | | | | | | |
| Transfers into Level 2 | | $ | 15,555 | | | $ | - | | | $ | 15,555 | |
| Transfers from Level 2 | | | - | | | | - | | | | - | |
| Net Transfers in/(out) of Level 2 | | $ | 15,555 | | | $ | - | | | $ | 15,555 | |
Transfers of $15,555 were made from Level 3 to Level 2 due to securities now being valued using other observable inputs instead of using significant unobservable inputs. There were no transfers out of Level 2 as of and during the six month period ended October 31, 2012. Transfers between levels are recognized as of the end of the reporting period.
The following is a reconciliation for which Level 3 inputs were used in determining fair value:
| | | Common Stock | | | Preferred Stock | | | Total | |
| | | | | | | | | | |
| Beginning balance April 30, 2012 | | $ | 500,776 | | | $ | 188,744 | | | $ | 689,520 | |
| Total realized loss | | | (277,683 | ) | | | - | | | | (277,683 | ) |
| Change in unrealized depreciation | | | 35,747 | | | | (71,800 | ) | | | (36,053 | ) |
| Cost of purchases | | | 2,531 | | | | - | | | | 2,531 | |
| Proceeds from sales | | | (65,384 | ) | | | - | | | | (65,384 | ) |
Net transfers in/(out) of level 3 (*) | | | (15,555 | ) | | | - | | | | (15,555 | ) |
| Ending balance October 31, 2012 | | $ | 180,432 | | | $ | 116,944 | | | $ | 297,376 | |
(*) Transfers include $15,555 transferred from Level 3 to Level 2 due to securities now being valued using other observable inputs instead of using significant unobservable inputs.
| 360 Funds | SEMI-ANNUAL REPORT |
The USX China Fund
NOTES TO THE FINANCIAL STATEMENTS
October 31, 2012 (Unaudited)
| 1. | ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) |
The total change in unrealized depreciation included in the statement of operations attributable to level 3 investments still held at October 31, 2012 was as follows:
| | | Common Stock | | | Preferred Stock | | | Total | |
| | | | | | | | | | |
| Change in unrealized depreciation | | $ | (172,565 | ) | | $ | (71,800 | ) | | $ | (244,365 | ) |
Significant unobservable inputs developed by the Adviser and approved by the Board of Trustees for material Level 3 investments as of October 31, 2012 are as follows:
Description | | Fair Value at 10/31/2012 | | Percent of Net Assets | | Valuation Techniques | | Unobservable Inputs |
| Common Stock | | $180,432 | | 16.55% | | (i)(i) Most recent last trade price with significant volume, (ii) Cost less illiquidity discount, (iii) Calculated from reported data less illiquidity discount | | (i) Montoring of reported data, (ii) Illiquidity discount multipliers |
| Preferred Stock | | 116,944 | | 10.73% | | (i) Equivalent value of common shares using their most recent last trade price with significant volume, (ii) Calculated from reported data less illiquidity discount | | (i) Montoring of reported data, (ii) Illiquidity discount multipliers |
c) Federal Income Taxes - The Fund qualifies and intends to continue to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). It is the policy of the Fund to comply with the requirements of the Code applicable to regulated investment companies and to distribute substantially all of its net investment company taxable income and net capital gains. Therefore, no provision for federal income taxes is required.
As of and during the six month period ended October 31, 2012, the Fund did not have a liability for any unrecognized tax expenses. The Fund recognizes interest and penalties, if any, related to unrecognized tax liability as income tax expense in the statement of operations. During the six month period ended October 31, 2012, the Fund did not incur any interest or penalties. The Fund is not subject to examination by U.S. Federal tax authorities for tax years before 2009. The Fund identifies its major tax jurisdictions as U.S. Federal and Delaware state.
d) Distributions to Shareholders - Dividends from net investment income and distributions of net realized capital gains, if any, will be declared and paid at least annually. Income and capital gain distributions, which are determined in accordance with income tax regulations, are recorded on the ex-dividend date. GAAP requires that permanent financial reporting differences relating to shareholder distributions be reclassified to paid-in capital or net realized gains. There were no reclassifications made during the six month period ended October 31, 2012
e) Use of Estimates - The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
f) Other - Investment and shareholder transactions are recorded on trade date. The Fund determines the gain or loss realized from the investment transactions by comparing the original cost of the security lot sold with the net sales proceeds. Dividend income is recognized on the ex-dividend date or as soon as information is available to the Fund and interest income is recognized on an accrual basis. Withholding taxes on foreign dividends have been provided for in accordance with the Fund’s understanding of the applicable country’s tax rules and rates.
| 360 Funds | SEMI-ANNUAL REPORT |
The USX China Fund
NOTES TO THE FINANCIAL STATEMENTS
October 31, 2012 (Unaudited)
| 2. | CAPITAL SHARE TRANSACTIONS |
Transactions in shares of capital stock for The USX China Fund Class A shares for the six month period ended October 31, 2012 were as follows:
| | | Class A | |
| | | Shares | | | Amount | |
| Sold | | | 5,740 | | | $ | 5,975 | |
| Reinvested | | | - | | | | - | |
| Redeemed | | | (178,362 | ) | | | (216,346 | ) |
| Net Decrease | | | (172,622 | ) | | $ | (210,371 | ) |
Transactions in shares of capital stock for The USX China Fund Class C shares for the six month period ended October 31, 2012 were as follows:
| | | Class C | |
| | | Shares | | | Amount | |
| Sold | | | 3,660 | | | $ | 3,450 | |
| Reinvested | | | - | | | | - | |
| Redeemed | | | (5,003 | ) | | | (5,800 | ) |
| Net Decrease | | | (1,343 | ) | | $ | (2,350 | ) |
Transactions in shares of capital stock for The USX China Fund Class A shares for the year ended April 30, 2012 were as follows:
| | | Class A | |
| | | Shares | | | Amount | |
| Sold | | | 498,521 | | | $ | 1,054,588 | |
| Reinvested | | | - | | | | - | |
| Redeemed | | | (231,238 | ) | | | (854,709 | ) |
| Net Increase | | | 267,283 | | | $ | 199,879 | |
Transactions in shares of capital stock for The USX China Fund Class C shares for the year ended April 30, 2012 were as follows:
| | | Class C | |
| | | Shares | | | Amount | |
| Sold | | | 4,989 | | | $ | 22,485 | |
| Reinvested | | | - | | | | - | |
| Redeemed | | | (31,139 | ) | | | (117,344 | ) |
| Net Decrease | | | (26,150 | ) | | $ | (94,859 | ) |
| 3. | INVESTMENT TRANSACTIONS |
For the six month period ended October 31, 2012, aggregate purchases and sales of investment securities (excluding short-term investments) for The USX China Fund were as follows:
| Purchases | Sales |
| $2,026,076 | $2,309,680 |
There were no government securities purchased or sold during the period.
| 360 Funds | SEMI-ANNUAL REPORT |
The USX China Fund
NOTES TO THE FINANCIAL STATEMENTS
October 31, 2012 (Unaudited)
| 4. | ADVISORY FEES AND OTHER RELATED PARTY TRANSACTIONS |
The Fund has entered into an Investment Advisory Agreement (the “Advisory Agreement”) with the Adviser. Pursuant to the Advisory Agreement, the Adviser provides investment management services to the Fund in accordance with its investment objectives, policies and restrictions. As compensation for the investment advisory services provided to the Fund, the Fund pays the Adviser a monthly fee based on an annualized rate of 1.25% of the average daily net asset value of the Fund. For the six month period ended October 31, 2012, the Adviser earned $9,513 of advisory fees.
The Adviser and the Fund have entered into an Expense Limitation Agreement (“Expense Agreement”) under which the Adviser has agreed to waive or reduce its fees and to assume other expenses of the Fund, if necessary, in an amount that limits annual operating expenses (exclusive of interest, taxes, brokerage fees and commissions, extraordinary expenses and payments, if any, under the Rule 12b-1 Plan). It is expected that the Expense Agreement will continue from year-to-year provided such continuance is approved by the Board of Trustees of the Fund. Pursuant to the Expense Agreement, the Adviser and Former Adviser have agreed to reimburse the Fund to the extent that total annualized expenses exceed 2.00% of the Fund’s average daily net assets. For the six month period ended October 31, 2012, the Adviser waived advisory fees of $9,513 and reimbursed expenses of $86,371.
One trustee of the Fund is also an officer of the Adviser. Certain officers of the Fund are also employees of the Adviser.
The Fund has entered into an Investment Company Services Agreement (“ICSA”) with Matrix 360 Administration, LLC (formerly Matrix Capital Group, Inc.) (“Matrix”). Pursuant to the ICSA, Matrix will provide day-to-day operational services to the Fund including, but not limited to, accounting, administrative, transfer agent, dividend disbursement, registrar and record keeping services.
For its services, Matrix receives a minimum fee of $6,250 per month, plus out of pocket expenses. In addition, the following asset based fees will apply at the following breakpoints: 0.10% on assets between $20 million and $50 million; 0.075% on the next $50 million; 0.05% on the next $100 million; 0.03% in excess of $200 million of daily net assets. For the six month period ended October 31, 2012, Matrix earned $43,354, including out of pocket expenses with $8,359 remaining payable at October 31, 2012.
Pursuant to the ICSA, Matrix will provide chief compliance officer services to the Fund. For these services Matrix will receive a fee of $18,000 per year, plus out of pocket expenses. For the six month period ended October 31, 2012, Matrix earned $9,075 including out of pocket expenses, with $1,575 remaining payable at October 31, 2012.
Certain officers of the Fund are also employees of Matrix. An officer of Matrix is also an officer of the Adviser.
The Fund has entered into a Distribution Agreement with Matrix Capital Group, Inc. (“Matrix Capital”). Pursuant to the Distribution Agreement, Matrix Capital will provide distribution services to the Fund. Matrix Capital serves as underwriter/distributor of the Fund. Pursuant to the Distribution Agreement, Matrix Capital receives $7,200 per year from the Fund. Distribution fees paid to Matrix Capital were paid from accruals made pursuant to Rule 12b-1 under the 1940 Act.
An officer of Matrix Capital is also an officer of the Adviser.
A separate plan of distribution has been adopted pursuant to Rule 12b-1 under the Investment Company Act of 1940 for each class of shares. With respect to Class A shares, the plan provides that the Fund may pay a servicing or Rule 12b-1 fee of up to 0.25% annually of the Fund’s average net assets, and up to 1.00% annually of the Fund’s average net assets attributable to Class C shares to persons or institutions for performing certain servicing functions for the Fund’s shareholders. Under the plan the Fund may pay for any activity primarily intended to result in the sale of shares of the Fund and the servicing of shareholder accounts, provided that the Trustees have approved the category of expenses for which payment is being made.
| 360 Funds | SEMI-ANNUAL REPORT |
The USX China Fund
NOTES TO THE FINANCIAL STATEMENTS
October 31, 2012 (Unaudited)
| 4. | ADVISORY FEES AND OTHER RELATED PARTY TRANSACTIONS (continued) |
The distribution plans for the Class A and Class C shares in The USX China Fund took effect September 23, 2005 and July 1, 2005, respectively. For the six month period ended October 31, 2012, the Fund accrued $50 in 12b-1 expenses attributable to Class C shares. For the six month period ended October 31, 2012, the Fund accrued $1,890 in 12b-1 expenses attributable to Class A shares.
For U.S. Federal income tax purposes, the cost of securities owned, gross appreciation, gross depreciation, and net unrealized appreciation/(depreciation) of investments at October 31, 2012 were as follows:
| Cost | | Gross Appreciation | | Gross Depreciation | | Net Depreciation |
| $2,776,963 | | $43,051 | | $(1,718,882) | | $(1,675,831) |
The difference between book basis unrealized depreciation and tax-basis unrealized depreciation is attributable primarily to the tax deferral of losses on wash sales.
The Fund’s tax basis distributable earnings are determined only at the end of each fiscal year. As of April 30, 2012, the Fund’s most recent fiscal year end, the Fund’s components of distributable earnings on a tax basis were as follows:
| Unrealized Depreciation | | $ | (2,928,857 | ) |
| Capital Loss Carryforwards | | | (9,048,675 | ) |
| Post-October Capital Losses | | | (3,088,968 | ) |
| Post-December Ordinary Losses | | | (6,181 | ) |
| Distributable Earnings, Net | | $ | (15,072,681 | ) |
The carryforward losses shown above differ from corresponding accumulated net investment income and accumulated net realized gain (loss) figures reported in the statement of assets and liabilities due to certain temporary book/tax differences due to the tax deferral of post-October losses and losses on wash sales.
Under current tax law, net capital losses realized after October 31st and net ordinary losses incurred after December 31st may be deferred and treated as occurring on the first day of the following fiscal year. The Fund’s carryforward losses, post-October losses and post-December losses are determined only at the end of each fiscal year. As of April 30, 2012 the Fund elected to defer net capital losses as indicated in the chart below.
| Post-October Losses | | | Post-December Losses | |
| Deferred | | | Utilized | | | Deferred | |
| $ | (3,088,968 | ) | | $ | - | | | $ | (6,181 | ) |
| Capital Loss Carryforwards Expiring | | | Loss Carryforwards Non-Expiring | | | | |
| 2017 | | | 2018 | | | 2019 | | | Short-Term | | | Long-Term | | | Total | |
| $ | (2,967,345 | ) | | $ | (418,788 | ) | | $ | (2,909,779 | ) | | $ | (2,068,466 | ) | | $ | (684,297 | ) | | $ | (9,048,675 | ) |
Under the Regulated Investment Company Modernization Act of 2010 (the “Act”), net capital losses recognized after December 31, 2010, may be carried forward indefinitely, and their character is retained as short-term and/or long-term. Under the law in effect prior to the Act, pre-enactment net capital losses were carried forward for eight years and treated as short-term losses. As a transition rule, the Act requires that post-enactment net capital losses be utilized before pre-enactment net capital losses.
The USX China Fund will normally invest over 80% of its assets in stocks issued by companies listed on U.S. exchanges whose principal business is located in or centered on the People’s Republic of China. Investing in companies from one geographic region may pose additional risks inherent to a region’s economic and political situation.
| 360 Funds | SEMI-ANNUAL REPORT |
The USX China Fund
NOTES TO THE FINANCIAL STATEMENTS
October 31, 2012 (Unaudited)
The beneficial ownership, either directly or indirectly, of more than 25% of the voting securities of a fund creates a presumption of control of the fund, under Section 2(a)(9) of the Investment Company Act of 1940. As of October 31, 2012, Sterne, Agee & Leach, Inc. held 55.90% of The USX China Fund Class A shares in an omnibus account for the sole benefit of their customers. As of October 31, 2012, Scottrade, Inc. held 60.55% of The USX China Fund Class C shares in omnibus accounts for the sole benefit of their customers.
| 8. | COMMITMENTS AND CONTINGENCIES |
In the normal course of business, the Trust may enter into contracts that may contain a variety of representations and warranties and provide general indemnifications. The Trust’s maximum exposure under these arrangements is dependent on future claims that may be made against the Fund and, therefore, cannot be estimated; however, management considers the risk of loss from such claims to be remote.
In accordance with GAAP, Management has evaluated the impact of all subsequent events on the Fund through the date the financial statements were issued, and has determined that there were no subsequent events requiring recognition or disclosure in the financial statements.
| 10. | RECENT ACCOUNTING PRONOUNCEMENTS |
In December 2011, FASB issued ASU No. 2011-11 related to disclosures about offsetting assets and liabilities. The amendments in this ASU require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The ASU is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The guidance requires retrospective application for all comparative periods presented. Management is currently evaluating the impact ASU 2011-11 will have on the financial statement disclosures.
