This report and the financial statements contained herein are submitted for the general information of the shareholders of the MAI Energy Infrastructure and MLP Fund (the "Fund"). The Fund's shares are not deposits or obligations of, or guaranteed by, any depository institution. The Fund's shares are not insured by the FDIC, Federal Reserve Board or any other agency, and are subject to investment risks, including possible loss of principal amount invested. Neither the Fund nor the Fund's distributor is a bank.
The MAI Energy Infrastructure and MLP Fund is distributed by Capital Investment Group, Inc., Member FINRA/SIPC, 17 Glenwood Ave, Raleigh, NC, 27603. There is no affiliation between the MAI Energy Infrastructure and MLP Fund, including its principals, and Capital Investment Group, Inc.
This Semi-Annual Report was first distributed to shareholders on or about July 30, 2015.
1. Organization and Significant Accounting Policies
The MAI Energy Infrastructure and MLP Fund (the "Fund") is formerly known as the Vertical Capital MLP & Energy Infrastructure Fund and is a series of the Leeward Investment Trust (the "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. The Trust is classified as a diversified company as defined in the 1940 Act.
The Fund commenced operations on December 16, 2014. The investment objective of the Fund is to seek long-term capital appreciation and current income through a diversified portfolio of investments in energy infrastructure and master limited partnerships ("MLPs"). The Fund's investment advisor (the "Advisor") is Vertical Capital Asset Management, LLC as of the period ended May 31, 2015. The Fund's investment sub-advisor, MAI Capital Management, LLC (the "Sub-Advisor") seeks to combine its energy industry investment expertise with financial market expertise to make sound investment decisions in MLP Positions. The Sub-Advisor manages MLP assets with a disciplined investment process focused on due diligence from the perspective of an MLP owner, operator and acquirer to create a portfolio of high quality MLPs with durable cash flows in order to seek to generate a high level of risk-adjusted return.
The Fund currently has an unlimited number of authorized shares, which are divided into two classes - Institutional Class Shares and Advisor Class Shares. Each class of shares has equal rights as to assets of the Fund, and the classes are identical except for differences in ongoing distribution and service fees. The Advisor Class Shares are subject to an initial sales charge of 5.75% of the offering price, as well as distribution plan fees, which are further discussed in Note 3. 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.
The following is a summary of significant accounting policies consistently followed by the Fund. The policies are in conformity with accounting principles generally accepted in the United States of America ("GAAP").
Investment Valuation
The 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 sales price as of 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. Instruments with maturities of 60 days or less are valued at amortized cost, which approximates market value. Securities and assets for which representative market quotations are not readily available (e.g., if the exchange on which the security is principally traded closes early or if trading of the particular security is halted during the day and does not resume prior to the Fund's net asset value calculation) or which cannot be accurately valued using the Fund's normal pricing procedures are valued at fair value as determined in good faith under policies approved by the Trustees. A security's "fair value" price may differ from the price next available for that security using the Fund's normal pricing procedures.
Fair Value Measurement
Various inputs are used in determining the value of the Fund's investments. These inputs are summarized in the three broad levels listed below:
Level 1: quoted prices in active markets for identical securities
Level 2: other significant observable inputs (including quoted prices for similar securities and identical securities in inactive markets, interest rates, credit risk, etc.)
Level 3: significant unobservable inputs (including the 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.
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MAI Energy Infrastructure and MLP Fund
Notes to Financial Statements
(Unaudited)
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 table summarizes the inputs as of the initial period ended May 31, 2015 for the Fund's assets measured at fair value:
| | | |
| Investments in Securities (a) | | Total | | Level 1 | | Level 2 | | Level 3 |
| Assets | | | | | | | | |
| Common Stocks * | $ | 7,561,424 | $ | 7,561,424 | $ | - | $ | - |
| Corporate Bond | | 328,613 | | 328,613 | | - | | - |
| Limited Partnerships | | 1,271,534 | | 1,271,534 | | - | | - |
| Master Limited Partnerships | | 2,966,505 | | 2,966,505 | | - | | - |
| Preferred Stock | | 196,920 | | 196,920 | | - | | - |
| Short-Term Investment | | 122,508 | | 122,508 | | - | | - |
| Total Assets | $ | 12,447,504 | $ | 12,447,504 | $ | - | $ | - |
| | | | | | | | | |
| Liabilities | | | | | | | | |
| Call Options Written | $ | 10,580 | $ | 10,580 | $ | - | $ | - |
| | | | | | | | | |
* See Schedule of Positions for a breakdown by Sector.
| (a) | The Fund had no significant transfers into or out of Level 1, 2, or 3 during the initial period ended May 31, 2015. The Fund did not hold any Level 3 securities during the period. The Fund recognizes transfers at the end of the year. |
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 the 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 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
The 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 Fund may declare and distribute dividends from net investment income (if any), quarterly. 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 the 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.
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MAI Energy Infrastructure and MLP Fund
Notes to Financial Statements
(Unaudited)
Federal Income Taxes
No provision for income taxes is included in the accompanying financial statements, as the Fund intends to distribute to shareholders all taxable investment income and realized gains and otherwise comply with Subchapter M of the Internal Revenue Code applicable to regulated investment companies.
| 2. | Transactions with Related Parties and Service Providers |
Advisor
The Advisor has entered into a contractual agreement (the "Expense Limitation Agreement") with the Trust, on behalf of the Fund, under which it has agreed to waive or reduce its fees and to assume other expenses of the Fund, if necessary, in amounts that limit the Fund's total operating expenses (exclusive of interest, taxes, brokerage commissions, other expenditures which are capitalized in accordance with generally accepted accounting principles, other extraordinary expenses not incurred in the ordinary course of the Fund's business, and amounts, if any, payable under a Rule 12b-1 distribution plan) to not more than 1.50% of the average daily net assets of the Fund for the current fiscal year. The current term of the Expense Limitation Agreement remains in effect until the last day of July 2016. While there can be no assurance that the Expense Limitation Agreement will continue after that date, it is expected to continue from year-to-year thereafter.
The Fund pays a monthly fee to the Advisor calculated at the annual rate of 1.00% of the Fund's average daily net assets. For the initial period ended May 31, 2015, $28,439 in advisory fees were incurred by the Fund, and all fees were waived by the Advisor.
Administrator
The Fund pays a monthly fee to the Administrator based upon the average daily net assets of the 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, as 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. A breakdown of these fees is provided in the following table.
| Administration Fees* | Custody Fees* | Fund Accounting Fees (monthly) | Fund Accounting Fees (annual) | Blue Sky Administration Fees (annual) |
Average Net Assets | Annual Rate | Average Net Assets | Annual Rate |
| First $100 million | 0.100% | First $100 million | 0.020% | $2,250 plus | 0.01% | $150 per state |
| Next $150 million | 0.080% | Over $100 million | 0.009% | $500 per | | |
| Next $250 million | 0.060% | | | additional class | | |
| Next $500 million | 0.050% | *Minimum monthly fees of $2,000 and $416 for Administration and Custody, respectively. |
| Over $1 billion | 0.040% |
| Over $2 billion | 0.030% |
The fund incurred $11,008 in administration fees, $15,799 in fund accounting fees, and $2,831 in custody fees for the initial period ended May 31, 2015.
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 Fund for their services pursuant to the Compliance Services agreement with the Fund.
Transfer Agent
Nottingham Shareholder Services, LLC (the "Transfer Agent") serves as transfer, dividend paying, and shareholder servicing agent for the Fund. For its services, the Transfer Agent is entitled to receive compensation from the Fund pursuant to the Transfer Agent's fee arrangements with the Fund.
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MAI Energy Infrastructure and MLP Fund
Notes to Financial Statements
(Unaudited)
Distributor
Capital Investment Group, Inc. (the "Distributor") serves as the Fund's principal underwriter and distributor. For its services, the Distributor is entitled to receive compensation from the Fund pursuant to the Distributor's fee arrangements with the Fund.
Certain Trustees and officers of the Trust are also officers of the Advisor, the Distributor, or the Administrator.
| 3. | Distribution and Service Fees |
The Trustees, including a majority of the Trustees who are not "interested persons" of the Trust as defined in the 1940 Act and who have no direct or indirect financial interest in such plan or in any agreement related to such plan, adopted a distribution plan pursuant to Rule 12b-1 of the 1940 Act (the "Plan"). The 1940 Act regulates the manner in which a regulated investment company may assume expenses of distributing and promoting the sales of its shares and servicing of its shareholder accounts. The Plan provides that the Advisor Class Shares may incur certain expenses, which may not exceed 0.25% per annum, respectively, of the Fund's average daily net assets 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 shares of the Advisor Class, or support servicing of shareholder accounts. For the initial period ended May 31, 2015, $276 in fees were incurred by the Advisor Class Shares.
| 4. | Purchases and Sales of Investment Securities |
For the initial period ended May 31, 2015, the aggregate cost of purchases and proceeds from sales of investment securities (excluding short-term securities) were as follows:
| Initial Period Ended | Purchases of Securities | Proceeds from Sales of Securities |
| May 31, 2015 | $14,638,056 | $2,583,109 |
There were no long-term purchases or sales of U.S Government Obligations during the period ended May 31, 2015.
5. Federal Income Tax
Distributions are determined in accordance with Federal income tax regulations, which 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 reviewed the Fund's tax positions to be taken on federal income tax returns as of and during the period ended May 31, 2015, and determined that the Fund does not have a liability for uncertain tax positions. The Fund recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the Statement of Operations. During the period, the Fund did not incur any interest or penalties.
(Continued)
MAI Energy Infrastructure and MLP Fund
Notes to Financial Statements
(Unaudited)
At May 31, 2015, the tax-basis cost of investments and components of distributable earnings were as follows:
| Cost of Investments | $ | 12,158,121 |
| | | |
| Unrealized Appreciation | | 471,998 |
| Unrealized Depreciation | | (193,196) |
| Net Unrealized Appreciation | | 278,802 |
| | | |
| Undistributed Net Investment Income | | 14,681 |
| | | |
| Distributable Earnings | $ | 293,483 |
| | | | | | |
6. 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 Fund. In addition, in the normal course of business, the Trust entered into contracts with its service providers, on behalf of the Fund, and others that provide for general indemnifications. The Fund's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund. The Fund expects risk of loss to be remote.
7. Subsequent Events
In preparing these financial statements, the Fund has evaluated the need for disclosures and/or adjustments resulting from subsequent events through the date of issuance of these financial statements.
As of July 1, 2015, Vertical Capital Management, LLC resigned as the Fund's Investment Advisor. The Sub-Advisor, MAI Capital Management, LLC, became the Interim Advisor to the Fund on that date.
