| 1. | Organization and Significant Accounting Policies |
The Adaptive Funds (“Funds”), formerly known as the Cavalier 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 Adaptive Fundamental Growth Fund seeks to achieve its investment objective of capital appreciation by principally investing in domestic stocks that the portfolio manager believes to have above-average growth potential relative to their peers.
The Adaptive 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 Adaptive Hedged Multi-Asset Income Fund, formerly known as Adaptive Hedged Income Fund, seeks to achieve its investment objective of total return by investing in other investment companies, including mutual funds and ETFs that are registered under the 1940 Act, or making direct investments.
The Adaptive Tactical Outlook Fund, formerly known as Adaptive 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 Adaptive Tactical Rotation Fund, formerly known as 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, 2021, the Adaptive Fundamental Growth Fund, the Adaptive Tactical Outlook Fund, and the Adaptive Tactical Rotation Fund were the only Funds with active Class A Shares.
| Adaptive Funds |
Notes to Financial Statements
|
| As of May 31, 2021 |
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 |
Adaptive Fundamental Growth Fund | October 17, 2013 | November 4, 2013 | March 13, 2018 |
| Adaptive Hedged High Income Fund | September 20, 2012 | September 26, 2012 | - |
| Adaptive Hedged Multi-Asset Income Fund | October 2, 2009 | February 25, 2011 | - |
| Adaptive Tactical Outlook Fund | September 20, 2012 | September 26, 2012 | October 18, 2018 |
| Adaptive Tactical Rotation Fund | September 20, 2012 | September 26, 2012 | April 2, 2018 |
| | | | |
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
| Adaptive Funds |
Notes to Financial Statements
|
| As of May 31, 2021 |
Level 2: Other significant observable inputs (including quoted prices for similar securities, interest rates, credit risk, etc.)
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, 2021 for each Fund’s investments measured at fair value:
Adaptive Fundamental Growth Fund (a)
Assets | | Total | | Level 1 | | Level 2 | | Level 3 |
| Common Stocks* | $ | 48,098,567 | $ | 48,098,567 | $ | - | $ | - |
| Exchange-Traded Products* | | 2,114,920 | | 2,114,920 | | - | | - |
| Short-Term Investment | | 5,199,616 | | 5,199,616 | | - | | - |
| Total Assets | $ | 55,413,103 | $ | 55,413,103 | $ | - | $ | -
|
Adaptive Hedged High Income Fund (a)
Assets | | Total | | Level 1 | | Level 2 | | Level 3 |
| Exchange-Traded Products* | $ | 6,225,707 | $ | 6,225,707 | $ | - | $ | - |
| Common Stocks* | | 411,126 | | 411,126 | | - | | - |
| Short-Term Investment | | 186,988 | | 186,988 | | -
| | -
|
| Total Assets | $ | 6,823,821 | $ | 6,823,821 | $ | - | $ | - |
Adaptive Hedged Multi-Asset Income Fund (a)
Assets | | Total | | Level 1 | | Level 2 | | Level 3 |
| Preferred Stock | $ | 500,000 | $ | - | $ | 500,000 | $ | - |
| Exchange-Traded Products* | | 15,992,542 | | 15,992,542 | | - | | - |
| Collateralized Mortgage Obligations* | | 4,424,030 | | - | | 4,424,030 | | - |
| Short-Term Investment | | 2,122,608 | | 2,122,608 | | - | | - |
| Total Assets | $ | 23,039,180 | $ | 18,115,150 | $ | 4,924,030 | $ | - |
Adaptive Tactical Outlook Fund (a)
Assets | | Total | | Level 1 | | Level 2 | | Level 3 |
| Exchange-Traded Products* | $ | 11,205,719 | $ | 11,205,719 | $ | - | $ | - |
| Short-Term Investment | | 1,326,499 | | 1,326,499 | | - | | - |
| Total Assets | $ | 12,532,218 | $ | 12,532,218 | $ | - | $ | -
|
| Adaptive Funds |
Notes to Financial Statements
|
| As of May 31, 2021 |
Adaptive Tactical Rotation Fund (a)
Assets | | Total | | Level 1 | | Level 2 | | Level 3 |
| Exchange-Traded Products* | $ | 19,618,143 | $ | 19,618,143 | $ | - | $ | -- |
| Short-Term Investment | | 503,811 | | 503,811 | | - | | - |
| Total Assets | $ | 20,121,954 | $ | 20,121,954 | $ | - | $ | - |
*Refer to the Schedules of Investments for a breakdown by Industry.
(a) The Funds held no Level 3 securities during the fiscal year ended May 31, 2021.
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 Funds had no open option positions as of the fiscal year ended May 31, 2021.
The following table sets forth the effect of the derivative instruments on the Statement of Operations for the fiscal year ended May 31, 2021 for the below Fund as follows:
Adaptive Fundamental Growth Fund
| Derivative Type | Location | Gains/Losses |
| | | |
| Equity Contracts – purchased options | Net realized loss from investments | $ (302,043) |
| | | |
| Equity Contracts – purchased options | Net change in unrealized appreciation on investments | $ 106,567 |
| | | |
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.
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.
| Adaptive Funds |
Notes to Financial Statements
|
| As of May 31, 2021 |
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 d/b/a Adaptive Investments, LLC (the “Advisor”), based upon the average daily net assets and calculated at an annual rate.
| Adaptive Funds |
Notes to Financial Statements
|
| As of May 31, 2021 |
See the table below for the advisory fee rates and amounts earned by the Advisor from each Fund during fiscal year ended May 31, 2021:
| Fund | | Advisory Fee Rate June 1, 2020 - May 31, 2021 | Amount Earned
| Amount Waived by Advisor (a) | Expenses Reimbursed by Advisor |
Adaptive Fundamental Growth Fund | | 1.00% | $ 550,447 | $ 224,257 | $ - |
| Adaptive Hedged High Income Fund | | 1.00% | 99,538 | 99,538 | 108,101 |
| Adaptive Hedged Multi Asset Income Fund | | 1.00% | 391,837 | 238,223 | - |
| Adaptive Tactical Outlook Fund | | 1.00% | 124,144 | 124,144 | 82,729 |
| Adaptive Tactical Rotation Fund | | 1.00% | 189,211 | 189,211 | 16,228 |
| | | | | | |
| (a) | Waivers and expense reimbursements are not subject to recoupment. |
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, 2021:
| Fund | Sub-Advisors |
|
Sub-Advisory Fee Rate |
Sub-Advisory Fee Received |
| | | | | | |
| | | | | | |
| Adaptive Fundamental Growth Fund | Navellier & Associates, Inc.* | | 0.30% (on AUM over $20M) | $ - | |
| | | | | | |
| | | | | | |
Adaptive Hedged Multi-Asset Income Fund | Buckhead Capital Management, LLC** | | 0.10% (on AUM over $10M) and 0.32% (on AUM over $20M) |
42,922 |
|
| | | | | | |
*As of June 2, 2020, Navellier and Associates, Inc. (“Navellier”) was no longer being compensated for managing the assets of the Adaptive Fundamental Growth Fund under the Sub-Advisor Agreement and ceased providing services under the Sub-Advisory Agreement as of June 15, 2020. Adaptive Investments, LLC continues to serve as Advisor to the Fund and has taken over management of the Fund’s assets.
**As of September 30, 2020, Buckhead Capital Management, LLC no longer managed the assets of the Adaptive Hedged Multi-Asset Income Fund. Adaptive Investments, LLC continues to serve as Advisor to the Fund and has taken over management of the Fund’s assets.
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:
| Adaptive Funds |
Notes to Financial Statements
|
| As of May 31, 2021 |
| Fund | | | Institutional Class Shares | Class C
Shares | Class A Shares | |
Adaptive Fundamental Growth Fund | | | 1.25% | 2.25% | 1.50% | |
| Adaptive Hedged High Income Fund | | | 1.25% | 2.25% | 1.50% | |
| Adaptive Hedged Multi-Asset Income Fund | | | 1.25% | 2.25% | 1.50% | |
| Adaptive Tactical Outlook Fund | | | 1.25% | 2.25% | 1.50% | |
| Adaptive 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. These fees are included in miscellaneous fees on the Statements of Operations.
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% | |
The Funds incurred the following amounts in Administration fees for the fiscal year ended May 31, 2021:
| Fund | | | | | |
Adaptive Fundamental Growth Fund | | | | | $ 60,733 |
| Adaptive Hedged High Income Fund | | | | | 28,877 |
| Adaptive Hedged Multi-Asset Income Fund | | | | | 44,302 |
| Adaptive Tactical Outlook Fund | | | | | 28,901 |
| Adaptive Tactical Rotation Fund | | | | | 30,453 |
| Adaptive Funds |
Notes to Financial Statements
|
| As of May 31, 2021 |
The Funds incurred the following amounts in Fund Accounting fees for the fiscal year ended May 31, 2021:
| Fund | | | | | |
Adaptive Fundamental Growth Fund | | | | | $ 44,627 |
| Adaptive Hedged High Income Fund | | | | | 34,210 |
| Adaptive Hedged Multi-Asset Income Fund | | | | | 37,134 |
| Adaptive Tactical Outlook Fund | | | | | 40,296 |
| Adaptive Tactical Rotation Fund | | | | | 40,947 |
The Funds incurred the following amounts in Custody fees for the fiscal year ended May 31, 2021:
| Fund | | | | | |
Adaptive Fundamental Growth Fund | | | | | $ 20,743 |
| Adaptive Hedged High Income Fund | | | | | 9,453 |
| Adaptive Hedged Multi-Asset Income Fund | | | | | 20,424 |
| Adaptive Tactical Outlook Fund | | | | | 7,671 |
| Adaptive Tactical Rotation Fund | | | | | 11,369 |
Compliance Services
The Nottingham Company, Inc. serves as the Trust’s compliance services provider including services as the Trust’s Chief Compliance Officer. The Nottingham Company, Inc. is entitled to receive customary fees from the Funds for its services pursuant to the Compliance Services Agreement with the Funds.
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.
The Funds incurred the following amounts in Transfer Agent fees for the fiscal year ended May 31, 2021:
| Fund | | | | | |
Adaptive Fundamental Growth Fund | | | | | $ 56,318 |
| Adaptive Hedged High Income Fund | | | | | 27,814 |
| Adaptive Hedged Multi-Asset Income Fund | | | | | 29,040 |
| Adaptive Tactical Outlook Fund | | | | | 36,619 |
| Adaptive Tactical Rotation Fund | | | | | 36,581 |
The Transfer Agent Fees disclosed on the Statement of Operations for the Funds include fees paid by the Funds 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.
| Adaptive Funds |
Notes to Financial Statements
|
| As of May 31, 2021 |
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. 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 reimburses 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 period 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.
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, 2021:
| Fund | | | | Amount Incurred |
| | | | | Class C Shares
| Class A Shares |
| Adaptive Fundamental Growth Fund | | | | $ 27,133
| $ 1,977 |
| Adaptive Hedged High Income Fund | | | | 4,897
| - |
| Adaptive Hedged Multi-Asset Income Fund | | | | 42,736
| - |
| Adaptive Tactical Outlook Fund | | | | 7,876
| 63 |
| Adaptive Tactical Rotation Fund | | | | 11,618
| 260 |
| | | | | |
| 5. | Purchases and Sales of Investment Securities |
For the fiscal year ended May 31, 2021, 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 |
| Adaptive Fundamental Growth Fund | | $ 79,085,271 | $ 115,767,301 |
| Adaptive Hedged High Income Fund | | 12,896,155 | 22,384,115 |
| Adaptive Hedged Multi-Asset Income Fund | | 49,433,349 | 67,167,836 |
| Adaptive Tactical Outlook Fund | | 16,059,364 | 19,960,521 |
| Adaptive Tactical Rotation Fund | | 89,449,962 | 90,882,466 |
| | | | |
There were no long-term purchases or sales of U.S. Government Obligations during the fiscal year ended May 31, 2021.
| Adaptive Funds |
Notes to Financial Statements
|
| As of May 31, 2021 |
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, 2021 open taxable years consisted of the taxable years ended May 31, 2018 through May 31, 2021. No examination of tax returns is currently in progress for any of the Funds.
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 |
| Adaptive Fundamental Growth Fund | 05/31/2021 | $ - | $ 4,212,000 |
| | 05/31/2020 | 31,002 | - |
| Adaptive Hedged High Income Fund | 05/31/2021 | 326,711 | - |
| | 05/31/2020 | 722,934 | - |
| Adaptive Hedged Multi-Asset Income Fund | 05/31/2021 | 1,043,130 | - |
| | 05/31/2020 | 1,394,755 | - |
| Adaptive Tactical Outlook Fund | 05/31/2021 | - | - |
| | 05/31/2020 | 218,000 | - |
| Adaptive Tactical Rotation Fund | 05/31/2021 | 176,200 | - |
| | 05/31/2020 | 931,000 | - |
| | | | |
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, 2021, the following reclassifications were necessary:
| | Paid-In Capital |
| Distributable Earnings/Accumulated Loss |
| Adaptive Fundamental Growth Fund | $(354,262) | | $ 354,262 |
| Adaptive Hedged Multi-Asset Income Fund | (41) | | 41 |
| | | | |
| Adaptive Funds |
Notes to Financial Statements
|
| As of May 31, 2021 |
At May 31, 2021, the tax-basis cost of investments and components of distributable earnings were as follows:
| | | | | Adaptive Fundamental Growth Fund | Adaptive Hedged High Income Fund |
Cost of Investments | | | | $ 46,040,274 | $ 6,562,169 |
| | | | | | |
| Gross Unrealized Appreciation | | | | 9,839,021 | 263,092 |
| Gross Unrealized Depreciation | | | | (466,192) | (1,440) |
| Net Unrealized Appreciation | | | | $ 9,372,829 | $ 261,652 |
| | | | | | |
| Undistributed Net Investment Income | | | | - | 6 |
| Capital Loss Carryforward | | | | - | (2,242,767) |
| Undistributed Long-Term Capital Gain | | | | 6,357,361 | - |
| | | | | | |
| Distributable Earnings/Accumulated Deficit | | | | $ 15,730,190 | $ (1,981,109) |
| | | | | | |
| | | Adaptive Hedged Multi-Asset Income Fund | Adaptive Tactical Outlook Fund | Adaptive Tactical Rotation Fund |
Cost of Investments | | $22,927,730 | $10,683,591 | $19,318,525 |
| | | | | |
| Gross Unrealized Appreciation | | 414,118 | 1,851,746 | 820,178 |
| Gross Unrealized Depreciation | | (302,668) | (3,119) | (16,749) |
| | | | | |
| Net Unrealized Appreciation | | $ 111,450 | $1,848,627 | $ 803,429 |
| | | | | |
| Capital Loss Carryforward | | (2,085,932) | (303,673) | (4,113,763) |
| Late Year Loss Deferral | | - | (9,257) | (9,820) |
| | | | | |
| Distributable Earnings/Accumulated Deficit | | $(1,974,482) | $1,535,697 | $(3,320,154) |
| | | | | |
The difference between book-basis and tax-basis net unrealized appreciation (depreciation) is attributable to the deferral of losses from wash sales.
Capital Loss Carryforwards
Accumulated capital losses noted above represent net capital loss carryovers as of May 31, 2021 that are available to offset future realized capital gains, if any, and thereby reduce future taxable gain distributions. The Adaptive Hedged High Income Fund has a capital loss carryforward of $2,242,767, of which $1,687,513 is short-term in nature and $555,254 is long-term in nature. The Adaptive Hedged Multi-Asset Hedged Income Fund has a capital loss carryforward of $2,085,932, all of which is long-term in nature. The Adaptive Tactical Outlook Fund has a capital loss carryforward of $303,673, all of which is long-term in nature. The Adaptive Tactical Rotation Fund has a capital loss carryforward of $4,113,763, all of which is short-term in nature. The capital loss carryforwards have no expiration date.
| Adaptive Funds |
Notes to Financial Statements
|
| As of May 31, 2021 |
Late Year Loss Deferrals
For tax purposes, the current late year losses of $9,257 in the Adaptive Tactical Outlook Fund were incurred during the period from January 1, 2021 through May 31, 2021. The current late year losses of $9,820 in the Adaptive Tactical Rotation Fund were also incurred during the period from January 1, 2021 through May 31, 2021. These losses will be recognized for tax purposes on the first business day of the Fund’s next fiscal year, June 1, 2021.
7. Concentration of Risk
The Adaptive Hedged High Income Fund currently invests a significant portion of its assets in the Goldman Sachs Access High Yield Corporate Bond ETF (“Goldman”) and iShares Broad USD High Yield Corporate Bond ETF (“iShares”). The Adaptive Hedged High Income Fund may redeem its investment from Goldman or iShares at any time if the Advisor determines that it is in the best interest of the Adaptive Hedged High Income Fund and its shareholders to do so. The performance of the Adaptive Hedged High Income Fund may be directly affected by the performance of Goldman and/or iShares. 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 Adaptive Hedged High Income’s financial statements. The financial statements of iShares, including the portfolio of investments, can be found at iShares’s website, www.ishares.com, or the Securities and Exchange Commission’s website, www.sec.gov, and should be read in conjunction with the Adaptive Hedged High Income Fund’s financial statements. As of May 31, 2021, the Adaptive Hedged High Income Fund’s net assets invested in Goldman and iShares were 25.56% and 31.40%, respectively.
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, 2021, Charles Schwab & Co. held 30.49% of the Adaptive Hedged Multi-Asset Income Fund.
As of May 31, 2021, LPL Financial held 48.00% of the Adaptive Fundamental Growth Fund, 29.82% of the Adaptive Tactical Outlook Fund, and 29.57% of the Adaptive Tactical Rotation Fund.
As of May 31, 2021, Pershing LLC held 40.07% of the Adaptive Hedged High Income Fund, 35.35% of the Adaptive Hedged Multi-Asset Income Fund, 38.41% of the Adaptive Tactical Outlook Fund, and 41.77% of the Adaptive Tactical Rotation 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 Adaptive Fundamental Growth Fund had negative daily cash balances at Interactive Brokers, LLC during the fiscal year ended May 31, 2021. The interest expense that accrued is reflected on the Statement of Operations for the Fund and is deemed immaterial based on the average net assets of the Fund.
| Adaptive Funds |
Notes to Financial Statements
|
| As of May 31, 2021 |
11. Reorganization
At a meeting held on March 11, 2021, the Board of Trustees of the Starboard Investment Trust (the “Board”) approved the reorganization of the Adaptive Fundamental Growth Fund, Adaptive Hedged High Income Fund, Adaptive Hedged Multi-Asset Income Fund, Adaptive Tactical Outlook Fund, and Adaptive Tactical Rotation Fund (the “Mutual Funds”) into new exchange-traded series of the Trust (the “Reorganizations”). The Reorganizations will occur pursuant to an Agreement and Plan of Reorganization, whereby the Mutual Funds will transfer all of their assets and liabilities to the AI Quality Growth ETF, Adaptive Hedged High Income ETF, Adaptive Hedged Multi-Asset Income ETF, RH Tactical Outlook ETF, and RH Tactical Rotation ETF (the “ETFs”), newly organized series of the Starboard Investment Trust in tax-free reorganizations. The investment objectives, principal investment strategies, and portfolio management will remain the same after the Reorganizations. A Combined Information Statement and Prospectus containing information on the ETFs, reasons for the proposed Reorganizations and benefits to the Mutual Funds’ shareholders will be mailed before the consummation of the Reorganizations to shareholders of the Mutual Funds.
12. Subsequent Events
Distributions
Per share distributions during the subsequent period were as follows:
Fund | Class | Record Date | Ex-Date/Payable Date
| Ordinary Income |
Adaptive Hedged High Income Fund | Institutional Class | 6/25/2021 | 6/28/2021 | $0.01911 |
Class C | 6/25/2021 | 6/28/2021 | $0.01063 |
Adaptive Hedged Multi- Asset Income Fund | Institutional Class | �� 6/25/2021 | 6/28/2021 | $0.02524 |
Class C | 6/25/2021 | 6/28/2021 | $0.01722 |
Fund | Class | Record Date | Ex-Date/Payable Date
| Ordinary Income |
Adaptive Hedged High Income Fund | Institutional Class | 7/28/2021 | 7/29/2021 | $0.022547 |
Class C | 7/28/2021 | 7/29/2021 | $0.011259 |
Adaptive Hedged Multi- Asset Income Fund | Institutional Class | 7/28/2021 | 7/29/2021 | $0.028117 |
Class C | 7/28/2021 | 7/29/2021 | $0.018726 |
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.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees of Starboard Investment Trust
and the Shareholders of Adaptive Fundamental Growth Fund, Adaptive Hedged High Income Fund, Adaptive Hedged Multi-Asset Income Fund, Adaptive Tactical Outlook Fund, and Adaptive Tactical Rotation Fund
Opinion on the Financial Statements
We have audited the accompanying statements of assets and liabilities of Adaptive Fundamental Growth Fund (formerly, Cavalier Fundamental Growth Fund), Adaptive Hedged High Income Fund (formerly, Cavalier Hedged High Income Fund), Adaptive Hedged Multi-Asset Income Fund (formerly, Cavalier Adaptive Income Fund), Adaptive Tactical Outlook Fund (formerly, Cavalier Tactical Economic Fund), and Adaptive Tactical Rotation Fund (formerly, Cavalier Tactical Rotation Fund), each a series of shares of beneficial interest in Starboard Investment Trust (the “Funds”), including the schedules of investments, as of May 31, 2021, and the related statements of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended and their financial highlights as noted in the table below, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Funds as of May 31, 2021, and the results of their operations for the year then ended, the changes in their net assets for each of the years in the two-year period then ended and their financial highlights for each of the periods noted in the table below, in conformity with accounting principles generally accepted in the United States of America.
Fund
| Financial Highlights Presented
|
Adaptive Fundamental Growth Fund
| For each of the years in the five-year period ended May 31, 2021 for Institutional Class Shares and Class C Shares and for each of the years in the three-year period ended May 31, 2021 and for the period from March 13, 2018 (Date of Initial Public Investment) through May 31, 2018 for Class A Shares |
Adaptive Hedged High Income Fund
| For each of the years in the five-year period ended May 31, 2021 |
Adaptive Hedged Multi- Asset Income Fund
| For each of the years in the five-year period ended May 31, 2021 |
Adaptive Tactical Outlook Fund
| For each of the years in the five-year period ended May 31, 2021 for Institutional Class Shares and Class C Shares and for each of the years in the two-year period ended May 31, 2021 and the period from October 18, 2018 (Date of Initial Public Investment) through May 31, 2019 for Class A Shares |
Adaptive Tactical Rotation Fund
| For each of the years in the five-year period ended May 31, 2021 for Institutional Class Shares and Class C Shares and for each of the years in the three-year period ended May 31, 2021 and for the period from April 2, 2018 (Date of Initial Public Investment) through May 31, 2018 for Class A Shares |
Basis for Opinion
These financial statements are the responsibility of the Funds' management. Our responsibility is to express an opinion on the Funds’ financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Funds in accordance with the U.S. federal securities law and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Funds are not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Funds’ internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risk of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of May 31, 2021 by correspondence with the custodian and brokers. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
BBD, LLP
We have served as the auditor of one or more of the Funds in the Starboard Investment Trust since 2012.
Philadelphia, Pennsylvania
July 28, 2021
| 1. | Proxy Voting Policies and Voting Record |
A copy of the Advisor’s Disclosure Policy is included as Appendix B to the Fund’s Statement of Additional Information and is available, without charge, upon request, by calling 800-773-3863, and on the website of the Securities and Exchange Commission (“SEC”) at http://www.sec.gov. Information regarding how each Fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30, is available (1) without charge, upon request, by calling the Funds at the number above and (2) on the SEC’s website at http://www.sec.gov.
| 2. | Quarterly Portfolio Holdings |
Each Fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-PORT. Each Fund’s Form N-PORT is available on the SEC’s website at http://www.sec.gov. You may also obtain copies without charge, upon request, by calling the Fund at 800-773-3863.
We are required to advise you within 60 days of each Fund’s fiscal period end regarding the federal tax status of certain distributions received by shareholders during each fiscal period.
Each of the funds listed below had the following distribution information for the fiscal year ended May 31, 2021.
| |
Ordinary Income | Long-Term Capital Gains |
| Adaptive Fundamental Growth Fund | $ - | $ 4,212,000 |
| Adaptive Hedged High Income Fund | 326,711 | - |
| Adaptive Hedged Multi-Asset Income Fund | 1,043,130 | - |
| Adaptive Tactical Outlook Fund | - | - |
| Adaptive Tactical Rotation Fund | 176,200 | - |
Dividend and distributions received by retirement plans such as IRAs, Keogh-type plans, and 403(b) plans need not be reported as taxable income. However, many retirement plans may need this information for their annual information meeting.
4. Schedule of Shareholder Expenses
As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including contingent deferred sales charges; and (2) ongoing costs, including management fees; distribution and/or service (12b-1) fees; and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period from December 1, 2020 through May 31, 2021.
Actual Expenses – The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (e.g., an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes – The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
| Adaptive Funds |
Additional Information (Unaudited)
|
| As of May 31, 2021 |
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads), redemption fees, or exchange fees. Therefore, the second line of the table is useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
| Adaptive Fundamental Growth Fund | Beginning Account Value December 1, 2020 |
Ending Account Value May 31, 2021 | Expenses Paid During Period* |
Annualized Expense Ratio* |
| Institutional Class Shares | | | | |
| Actual | $1,000.00 | $1,087.90 | $6.51 | 1.25% |
| Hypothetical (5% annual return before expenses) | $1,000.00 | $1,018.70 | $6.29 | 1.25% |
| Class C Shares | | | | |
| Actual | $1,000.00 | $1,082.20 | $11.68 | 2.25% |
| Hypothetical (5% annual return before expenses) | $1,000.00 | $1,013.71 | $11.30 | 2.25% |
| Class A Shares | | | | |
| Actual | $1,000.00 | $1,086.80 | $7.80 | 1.50% |
| Hypothetical (5% annual return before expenses) | $1,000.00 | $1,017.45 | $7.54 | 1.50% |
| Adaptive Hedged High Income Fund | Beginning Account Value December 1, 2020 |
Ending Account Value May 31, 2021 | Expenses Paid During Period* |
Annualized Expense Ratio* |
| Institutional Class Shares | | | | |
| Actual | $1,000.00 | $1,034.40 | $6.34 | 1.25% |
| Hypothetical (5% annual return before expenses) | $1,000.00 | $1,018.70 | $6.29 | 1.25% |
| Class C Shares | | | | |
| Actual | $1,000.00 | $1,029.80 | $11.39 | 2.25% |
| Hypothetical (5% annual return before expenses) | $1,000.00 | $1,013.71 | $11.30 | 2.25% |
| Adaptive Hedged Multi-Asset Income Fund | Beginning Account Value December 1, 2020 |
Ending Account Value May 31, 2021 | Expenses Paid During Period* |
Annualized Expense Ratio* |
| Institutional Class Shares | | | | |
| Actual | $1,000.00 | $1,012.40 | $6.27 | 1.25% |
| Hypothetical (5% annual return before expenses) | $1,000.00 | $1,018.70 | $6.29 | 1.25% |
| Class C Shares | | | | |
| Actual | $1,000.00 | $1,010.40 | $11.28 | 2.25% |
| Hypothetical (5% annual return before expenses) | $1,000.00 | $1,013.71 | $11.30 | 2.25% |
| Adaptive Funds |
Additional Information (Unaudited)
|
| As of May 31, 2021 |
| Adaptive Tactical Outlook Fund | Beginning Account Value December 1, 2020 |
Ending Account Value May 31, 2021 | Expenses Paid During Period* |
Annualized Expense Ratio* |
| Institutional Class Shares | | | | |
| Actual | $1,000.00 | $1,142.40 | $6.68 | 1.25% |
| Hypothetical (5% annual return before expenses) | $1,000.00 | $1,018.70 | $6.29 | 1.25% |
| Class C Shares | | | | |
| Actual | $1,000.00 | $1,136.60 | $11.99 | 2.25% |
| Hypothetical (5% annual return before expenses) | $1,000.00 | $1,013.71 | $11.30 | 2.25% |
| Class A Shares | | | | |
| Actual | $1,000.00 | $1,273.70 | $8.50 | 1.50% |
| Hypothetical (5% annual return before expenses) | $1,000.00 | $1,017.45 | $7.54 | 1.50% |
| Adaptive Tactical Rotation Fund | Beginning Account Value December 1, 2020 |
Ending Account Value May 31, 2021 | Expenses Paid During Period* |
Annualized Expense Ratio* |
| Institutional Class Shares | | | | |
| Actual | $1,000.00 | $1,139.10 | $6.67 | 1.25% |
| Hypothetical (5% annual return before expenses) | $1,000.00 | $1,018.70 | $6.29 | 1.25% |
| Class C Shares | | | | |
| Actual | $1,000.00 | $1,133.60 | $11.97 | 2.25% |
| Hypothetical (5% annual return before expenses) | $1,000.00 | $1,013.71 | $11.30 | 2.25% |
| Class A Shares | | | | |
| Actual | $1,000.00 | $1,138.10 | $8.00 | 1.50% |
| Hypothetical (5% annual return before expenses) | $1,000.00 | $1,017.45 | $7.54 | 1.50% |
*Expenses are equal to the average account value over the period multiplied by each Fund’s annualized expense ratio, multiplied by the number of days in the most recent period divided by the number of days in the fiscal year (to reflect the six month period).
5. Approval of Investment Advisory Agreement
Investment Advisory Agreement with the Advisor
In connection with the regular Board meeting held on December 10, 2020, the Board, including a majority of the Independent Trustees, discussed the approval of a management agreement between the Trust and the Advisor, with respect to the Funds (the "Investment Advisory Agreement").
The Trustees were assisted by legal counsel throughout the review process. The Trustees relied upon the advice of legal counsel and their own business judgment in determining the material factors to be considered in evaluating the Investment Advisory Agreement and the weight to be given to each factor considered. The conclusions reached by the Trustees were based on a comprehensive evaluation of all of the information provided and were not the result of any one factor. Moreover, each Trustee may have afforded different weight to the various factors in reaching his conclusions with respect to the approval of the Investment Advisory Agreement. In connection with their deliberations regarding approval of the Investment Advisory Agreement, the Trustees reviewed materials prepared by the Advisor.
In deciding on whether to approve the Investment Advisory Agreement, the Trustees considered numerous factors, including:
| Adaptive Funds |
Additional Information (Unaudited)
|
| As of May 31, 2021 |
(i)
Nature, Extent, and Quality of Services. The Trustees considered the responsibilities of the Advisor under the Investment Advisory Agreement. The Trustees reviewed the services being provided by the Advisor to the Funds including, without limitation, the quality of its investment advisory services since the Advisor began managing the Funds (including research and recommendations with respect to portfolio securities); its procedures for formulating investment recommendations and assuring compliance with the Funds’ investment objectives, policies and limitations; its coordination of services for the Funds among the Funds’ service providers; and its efforts to promote the Funds, grow the Funds’ assets, and assist in the distribution of Fund shares (although no portion of the investment advisory fee was targeted to pay distribution expenses). The Trustees evaluated the Advisor’s staffing, personnel, and methods of operating; the education and experience of the Advisor’s personnel; the Advisor’s compliance program; and the financial condition of the Advisor. It was noted that there had been no change in personnel.
After reviewing the foregoing information and further information in the memorandum from the Advisor (e.g., descriptions of the Advisor’s business, compliance program, and Form ADV), the Board concluded that the nature, extent, and quality of the services provided by the Advisor were satisfactory and adequate for the Funds.
(ii) Performance. The Trustees compared the performance of the Funds with the performance of comparable funds with similar strategies managed by other investment advisers, and applicable peer group data (e.g., Morningstar/Lipper peer group average). The Trustees also considered the consistency of the Advisor’s management of the Funds with its investment objective, policies, and limitations. The Trustees made the following observations regarding the performance of each of the Funds.
Adaptive Fundamental Growth Fund: The Trustees noted that the Fund underperformed the category for all periods but outperformed the peer group for all periods. The Trustees noted that the Advisor made adjustments to the Fund’s strategy in September 2020 and that the Advisor believed that the Fund was not properly categorized by Lipper.
Adaptive Hedged High Income Fund: The Trustees noted that the Fund had outperformed the peer group for all periods. The Trustees noted that the Fund had underperformed the category for the 5-year and since-inception periods but outperformed for the 1-year period. The Trustees considered the Advisor’s explanation that the strategy of the Fund may lose some performance as compared to the category in short-term down markets but should offer enhanced returns over full market cycles.
Adaptive Hedged Multi-Asset Income Fund: The Trustees noted that the Fund had underperformed the category for all periods. The Trustees noted that the Fund had underperformed the peer group for the 5-year, 10-year and since inception periods but outperformed the peer group for the 1-year period. The Trustees noted that the Advisor believed that the underperformance was largely because the Fund had limited duration and interest rate risk and offered less risk than the category. The Advisor also noted that it had expanded the Fund’s holdings in order to increase yield and overall performance while attempting to mitigate risk in down markets.
Adaptive Tactical Outlook Fund: The Trustees noted that the Fund had underperformed the peer group and the category for the 1-year and 5-year periods while outperforming the peer group for the since inception period. The Trustees considered that the Advisor believed the Fund was performing as expected for its strategy against its peer group. The Trustees noted that the Advisor believes that the Fund is miscategorized by Lipper, which is why it underperformed the category.
Adaptive Tactical Rotation Fund: The Trustees noted that the Fund underperformed the category for all periods and underperformed the peer group for the 1-year and 5-year periods but outperformed the peer group for the since inception period. The Advisor noted that the under performance of the peer group was due to defensive positioning and the underperformance of the category was due to a misalignment between the Fund’s strategy and the category.
After reviewing the investment performance of the Funds, the Advisor’s experience managing the Funds, the historical investment performance, and other factors, the Board concluded that the investment performance of the Funds and the Advisor was satisfactory.
| Adaptive Funds |
Additional Information (Unaudited)
|
| As of May 31, 2021 |
(iii) Fees and Expenses. The Trustees noted the management fees for the Funds were under the Investment Advisory Agreement. The Trustees noted that the management fee for each Fund was above the average of the peer group and category. They further discussed that the Advisor believed this was due primarily to the small size of the Funds relative to those comparison groups. The Trustees considered the Advisor’s unique research and investment process in evaluating the reasonableness of its management fee.
Following this comparison, and upon further consideration and discussion of the foregoing, the Board concluded that the fees to be paid to the Advisor by the Funds were not unreasonable in relation to the nature and quality of the services provided by the Advisor and that they reflected charges that were within a range of what could have been negotiated at arm’s length.
(iv) Profitability. The Board reviewed the Advisor’s profitability analysis in connection with its management of the Funds over the past twelve months. The Board noted that the Advisor did not retain a profit for the prior twelve months of operations for any of the Funds except the Adaptive Fundamental Growth Fund. The Independent Trustees discussed the profitability level of the Advisor, noting, among other factors and circumstances, that the level of profitability was a function of current and expected expenses, and it was important for the Advisor to make a profit in order to have adequate resources to operate the Funds until the Funds reached scale. After discussion, the Trustees concluded that the Advisor’s level of profitability was not excessive.
(v) Economies of Scale. In this regard, the Trustees reviewed the Funds’ operational history and noted that the size of the Funds had not provided an opportunity to realize economies of scale. The Trustees then reviewed the Funds’ fee arrangements for breakpoints or other provisions that would allow the Funds’ shareholders to benefit from economies of scale in the future as the Funds grow. The Trustees determined that the maximum management fee would stay the same regardless of the Funds’ asset levels but noted the Advisor’s willingness to consider breakpoints in the future as assets grow. The Trustees noted that the Funds were a relatively small size and economies of scale were unlikely to be achievable in the near future. It was pointed out that breakpoints in the advisory fee could be reconsidered in the future as the Funds grow.
Conclusion. Having reviewed and discussed in depth such information from the Advisor as the Trustees believed to be reasonably necessary to evaluate the terms of the Investment Advisory Agreement and as assisted by the advice of legal counsel, the Trustees concluded that approval of the Investment Advisory Agreement was in the best interest of the shareholders of the Funds.
6. Liquidity Risk Management Program
In October 2016, the Securities and Exchange Commission (“SEC”) adopted Rule 22e-4, or the “Liquidity Rule,” under the Investment Company Act of 1940. The Liquidity Rule requires a mutual fund to adopt a liquidity risk management program (“Program”). In June 2018, the SEC adopted a requirement that a mutual fund disclose information about the operation and effectiveness of its Program in its reports to shareholders.
The Funds have adopted and implemented a Program pursuant to the Liquidity Rule, effective December 1, 2019. The Program is intended to provide a framework for: (1) assessing and managing the Funds’ liquidity risk (i.e., the risk that the Funds could not meet requests to redeem shares without significantly diluting remaining investors’ interests) based on a variety of factors, including the Funds’ investment strategy and liquidity of its portfolio investments, (2) classifying the liquidity of the Funds’ investments, (3) determining the Funds’ highly liquid investment minimum (“HLIM”), if applicable, (4) complying with the Funds’ illiquid investment limit, and (5) reporting to the Funds’ Board of Trustees. The Board of Trustees designated the individuals serving as the Advisor’s liquidity program administrator to serve as the Trust’s program administrator (the “Trust Program Administrator”) to administer the Program. The Trust Program Administrator established a governance committee to assist the Trust Program Administrator in administering the Program.
| Adaptive Funds |
Additional Information (Unaudited)
|
| As of May 31, 2021 |
Under the Program, each of the Funds’ portfolio investments is classified into one of four liquidity categories defined by the SEC: highly liquid, moderately liquid, less liquid, and illiquid. Liquidity classifications take into account a variety of market, trading, and investment factors, including the Funds’ reasonably anticipated trade size, and the Program Administrator has engaged a third-party vendor to assist with the classification of portfolio investments.
The Liquidity Rule prohibits mutual funds from acquiring investments that would cause their illiquid investments to exceed 15% of net assets. The Liquidity Rule also requires funds that do not primarily hold assets that are highly liquid investments to determine a minimum percentage of net assets to be invested in highly liquid investments (the HLIM). The Program includes provisions designed to comply with the 15% limit on illiquid investments and for determining and complying with the HLIM requirement, as applicable.
In accordance with the Liquidity Rule, the Program Administrator prepared, and the Fund’s Board of Trustees reviewed, a report regarding the operation and effectiveness of the Program for the period from December 1, 2019 through November 30, 2020. During the period, there were no liquidity events that materially impacted the Fund’s ability to timely meet redemptions without significantly diluting remaining investors’ interests. The report concluded that the Program remains reasonably designed to assess and manage the Fund’s liquidity risk, and that during the period the Program was implemented effectively.
7. Information about Trustees and Officers
The business and affairs of the Funds and the Trust are managed under the direction of the Board of Trustees of the Trust. Information concerning the Trustees and officers of the Trust and Funds is set forth below. Generally, each Trustee and officer serves an indefinite term or until certain circumstances such as their resignation, death, or otherwise as specified in the Trust’s organizational documents. Any Trustee may be removed at a meeting of shareholders by a vote meeting the requirements of the Trust’s organizational documents. The Statement of Additional Information of the Funds includes additional information about the Trustees and officers and is available, without charge, upon request by calling the Funds toll-free at 1-800-773-3863. The address of each Trustee and officer, unless otherwise indicated below, is 116 South Franklin Street, Rocky Mount, North Carolina 27804. The Independent Trustees received aggregate compensation of $22,732 during the fiscal year ended May 31, 2021 for their services to the Funds and Trust.
| Adaptive Funds |
Additional Information (Unaudited)
|
| As of May 31, 2021 |
Name and
Date of Birth | Position
held with
Funds or Trust | Length
of Time Served | Principal Occupation
During Past 5 Years | Number of Portfolios in Fund Complex Overseen by Trustee | Other Directorships
Held by Trustee
During Past 5 Years |
| Independent Trustees |
James H. Speed, Jr.
(06/1953) | Independent Trustee, Chairman | Trustee since 7/09, Chair since 5/12 | Retired Executive/Private Investor | 18 | Independent Trustee of the Brown Capital Management Mutual Funds for all its series from 2011 to present, Hillman Capital Management Investment Trust for all its series from 2009 to present, Centaur Mutual Funds Trust for all its series from 2013 to present, Chesapeake Investment Trust for all its series from 2016 to present, Leeward Investment Trust for all its series from 2018 to present, and WST Investment Trust for all its series from 2013 to present. (all registered investment companies) Member of Board of Directors of Communities in Schools of N.C. from 2001 to present. Member of Board of Directors of Investors Title Company from 2010 to present. Member of Board of Directors of AAA Carolinas from 2011 to present. Previously, member of Board of Directors of M&F Bancorp Mechanics & Farmers Bank from 2009 to 2019. Previously, member of Board of Visitors of North Carolina Central University School of Business from 1990 to 2016. Previously, Board of Directors of NC Mutual Life Insurance Company from 2004 to 2016. Previously, President and CEO of North Carolina Mutual Life Insurance Company from 2003 to 2015. |
Theo H. Pitt, Jr.
(04/1936) | Independent Trustee | Since 9/10 | Senior Partner, Community Financial Institutions Consulting (financial consulting) since 1999. | 18 | Independent Trustee of World Funds Trust for all its series from 2013 to present, Chesapeake Investment Trust for all its series from 2002 to present, Leeward Investment Trust for all its series from 2011 to present, and Hillman Capital Management Investment Trust for all its series from 2000 to present (all registered investment companies). Senior Partner of Community Financial Institutions Consulting from 1997 to present. Previously, Partner at Pikar Properties from 2001 to 2017. |
Michael G. Mosley
(01/1953) | Independent Trustee | Since 7/10 | Owner of Commercial Realty Services (real estate) since 2004. | 18 | None. |
J. Buckley Strandberg
(03/1960) | Independent Trustee | Since 7/09 | President of Standard Insurance and Realty since 1982. | 18 | None. |
| Adaptive Funds |
Additional Information (Unaudited)
|
| As of May 31, 2021 |
Name and
Date of Birth | Position held with
Funds or Trust |
Length
of Time Served | Principal Occupation
During Past 5 Years |
Officers
|
Katherine M. Honey
(09/1973) | President and Principal Executive Officer | Since 05/15 | President of The Nottingham Company since 2018. EVP of The Nottingham Company from 2008 to 2018. |
Ashley H. Lanham (03/1984) | Treasurer, Assistant Secretary, Principal Accounting Officer and Principal Financial Officer | Since 05/15 | Director of Fund Administration, The Nottingham Company since 2008. |
Tracie A. Coop
(12/1976) | Secretary | Since 12/19 | General Counsel, The Nottingham Company since 2019. Formerly, Vice President and Managing Counsel, State Street Bank and Trust Company from 2015 to 2019. Formerly, General Counsel for Santander Asset Management USA, LLC from 2013 to 2015. |
Matthew Baskir
(07/1979) | Chief Compliance Officer | Since 04/20 | Compliance Director, The Nottingham Company, Inc., since 2020. Formerly, Consultant at National Regulatory Services from 2019 to 2020. Formerly, Counsel at Financial Industry Regulatory Authority (FINRA), Member Supervision from 2016-2019. Formerly Counsel at FINRA, Market Regulation Enforcement from 2014 – 2016. |
