| 1. | Organization and Significant Accounting Policies |
The Cavalier Funds (“Funds”) are series of the Starboard Investment Trust (“Trust”). The Trust is organized as a Delaware statutory trust and is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company. Each Fund is a separate, diversified series of the Trust.
The Cavalier Adaptive Income Fund seeks to achieve its investment objective of total return by investing primarily in fixed income securities.
The Cavalier Fundamental Growth Fund seeks to achieve its investment objective of capital appreciation by principally investing in stocks that the portfolio manager believes to have above-average growth potential relative to their peers.
The Cavalier Growth Opportunities Fund seeks to achieve its investment objective of capital appreciation by investing in exchange-traded funds (“ETFs”) that are registered under the 1940 Act and not affiliated with the Fund that invest in equity securities of issuers from a number of countries throughout the world.
The Cavalier Hedged High Income Fund seeks to achieve its investment objective of current income and real return by investing in other investment companies, including mutual funds and ETFs that are registered under the 1940 Act and not affiliated with the Fund or making direct investments in portfolio securities based upon institutional research.
The Cavalier Tactical Economic Fund seeks to achieve its investment objective of total return by investing in ETFs as well as other funds that are registered under the 1940 Act and not affiliated with the Fund.
The Cavalier Tactical Rotation Fund seeks to achieve its investment objective of capital appreciation by investing in ETFs that are registered under the 1940 Act and not affiliated with the Fund.
Each Fund currently has an unlimited number of authorized shares, which are divided into three classes – Institutional Class Shares, Class C Shares, and Class A Shares. Each class of shares has equal rights to assets of the Funds, and the classes are identical except for differences in ongoing distribution and service fees.
The Class C Shares and Class A Shares are subject to distribution plan fees as described in Note 4. Each Fund’s Class C Shares are sold without an initial sales charge; however, they are subject to a contingent deferred sales charge of 1.00% on shares redeemed within one year of the purchase date. This amount is paid to Capital Investment Group, Inc. (the “Distributor”). Income, expenses (other than distribution and service fees), and realized and unrealized gains or losses on investments are allocated to each class of shares based upon its relative net assets. All classes have equal voting privileges, except where otherwise required by law or when the Trustees determine that the matter to be voted on affects only the interests of the shareholders of a particular class. Class C Shares held longer than seven years will automatically convert into Institutional Class Shares. Class A Shares have an initial sales charge of 4.50%, but there is no automatic conversion of Class A Shares into any other Class of Shares.
As of May 31, 2020, the Cavalier Fundamental Growth Fund, the Cavalier Growth Opportunities Fund, the Cavalier Tactical Economic Fund, and the Cavalier Tactical Rotation Fund were the only Funds with active Class A Shares.
Cavalier Funds
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Notes to Financial Statements
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As of May 31, 2020
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The Date of Initial Public Investment for each Fund and Class of Shares is as follows:
| Fund | Institutional Class Shares | Class C Shares | Class A Shares |
Cavalier Adaptive Income Fund | October 2, 2009 | February 25, 2011 | - |
Cavalier Fundamental Growth Fund | October 17, 2013 | November 4, 2013 | March 13, 2018 |
Cavalier Growth Opportunities Fund | September 20, 2012 | September 26, 2012 | April 16, 2018 |
Cavalier Hedged High Income Fund | September 20, 2012 | September 26, 2012 | - |
Cavalier Tactical Economic Fund | September 20, 2012 | September 26, 2012 | October 18, 2018 |
Cavalier Tactical Rotation Fund | September 20, 2012 | September 26, 2012 | April 2, 2018 |
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The following is a summary of significant accounting policies consistently followed by the Funds. The policies are in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The Funds follow the accounting and reporting guidance in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 946 “Financial Services – Investment Companies.”
Investment Valuation
Each Fund’s investments in securities are carried at fair value. Securities listed on an exchange or quoted on a national market system are valued at the last quoted sales price provided by a third-party pricing service at the time the valuation is made (generally 4:00 p.m. Eastern Time). Securities traded in the NASDAQ over-the-counter market are generally valued at the NASDAQ Official Closing Price. Other securities traded in the over-the-counter market and listed securities for which no sale was reported on that date are valued at the most recent bid price. Securities and assets for which representative market quotations are not readily available (e.g., if the exchange on which the portfolio security is principally traded closes early or if trading of the particular portfolio security is halted during the day and does not resume prior to each Fund’s net asset value calculation) or which cannot be accurately valued using each Fund’s normal pricing procedures are valued at fair value as determined in good faith under policies approved by the Board of Trustees (the “Trustees”). A portfolio security’s “fair value” price may differ from the price next available for that portfolio security using each Fund’s normal pricing procedures. Instruments with maturities of 60 days or less are valued at amortized cost, which approximates market value. Unlisted securities for which market quotations are readily available are valued at the latest quoted sales price, if available, at the time of valuation, otherwise, at the latest quoted bid price. Options are valued at the mean of the last quoted bid and ask prices provided by a third-party pricing service from the primary exchange or the board of trade on which such options are traded. Foreign securities listed on foreign exchanges are valued with quotations from the primary market in which they are traded and are translated from the local currency into U.S. dollars using current exchange rates.
Underlying Funds
Open-End Funds - Open-end funds value securities in their portfolios for which market quotations are readily available at their market values (generally the last reported sale price) and all other securities and assets at their fair value to the methods established by the boards of directors of the open-end funds. Open-end funds are valued at their respective net asset values as reported by such investment companies.
Fair Value Measurement
Each Fund has adopted ASC Topic 820, Fair Value Measurements. ASC Topic 820 defines fair value, establishes a framework for measuring fair value and expands disclosure about fair value measurements.
Various inputs are used in determining the value of each Fund's investments. These inputs are summarized in the three broad levels listed below:
Level 1: Unadjusted quoted prices in active markets for identical securities
Level 2: Other significant observable inputs (including quoted prices for similar securities, interest rates, credit risk, etc.)
Cavalier Funds
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Notes to Financial Statements
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As of May 31, 2020
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Level 3: Significant unobservable inputs (including each Fund’s own assumptions in determining fair value of investments)
The availability of observable inputs can vary from security to security and is affected by a wide variety of factors, including, for example, the type of security, whether the security is new and not yet established in the marketplace, the liquidity of markets, and other characteristics particular to the security. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.
The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement falls in its entirety, is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The following tables summarize the inputs as of May 31, 2020 for each Fund’s investments measured at fair value:
Cavalier Adaptive Income Fund (a)
Assets | | Total | | Level 1 | | Level 2 | | Level 3 |
Preferred Stock | $ | 500,000 | $ | - | $ | 500,000
| $ | - |
Asset-Backed Securities | | 3,777,605 | | - | | 3,777,605 | | - |
Corporate Bonds | | 742,383 | | - | | 742,383 | | - |
Collateralized Mortgage Obligations | | 36,320,733 | | - | | 36,320,733 | | - |
U.S. Treasury Note | | 2,006,064 | | - | | 2,006,064 | | - |
Short-Term Investment | | 2,905,480 | | 2,905,480 | | - | | - |
| Total Assets | $ | 46,252,265 | $ | 2,905,480 | $ | 43,346,785 | $ | - |
Cavalier Fundamental Growth Fund (a)
Assets | | Total | | Level 1 | | Level 2 | | Level 3 |
Common Stocks* | $ | 67,725,880 | $ | 67,725,880 | $ | - | $ | - |
Exchange-Traded Product | | 3,697,200 | | 3,697,200 | | - | | - |
Put Options Purchased | | 339,571 | | - | | 339,571 | | - |
Short-Term Investment | | 9,247,744 | | 9,247,744 | | - | | - |
| Total Assets | $ | 81,010,395 | $ | 80,670,824 | $ | 339,571 | $ | - |
Cavalier Growth Opportunities Fund (a)
Assets | | Total | | Level 1 | | Level 2 | | Level 3 |
Exchange-Traded Products* | $ | 63,919,063 | $ | 63,919,063 | $ | - | $ | - |
Put Options Purchased | | 270,474 | | - | | 270,474 | | - |
| Total Assets | $ | 64,189,537 | $ | 63,919,063 | $ | 270,474 | $ | - |
Cavalier Hedged High Income Fund (a)
Assets | | Total | | Level 1 | | Level 2 | | Level 3 |
Exchange-Traded Product* | $ | 12,557,431 | $ | 12,557,431 | $ | - | $ | -
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Open-End Fund* | | 2,881,397 | | 2,881,397 | | - | | - |
Short-Term Investment | | 2,459,143 | | 2,459,143 | | -
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| Total Assets | $ | 17,897,971 | $ | 17,897,971 | $ | - | $ | -
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Cavalier Funds
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Notes to Financial Statements
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As of May 31, 2020
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Cavalier Tactical Economic Fund (a)
Assets | | Total | | Level 1 | | Level 2 | | Level 3 |
Exchange-Traded Products* | $ | 12,204,411 | $ | 12,204,411 | $ | - | $ | -
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Short-Term Investment | | 4,698,796 | | 4,698,796 | | -
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| Total Assets | $ | 16,903,207 | $ | 16,903,207 | $ | - | $ | - |
Cavalier Tactical Rotation Fund (a)
Assets | | Total | | Level 1 | | Level 2 | | Level 3 |
Exchange-Traded Products* | $ | 16,118,839 | $ | 16,118,839 | $ | - | $ | -
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Short-Term Investment | | 5,714,564 | | 5,714,564 | | - | | - |
| Total Assets | $ | 21,833,403 | $ | 21,833,403 | $ | -
| $ | - |
*Refer to the Schedules of Investments for a breakdown by sector.
(a) The Funds held no Level 3 securities during the fiscal year ended May 31, 2020.
Purchased Options
When the Funds purchase an option, an amount equal to the premium paid by the Funds is recorded as an investment and is subsequently adjusted to the current value of the option purchased. If an option expires on the stipulated expiration date or if the Funds enter into a closing sale transaction, a gain or loss is realized. If a call option is exercised, the cost of the security acquired is increased by the premium paid for the call. If a put option is exercised, a gain or loss is realized from the sale of the underlying security, and the proceeds from such sale are decreased by the premium originally paid. Purchased options are non-income producing securities.
Derivative Financial Instruments
The Funds may invest in derivative financial instruments (derivatives) in order to manage risk or gain exposure to various other investments or markets. Derivatives may contain various risks including the potential inability of the counterparty to fulfill their obligations under the terms of the contract, the potential for an illiquid secondary market, and the potential for market movements which may expose the Funds to gains or losses in excess of the amounts shown on each Funds’ Statement of Assets and Liabilities.
Derivatives are marked to market daily based upon quotations from market makers or the Funds’ independent pricing services and the Funds’ net benefit or obligation under the contract, as measured by the fair market value of the contract, is included in Investments, at value on the Statement of Assets and Liabilities for options purchased. Net realized gains and losses and net change in unrealized appreciation and depreciation on these contracts for the year are included in the Realized and Unrealized Gain on Investments on each Funds’ Statement of Operations for options purchased. The Cavalier Tactical Rotation Fund had no open option positions as of the fiscal year ended May 31, 2020.
The following table sets forth the effect of the derivative instruments on the Statement of Assets and Liabilities as of May 31, 2020 for each applicable Fund as follows:
Cavalier Fundamental Growth Fund
Derivative Type | Location | | | Market Value |
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| Equity Contracts – purchased options | Assets – Investments, at value | | | $339,571 |
Cavalier Growth Opportunities Fund
Derivative Type | Location | | | Market Value |
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| Equity Contracts – purchased options | Assets – Investments, at value | | | $270,474 |
Cavalier Funds
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Notes to Financial Statements
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As of May 31, 2020
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The following table sets forth the effect of the derivative instruments on the Statement of Operations for the fiscal year ended May 31, 2020 for each applicable Fund as follows:
Cavalier Fundamental Growth Fund
| Derivative Type | Location | Gains/Losses |
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| Equity Contracts – purchased options | Net realized loss from investments | $ (1,843,661) |
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| Equity Contracts – purchased options | Net change in unrealized appreciation on investments | $ (864,465) |
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Cavalier Growth Opportunities Fund
| Derivative Type | Location | Gains/Losses |
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| Equity Contracts – purchased options | Net realized gain from investments | $ (1,494,248) |
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| Equity Contracts – purchased options | Net change in unrealized appreciation on investments | $ (684,569) |
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Cavalier Tactical Rotation Fund
| Derivative Type | Location | Gains/Losses |
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| Equity Contracts – purchased options | Net realized loss from investments | $ (452,618) |
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The following table represents the total premiums received or paid on options, which serve as an indicator of volume for options during the fiscal year ended May 31, 2020 for each applicable Fund as follows:
Cavalier Fundamental Growth Fund
| Derivative Type | Type | Total Value |
Equity Contracts – purchased options | Premiums Paid | $ 2,289,798 | |
Cavalier Growth Opportunities Fund
| Derivative Type | Type | Total Value | |
Equity Contracts – purchased options | Premiums Paid | $ 1,849,551 |
Cavalier Tactical Rotation Fund
| Derivative Type | Type | Total Value |
Equity Contracts – purchased options | Premiums Paid | $ 457,620 | |
Investments in the Funds are subject to the following options risks:
Risks from Purchasing Options. If a call or put option purchased by the Funds is not sold when it has remaining value and if the market price of the underlying security, in the case of a call, remains less than or equal to the exercise price, or, in the case of a put, remains equal to or greater than the exercise price, the Funds will lose its entire investment in the option. Since many factors influence the value of an option, including the price of the underlying security, the exercise price, the time to expiration, the interest rate, and the dividend rate of the underlying security, the Advisor’s success in implementing the Funds’ strategy may depend on an ability to predict movements in the prices of individual securities, fluctuations in markets, and movements in interest rates. There is no assurance that a liquid market will exist when the Funds seek to close out an option position. Where a position in a purchased option is used as a hedge against price movements in a related position, the price of the option may move more or less than the price of the related position.
Cavalier Funds
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Notes to Financial Statements
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As of May 31, 2020
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Investments in the Funds may also be subject to counterparty risk on derivatives. This risk refers to the risk that an issuer or counterparty will fail to pay its obligations to the Funds when they are due. As a result, the Funds’ income might be reduced, the value of the Funds’ investment might fall, and/or the Funds could lose the entire amount of their investment. Changes in the financial condition of an issuer or counterparty, changes in specific economic, social, or political conditions that affect a particular type of security or other instrument or an issuer, and changes to economic, social, or political conditions in general can increase the risk of default by an issuer or counterparty, which can affect a security’s or other instrument’s credit quality or value and an issuer’s or counterparty’s ability to pay interest and principal when due.
Investment Transactions and Investment Income
Investment transactions are accounted for as of the date purchased or sold (trade date). Dividend income is recorded on the ex-dividend date. Certain dividends from foreign securities will be recorded as soon as a Fund is informed of the dividend if such information is obtained subsequent to the ex-dividend date. Interest income is recorded on the accrual basis and includes accretion and amortization of discounts and premiums. Gains and losses are determined on the identified cost basis, which is the same basis used for federal income tax purposes.
Expenses
Each Fund bears expenses incurred specifically on its behalf as well as a portion of general expenses, which are allocated according to methods reviewed annually by the Trustees.
Distributions
The Funds may declare and distribute dividends from net investment income (if any) monthly. Distributions from capital gains (if any) are generally declared and distributed annually. Dividends and distributions to shareholders are recorded on ex-date.
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 increases and decreases in the net assets from operations during the reporting period. Actual results could differ from those estimates.
Federal Income Taxes
No provision for income taxes is included in the accompanying financial statements, as each Fund intends to distribute to shareholders all taxable investment income and realized gains and otherwise continue to comply with Subchapter M of the Internal Revenue Code applicable to regulated investment companies.
| 2. | Transactions with Related Parties and Service Providers |
Advisor
Each Fund pays a monthly advisory fee to Cavalier Investments, LLC (the “Advisor”) based upon the average daily net assets and calculated at an annual rate.
Cavalier Funds
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Notes to Financial Statements
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As of May 31, 2020
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See the table below for the advisory fee rates and amounts earned by the Advisor from each Fund during fiscal year ended May 31, 2020:
| Fund | | Advisory Fee Rate June 1, 2019 - May 31, 2020 | Amount Earned
| Amount Waived by
Advisor
| Expenses Reimbursed by Advisor |
Cavalier Adaptive Income Fund | | 1.00% | $ 434,811 | $255,524 | $ - |
Cavalier Fundamental Growth Fund | | 1.00% | 820,915 | 162,047 | - |
Cavalier Growth Opportunities Fund | | 1.00% | 643,993 | 208,689 | - |
Cavalier Hedged High Income Fund | | 1.00% | 214,674 | 176,657 | - |
Cavalier Tactical Economic Fund | | 1.00% | 167,968 | 167,968 | 41,615 |
Cavalier Tactical Rotation Fund | | 1.00% | 399,481 | 215,409 | - |
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The Advisor has engaged sub-advisors to provide day to day portfolio management for some of the Funds. Each sub-advisor is paid directly by the Advisor based upon the average daily net assets and calculated at an annual rate. See the table below for the sub-advisory fee rates and amounts paid by the Advisor to the Sub-Advisor for each sub-advised Fund during the fiscal year ended May 31, 2020:
| Fund | Sub-Advisors | Sub-Advisory Fee Rate | Sub-Advisory Fee Received |
Cavalier Adaptive Income Fund
| Buckhead Capital Management, LLC
| 0.10% (on AUM above $10M) and 0.32% (on AUM over $20M) | $109,233
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Cavalier Fundamental Growth Fund | Navellier & Associates, Inc. | 0.30% (on AUM over $20M) | 186,233 |
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Cavalier Growth Opportunities Fund | Bluestone Capital Management, LLC | 0.30% | 193,260 |
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Cavalier Tactical Rotation Fund | Julex Capital Management, LLC* | 0.20% | 49,371 |
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*As of January 13, 2020, Julex Capital Management, LLC no longer manages the assets of the Cavalier Tactical Rotation Fund. Cavalier Investments, LLC continues to serve as Advisor to the Fund and has taken over management of the Fund’s assets.
Cavalier Funds
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Notes to Financial Statements
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As of May 31, 2020
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Expense Limitation
The Advisor has entered into a contractual expense limitation agreement (the “Expense Limitation Agreement”) with the Trust, on behalf of the Funds, under which it has agreed to waive or reduce its fees and to assume other expenses of the Funds, if necessary, in amounts that limit the Funds’ total operating expenses (exclusive of (i) any front-end or contingent deferred loads; (ii) brokerage fees and commissions, (iii) acquired fund fees and expenses; (iv) fees and expenses associated with investments in other collective investment vehicles or derivative instruments (including for example option and swap fees and expenses); (v) borrowing costs (such as interest and dividend expense on securities sold short); (vi) taxes; and (vii) extraordinary expenses, such as litigation expenses (which may include indemnification of Fund officers and Trustees and contractual indemnification of Fund service providers (other than the Advisor)) to not more than the following percentages of the average daily net assets of the Institutional Class Shares, Class C Shares, and Class A Shares of the Funds:
| Fund | | | Institutional Class Shares | Class C Shares | Class A Shares |
Cavalier Adaptive Income Fund | | | 1.25% | 2.25% | 1.50% |
Cavalier Fundamental Growth Fund | | | 1.25% | 2.25% | 1.50% |
Cavalier Growth Opportunities Fund | | | 1.25% | 2.25% | 1.50% |
Cavalier Hedged High Income Fund | | | 1.25% | 2.25% | 1.50% |
Cavalier Tactical Economic Fund | | | 1.25% | 2.25% | 1.50% |
Cavalier Tactical Rotation Fund | | | 1.25% | 2.25% | 1.50% |
Administrator
Each Fund pays a monthly fee to The Nottingham Company (the “Administrator”) based upon the average daily net assets of each Fund and calculated at the annual rates as shown in the schedule below subject to a minimum of $2,000 per month. The Administrator also receives a fee as to procure and pay the Fund’s custodian, additional compensation for fund accounting and recordkeeping services, and additional compensation for certain costs involved with the daily valuation of securities and as reimbursement for out-of-pocket expenses. The Administrator also receives a miscellaneous reporting expense for peer group, comparative analysis, and compliance support totaling $150 per month.
A breakdown of these fees is provided in the following table:
| Administration Fees* | Custody Fees* | Fund Accounting Fees (base fee) (monthly fee) | Fund Accounting Fees (asset-based fee) | Blue Sky Administration Fees (annual) |
Average Net Assets | Annual Rate | Average Net Assets | Annual Rate |
First $250 million | 0.100% | First $200 million | 0.020% | $2,250 plus $500/additional share class | 0.01% | $150 per state |
Next $250 million | 0.080% | Over $200 million | 0.009% | | | |
Next $250 million | 0.060% | | | | | |
Next $250 million | 0.050% | *Minimum monthly fees of $2,000 and $417 for Administration and Custody, respectively. |
On the next $1 billion | 0.040% |
On all assets over $2 billion | 0.035% | |
Cavalier Funds
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Notes to Financial Statements
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As of May 31, 2020
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The Fund incurred the following amounts in Administration fees for the fiscal year ended May 31, 2020:
| Fund | | | | | |
Cavalier Adaptive Income Fund | | | | | $ 45,955 |
Cavalier Fundamental Growth Fund | | | | | 84,170 |
Cavalier Growth Opportunities Fund | | | | | 66,478 |
Cavalier Hedged High Income Fund | | | | | 26,264 |
Cavalier Tactical Economic Fund | | | | | 26,072 |
Cavalier Tactical Rotation Fund | | | | | 42,799 |
The Funds incurred the following amounts in Fund Accounting fees for the fiscal year ended May 31, 2020:
| Fund | | | | | |
Cavalier Adaptive Income Fund | | | | | $ 37,316 |
Cavalier Fundamental Growth Fund | | | | | 47,314 |
Cavalier Growth Opportunities Fund | | | | | 45,545 |
Cavalier Hedged High Income Fund | | | | | 35,344 |
Cavalier Tactical Economic Fund | | | | | 40,785 |
Cavalier Tactical Rotation Fund | | | | | 43,100 |
The Funds incurred the following amounts in Custody fees for the fiscal year ended May 31, 2020:
| Fund | | | | | |
Cavalier Adaptive Income Fund | | | | | $ 21,049 |
Cavalier Fundamental Growth Fund | | | | | 20,677 |
Cavalier Growth Opportunities Fund | | | | | 17,338 |
Cavalier Hedged High Income Fund | | | | | 6,632 |
Cavalier Tactical Economic Fund | | | | | 6,950 |
Cavalier Tactical Rotation Fund | | | | | 24,081 |
Compliance Services
Cipperman Compliance Services, LLC provides services as the Trust’s Chief Compliance Officer. Cipperman Compliance Services, LLC is entitled to receive customary fees from the Funds for their services pursuant to the Compliance Services agreement with the Funds.
Effective March 31, 2020, The Nottingham Company, Inc. replaced Cipperman Compliance Services, LLC as the Trust’s compliance services provider including services as the Trust’s Chief Compliance Officer.
Transfer Agent
Nottingham Shareholder Services, LLC (“Transfer Agent”), an affiliate of the Administrator, serves as transfer, dividend paying, and shareholder servicing agent for the Funds. For its services, the Transfer Agent is entitled to receive compensation from the Funds pursuant to the Transfer Agent’s fee arrangements with the Funds.
Cavalier Funds
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Notes to Financial Statements
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As of May 31, 2020
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The Funds incurred the following amounts in Transfer Agent fees for the fiscal year ended May 31, 2020:
| Fund | | | | | |
Cavalier Adaptive Income Fund | | | | | $ 27,000 |
Cavalier Fundamental Growth Fund | | | | | 33,000 |
Cavalier Growth Opportunities Fund | | | | | 33,705 |
Cavalier Hedged High Income Fund | | | | | 27,000 |
Cavalier Tactical Economic Fund | | | | | 33,000 |
Cavalier Tactical Rotation Fund | | | | | 34,240 |
The Shareholder Fulfillment Fees disclosed on the Statement of Operations for the Funds include fees paid by the Fund to a Sub-Transfer Agent for certain services.
Distributor
Capital Investment Group, Inc. (the “Distributor”) serves as the Funds’ principal underwriter and distributor. For its services, the Distributor is entitled to receive compensation from the Funds pursuant to the Funds’ fee arrangements with the Distributor.
The Trust is governed by the Board of Trustees, which is responsible for the management and supervision of the Funds. The Trustees meet periodically throughout the year to review contractual agreements with companies that furnish services to the Funds; review performance of the Advisor and the Funds; and oversee activities of the Funds. Officers of the Trust and Trustees who are interested persons of the Trust or the Advisor will receive no salary or fees from the Trust. Effective April 1, 2020, a new compensation schedule was implemented for the Independent Trustees. Each Trustee will receive $2,000 per series per year, $200 per meeting attended, and $500 per series per special meeting related to contract renewal issues. The Trust will reimburse each Trustee and officer of the Trust for his or her travel and other expenses related to attendance of Board meetings. Prior to April 1, 2020, Trustees who were not “interested persons” of the Trust or the Advisor within the meaning of the Investment Company Act of 1940, as amended (the “Independent Trustees”) received $2,000 each year from each Fund. The Trust reimbursed each Trustee and officer of the Trust for his or her travel and other expenses related to attendance of Board meetings. Additional fees were incurred during the year as special meetings were necessary in addition to the regularly scheduled meetings of the Board of Trustees.
Certain officers of the Trust may also be officers of the Administrator.
| 4. | Distribution and Service Fees |
The Board of Trustees, including a majority of the Independent Trustees, adopted a distribution and service plan pursuant to Rule 12b-1 of the 1940 Act (the “Plan”) for the Class C Shares and Class A Shares. The 1940 Act regulates the manner in which a registered investment company may assume costs of distributing and promoting the sales of its shares and servicing of its shareholder accounts. The Plan provides that each Fund may incur certain costs, which may not exceed 1.00% per annum of the average daily net assets of the Class C Shares and 0.25% per annum of the average daily net assets of the Class A Shares for each year elapsed subsequent to adoption of the Plan, for payment to the Distributor and others for items such as advertising expenses, selling expenses, commissions, travel, or other expenses reasonably intended to result in sales of Class C Shares or Class A Shares or servicing of Class C or Class A shareholder accounts.
Cavalier Funds
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Notes to Financial Statements
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As of May 31, 2020
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See the table below for the Distribution and Service Fees of the Class C Shares and Class A Shares for each Fund during the fiscal year ended May 31, 2020:
| Fund | | | Amount Incurred |
| | | | Class C Shares | Class A Shares |
Cavalier Adaptive Income Fund | | | $ 42,124
| $ - |
Cavalier Fundamental Growth Fund | | | 25,472 | 1,935 |
Cavalier Growth Opportunities Fund | | | 10,898 | 1,357 |
Cavalier Hedged High Income Fund | | | 5,909 | - |
Cavalier Tactical Economic Fund | | | 8,367 | 54 |
Cavalier Tactical Rotation Fund | | | 16,273 | 402 |
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| 5. | Purchases and Sales of Investment Securities |
For the fiscal year ended May 31, 2020, the aggregate cost of purchases and proceeds from sales of investment securities (excluding short-term securities) were as follows:
| | | Purchases of Securities | Proceeds from
Sales of Securities |
Cavalier Adaptive Income Fund | | $ 40,024,326 | $ 3,756,291 |
Cavalier Fundamental Growth Fund | | 57,442,007 | 75,981,454 |
Cavalier Growth Opportunities Fund | | 193,164,575 | 187,504,034 |
Cavalier Hedged High Income Fund | | 26,976,015 | 26,569,362 |
Cavalier Tactical Economic Fund | | 22,145,893 | 24,187,614 |
Cavalier Tactical Rotation Fund | | 233,719,710 | 291,041,121 |
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There were no long-term purchases or sales of U.S. Government Obligations during the fiscal year ended May 31, 2020.
Distributions are determined in accordance with Federal income tax regulations, which may differ from GAAP, and, therefore, may differ significantly in amount or character from net investment income and realized gains for financial reporting purposes. Financial reporting records are adjusted for permanent book/tax differences to reflect tax character but are not adjusted for temporary differences.
Management has reviewed all taxable years / periods that are open for examination (i.e., not barred by the applicable statute of limitations) by taxing authorities of all major jurisdictions, including the Internal Revenue Service. As of May 31, 2020, open taxable years consisted of the taxable years ended May 31, 2017 through May 31, 2020. No examination of tax returns is currently in progress for any of the Funds.
Cavalier Funds
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Notes to Financial Statements
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As of May 31, 2020
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Distributions during the fiscal years ended below were characterized for tax purposes as follows:
| | | Distributions from |
| Fund | Fiscal year ended | Ordinary Income | Long-Term
Capital Gains |
| Cavalier Adaptive Income Fund | 05/31/2020 | $ 1,394,755 | $ - |
| | 05/31/2019 | 454,738 | - |
| Cavalier Fundamental Growth Fund | 05/31/2020 | 31,002 | - |
| | 05/31/2019 | 1,046,710 | 5,804,179 |
| Cavalier Growth Opportunities Fund | 05/31/2020 | 1,837,000 | - |
| | 05/31/2019 | 2,848,714 | 564,594 |
| Cavalier Hedged High Income Fund | 05/31/2020 | 722,934 | - |
| | 05/31/2019 | 1,434,166 | - |
| Cavalier Tactical Economic Fund | 05/31/2020 | 218,000 | - |
| | 05/31/2019 | 1,149,074 | 790,938 |
| Cavalier Tactical Rotation Fund | 05/31/2020 | 931,000 | - |
| | 05/31/2019 | 949,396 | 14,091,743 |
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Reclassifications relate primarily to differing book/tax treatment of ordinary net investment losses and taxable overdistributions and have no impact on the net assets of the Funds.
For the year ended May 31, 2020, the following reclassifications were necessary:
| | Paid-In- Capital |
| Distributable Earnings/Accumulated Loss |
Cavalier Adaptive Income Fund | $ (8,653) | | $ 8,653 |
Cavalier Fundamental Growth Fund | (230,509) | | 230,509 |
Cavalier Tactical Economic Fund | (121,899) | | 121,899 |
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At May 31, 2020, the tax-basis cost of investments and components of distributable earnings were as follows:
| | | | Cavalier Adaptive Income Fund | Cavalier Fundamental Growth Fund | Cavalier Growth Opportunities
Fund |
Cost of Investments | | | $48,723,087 | $66,184,229 | $60,475,660 |
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Gross Unrealized Appreciation | | | 153,779 | 17,034,566 | 4,248,646 |
Gross Unrealized Depreciation | | | (2,624,601) | (2,208,400) | (534,769) |
Net Unrealized Appreciation (Depreciation) | | | (2,470,822) | 14,826,166 | 3,713,877 |
Undistributed Net Investment Income | | | - | - | 802,791 |
Capital Loss Carryforward | | | (170,300) | (10,134,285) | - |
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Distributable Earnings/Accumulated Deficit | | | $(2,641,122) | $4,691,881 | $4,516,668 |
Cavalier Funds
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Notes to Financial Statements
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As of May 31, 2020
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| | | Cavalier Hedged High Income Fund | Cavalier Tactical
Economic Fund | Cavalier Tactical Rotation Fund |
Cost of Investments | | $17,968,772 | $16,501,899 | $20,557,552 |
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Gross Unrealized Appreciation | | - | 1,348,096 | 2,030,393 |
Gross Unrealized Depreciation | | (70,801) | (946,788) | (754,542) |
Net Unrealized Appreciation (Depreciation) | | (70,801) | 401,308 | 1,275,851 |
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Undistributed Net Investment Income | | 7,159 | - | 176,141 |
Capital Loss Carryforward | | (2,596,277) | - | (5,748,340) |
Post-October Losses | | - | (1,758,818) | (3,769,653) |
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Accumulated Deficit | | $(2,659,919) | $(1,357,510) | $(8,066,001) |
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The difference between book-basis and tax-basis net unrealized appreciation (depreciation) is attributable to the deferral of losses from wash sales. Accumulated capital losses noted above represent net capital loss carryovers as of May 31, 2020 that are available to offset future realized capital gains, if any, and thereby reduce future taxable gain distributions. The Cavalier Adaptive Income Fund has a capital loss carryforward of $170,300, of which $23,857 is short-term in nature and $146,443 is long-term in nature. The Cavalier Fundamental Growth Fund has a capital loss carryforward of $10,134,285, all of which is short-term in nature. The Cavalier Hedged High Income Fund has a capital loss carryforward of $2,596,277, of which $1,815,546 is short-term in nature and $780,731 is long-term in nature. The Cavalier Tactical Rotation Fund has a capital loss carryforward of $5,748,340, all of which is short-term in nature. The capital loss carryforwards have no expiration date.
In addition, realized losses reflected in the accompanying financial statements include net capital losses realized between November 1 and the Funds’ fiscal year-end that have not been recognized for tax purposes (Deferred Post-October Losses).
7. Concentration of Risk
The Cavalier Hedged High Income Fund currently invests a significant portion of its assets in the Goldman Sachs Access High Yield Corporate Bond ETF (“Goldman”). The Cavalier Hedged High Income Fund may redeem its investment from Goldman at any time if the Advisor determines that it is in the best interest of the Cavalier Hedged High Income Fund and its shareholders to do so. The performance of the Cavalier Hedged High Income Fund may be directly affected by the performance of Goldman. The financial statements of Goldman, including the portfolio of investments, can be found at Goldman’s website, www.gsam.com, or the Securities and Exchange Commission’s website, www.sec.gov, and should be read in conjunction with the Cavalier Hedged High Income’s financial statements. As of May 31, 2020, the Cavalier Hedged Income Fund’s net assets invested in Goldman were 69.94%.
8. Beneficial Ownership
The beneficial ownership, either directly or indirectly, of 25% or more of the voting securities of a fund creates a presumption of control of a fund, under Section 2(a)(9) of the Investment Company Act of 1940.
As of May 31, 2020, Pershing LLC held 26.14% of the Adaptive Income Fund, 31.79% of the Tactical Economic Fund, and 42.61% of the Tactical Rotation Fund.
Cavalier Funds
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Notes to Financial Statements
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As of May 31, 2020
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As of May 31, 2020, Charles Schwab & Co. held 25.06% of the Adaptive Income Fund and 27.98% of the Fundamental Growth Fund.
As of May 31, 2020, LPL Financial held 40.43% of the Growth Opportunities Fund and 26.59% of the Tactical Economic Fund.
The Funds have no knowledge as to whether all or any portion of the shares of record owned by Pershing LLC, Charles Schwab & Co., and LPL Financial are also owned beneficially.
9. Commitments and Contingencies
Under the Trust’s organizational documents, its officers and Trustees are indemnified against certain liabilities arising out of the performance of their duties to the Funds. In addition, in the normal course of business, the Trust entered into contracts with its service providers, on behalf of the Funds, and others that provide for general indemnifications. The Funds’ maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Funds. The Funds expect the risk of loss to be remote.
10. Borrowings
The Funds established a borrowing agreement with Interactive Brokers, LLC for investment purposes subject to the limitations of the 1940 Act for borrowings by registered investment companies. Interest expense in the Funds relates to the negative daily cash balance held at Interactive Brokers, LLC. The Cavalier Fundamental Growth Fund, Cavalier Growth Opportunities Fund, and Cavalier Tactical Rotation Fund each had negative daily cash balances at Interactive Brokers, LLC during the fiscal year ended May 31, 2020. The interest expense that accrued is reflected on the Statement of Operations for each Fund and is deemed immaterial based on the average net assets of each Fund.
11. Subsequent Events
Distributions
Per share distributions during the subsequent period were as follows:
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| Fund | Class | Record Date | Pay Date | Ordinary Income |
| Cavalier Adaptive Income Fund | Institutional | 6/25/2020 | 6/26/2020 | $ 0.02345 |
| Class C | 6/25/2020 | 6/26/2020 | 0.01548 |
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| | Institutional | 6/25/2020 | 6/26/2020 | 0.02131 |
Cavalier Hedged High Income Fund | Class C | 6/25/2020 | 6/26/2020 | 0.01316 |
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Termination of Navellier as Sub-Advisor
As of June 2, 2020, Navellier and Associates, Inc. (“Navellier”) was no longer being compensated for managing the assets of the Cavalier Fundamental Growth Fund under the Sub-Advisor Agreement and ceased providing services under the Sub-Advisory Agreement as of June 15, 2020. Cavalier Investments, LLC continues to serve as Advisor to the Fund and has taken over management of the Fund’s assets.
Cavalier Funds
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Notes to Financial Statements
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As of May 31, 2020
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Management is currently evaluating the impact of the COVID-19 virus on the financial services industry and has concluded that while it is reasonably possible that the virus could have a negative effect on the fair value of the Company’s investments and results of operations, the specific impact is not readily determinable as of the date of these financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
In accordance with GAAP, management has evaluated the need for disclosures and/or adjustments resulting from subsequent events through the date of issuance of these financial statements. Management has concluded there are no additional matters, other than those noted above, requiring recognition or disclosure.
