This report and the financial statements contained herein are submitted for the general information of the shareholders of the Forefront Income Trust (the "Trust"). The Trust's shares are not deposits or obligations of, or guaranteed by, any depository institution. The Trust'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. The Trust's distributor is not a bank.
The Forefront Income Trust is distributed by Capital Investment Group, Inc., Member FINRA/SIPC, 100 E. Six Forks Road, Suite 200, Raleigh, NC, 27609. There is no affiliation between the Forefront Income Trust, including its principals, and Capital Investment Group, Inc.
This Annual Report was first distributed to shareholders on or about November 30, 2016.
Forefront Income Trust
Notes to Financial Statements
1. Organization and Significant Accounting Policies
The Forefront Income Trust (the "Trust") is organized as a Delaware statutory trust organized on August 20, 2014 and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as a closed-end, non-diversified, "interval" management investment company. The Trust follows accounting and reporting guidance in the Financial Accounting Standards Board ("FASB") Accounting Standards Codifications 946, Financial Services – Investment Companies. The Trust became effective on December 8, 2014 and commenced operations on December 31, 2014 upon the issuance of shares.
The Trust seeks to achieve its investment objective of current income by primarily investing in fixed income securities, such as unrated or below-investment-grade-rated (commonly referred to as "junk" or high yield risk) loans and debt instruments with maturities of generally not more than three years, as well as, to a lesser extent, dividend yielding preferred securities, all of which will represent what Forefront Capital Advisors, LLC (the "Advisor") believes to be deep value opportunities, in that they will offer prospective returns that are high in proportion to their risks as assessed by the Advisor based on its fundamental analysis.
The following is a summary of significant accounting policies consistently followed by the Trust. The policies are in conformity with accounting principles generally accepted in the United States of America ("GAAP"). The Trust's fiscal year end is September 30.
Investment Valuation
The Trust'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. 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 Trust's net asset value calculation) or which cannot be accurately valued using the Trust's normal pricing procedures are valued at fair value as determined in good faith under policies approved by the Trustees, who consist of the Independent Trustees, the Chairman, and the Chief Executive Officer of the Advisor. A security's "fair value" price may differ from the price next available for that security using the Trust's normal pricing procedures. Instruments with maturities of 60 days or less are valued at amortized cost, which approximates market value.
Investments in underlying investment vehicles are valued, as a practical expedient, utilizing the net asset valuations provided by the underlying investment vehicles and/or their administrators, without adjustment, when the net asset valuations of the investments are calculated in a manner consistent with GAAP for investment companies. The Trust applies the practical expedient to its investments in underlying investment vehicles on an investment-by-investment basis, and consistently with the Trust's entire position in a particular underlying investment vehicle, unless it is probable that the Trust will sell a portion of an investment at an amount different from the net asset valuation. If it is probable that the Trust will sell an investment in the underlying investment vehicle at an amount different from the net asset valuation or in other situations where the practical expedient is not available, the Trust considers other factors in addition to the net asset valuation, such as subscription and redemption rights, expected discounted cash flows, transactions in the secondary market, bids received from potential buyers, and overall market conditions in its determination of fair value.
Valuation of Securities For Which Independent Pricing Sources Are Not Available
The Trust may hold certain interests in loans and other fixed income securities, including senior loans, and will not have readily available market quotations or will not be priced by an independent pricing source or pricing model. Such loans and fixed income securities will be valued by the Advisor, Forefront Capital Advisors, LLC (the "Advisor"), according to the fair value process set forth in the Trust's valuation policies and procedures. Loans and other securities held by the Trust which do not trade in any market, which are not priced by an independent pricing source or pricing model, or which are deemed to be illiquid will be valued at fair value by the Advisor under valuations policies and procedures established by and under the general supervision and responsibility of the Trust's Board of Trustees.
(Continued)
Forefront Income Trust
Notes to Financial Statements
The Advisor meets with the Board of Trustees on a monthly basis, or more frequently as needed, to review and discuss the appropriateness of such fair values using more current information such as, recent security news, recent market transactions, updated corporate action information and/or other macro or security specific events. The Advisor is responsible for developing the Trust's written valuation processes and procedures, conducting periodic reviews of the valuation policies, and evaluating the overall fairness and consistent application of the valuation policies as well as ensuring that the valuation methodologies for investments that are categorized within Level 3 of the fair value hierarchy are fair, consistent, and verifiable. Valuations determined by the Advisor are required to be supported by market data, third-party pricing sources, industry accepted third-party pricing models, counterparty prices, or other methods the Board of Trustees deem to be appropriate, including the use of internal proprietary pricing models. When determining the reliability of third party pricing information for investments owned by the Trust, the Board of Trustees, among other things, conducts due diligence reviews of pricing vendors, monitors the daily change in prices and reviews transactions among market participants.
Also, when observable inputs become available, the Board of Trustees conducts back testing of the methodologies used to value Level 3 financial instruments to substantiate the unobservable inputs used to value those investments. Such back testing includes comparing Level 3 investment values to observable inputs such as exchange-traded prices, transaction prices, and/or vendor prices.
The fair value methodologies and processes set forth in the Trust's valuation policies and procedures take into account applicable regulatory and accounting guidance, including the fair value measurement standards incorporated in Financial Accounting Standards Board ("FASB") Topic 820, in addition to other factors, as defined below.
Fair Value Measurement
Various inputs are used in determining the value of the Trust'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 Trust'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.
(Continued)
Forefront Income Trust
Notes to Financial Statements
The following table summarizes the inputs as of September 30, 2016 for the Trust's assets measured at fair value:
| Investments (a) | | Total | | Level 1 | | Level 2 | | Level 3 |
| Assets | | | | | | | | |
| Limited Liability Company Interest | $ | 2,500,000 | $ | - | $ | - | $ | 2,500,000 |
| Senior Loans | | 3,180,000 | | - | | - | | 3,180,000 |
| Structured Notes | | 4,675,000 | | - | | - | | 4,675,000 |
| Warrants | | - | | - | | - | | - |
| Short-Term Investment | | 461,885 | | 461,885 | | - | | - |
| Total | $ | 10,816,885 | $ | 461,885 | $ | - | $ | 10,355,000 |
| (a) | The Trust had no significant transfers into or out of Level 1, 2, or 3 during the fiscal year ended September 30, 2016. The Trust held Level 3 securities during the fiscal year. The aggregate value of such securities is 91.70% of net assets, and they have been fair valued under procedures approved by the Trust's Board of Trustees. It is the Trust's policy to record transfers at the end of the reporting period. |
The table below presents a reconciliation of all Level 3 fair value measurements existing at September 30, 2016:
| | Limited Partnership | Limited Liability Company Interest | Senior Loans | Structured Notes | Warrants |
| Opening Balance | $ | 508,332 | $ | 2,500,000 | $ | 500,000 | $ | 3,000,000 | $ | - |
| Purchases | - | - | 2,680,000 | 3,925,000 | - |
| Principal payments/sales | (500,000) | - | - | (2,285,000) | - |
| Accrued discounts (premiums) | - | - | - | - | - |
| Realized Gains | 8,332 | - | - | 35,000 | - |
| Unrealized Gains | - | - | - | - | - |
| Ending Balance | $ | - | $ | 2,500,000 | $ | 3,180,000 | $ | 4,675,000 | $ | - |
| | | | | | |
There is no change in the unrealized gains (losses) for the year for the investments held at the end of the year.
Level 3 asset category | Value ($) | Valuation Technique | Unobservable Input |
Limited Liability Company Interest | 2,500,000 | Net asset value | Performance indicators |
Senior Loans – Financial Services | 2,680,000 | Net asset value | Performance indicators |
Senior Loans – Retail | 500,000 | Net asset value | Financial indicators |
Structured Notes | 4,675,000 | Market net asset value (a) | Certified Appraisal Reports |
Warrants | - | Quoted stock price vs. exercise price | Impact of exercise on limited market |
| (a) | Appraised market value less the first secured position loan balance. |
Range of inputs and certified appraisal quotes not included as the Fund does not develop the quantitative inputs.
(Continued)
Forefront Income Trust
Notes to Financial Statements
Valuation Techniques
Limited Partnership
The Advisor uses the market approach valuation technique to value its limited partnership investment in underlying investment vehicles. An investment in an underlying investment vehicle is carried at its estimated fair value which is based on the Trust's proportionate share of the net assets of the underlying investment vehicles as reported to the Trust by such entities at the reporting date. Investments in underlying investment vehicles are included in Level 2 or 3 of the fair value hierarchy. In determining the level, the Trust considers the length of time until the investment in the underlying investment vehicle is redeemable, including notice and lock-up periods or any other restriction on the disposition of the underlying investment vehicle. The Trust also considers the information provided by underlying investment vehicles, the nature of the portfolios of the underlying investment vehicle and their ability to liquidate their portfolio of investments when determining the level.
Limited Liability Company Interest
The Trust's investments in limited liability companies consist of direct equity interest investments. The transaction price, excluding transaction costs, is typically the Trust's best estimate of fair value at inception. When evidence supports a change to the carrying value from the transaction price, adjustments are made to reflect expected exit values in the investment's principal market under current market conditions. Ongoing reviews by management are based on an assessment of each underlying investment from the inception date through the most recent valuation date. These assessments typically incorporate valuation techniques that consider the evaluation of financing and sale transactions with third parties, an income approach reflecting a discounted cash flow analysis using an appropriate risk-adjusted discount rate, and a market approach that includes comparative analysis of acquisition multiples and pricing multiples generated by market participants. In certain instances, the Partnership may use multiple valuation methodologies for a particular investment and estimate its fair value based on a weighted average or a selected outcome within a range of multiple valuation results. Equity investments in private limited liability companies are generally included in Level 3 of the fair value hierarchy.
Senior Loans and Structured Notes
Investments in private operating companies also consist of senior loan investments and structured notes. The transaction price, excluding transaction costs, is typically the Trust's best estimate of fair value at inception. When evidence supports a change to the carrying value from the transaction price, adjustments are made to reflect expected exit values in the investment's principal market under current market conditions. Ongoing reviews by management are based on an assessment of each underlying investment from the inception date through the most recent valuation date. These assessments typically incorporate valuation techniques that consider trends in the performance and credit profile of each underlying investment, evaluation of arm's length financing, an income approach based upon a discounted cash flow analysis and sales transactions with third parties. Inputs relied upon by debt investments using the income approach include an understanding of the underlying company's compliance with debt covenants, the operating performance of the underlying company, trends in liquidity and financial leverage ratios of the underlying company from the point of the original investment to the stated valuation date, an assessment of the credit profile of the underlying company from the original investment to the stated valuation date, as well as an assessment of the underlying company's business enterprise value, liquidation value and debt repayment capacity of each subject debt investment. In addition, inputs include an assessment of potential yield adjustments for each debt investment based upon trends in the credit profile of the underlying company and trends in the interest rate environment from the date of the original investment to the stated valuation date. Investments in senior loans and structured notes provided to private operating companies are generally included in Level 3 of the fair value hierarchy.
Warrants
The Trust may invest in derivative financial instruments (derivatives), like warrants, 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 Fund to gains or losses in excess of the amounts shown on the Statement of Assets and Liabilities. Trust Level 3 investments in warrants have been valued by comparing quoted stock price against exercise price.
(Continued)
Forefront Income Trust
Notes to Financial Statements
Short Term Investment
Investments in the short term investment for the Dreyfus Cash Management account was priced at the ending net asset value (NAV) provided by the service agent of the account. These securities will be categorized as Level 1 securities since they are valued at the closing price reported by an active market.
At September 30, 2016, investments in the Limited Liability Company Interest, the Senior Loans, Structured Notes, and warrants within Level 3 have been valued at fair value using unadjusted third party transaction prices as described above by the Advisor. The Senior Loans, Structured Notes, and warrants are collateralized by underlying assets and/or real estate property. As part of the Trust's analysis for entering into these loans as well as for its fair value analysis, the Advisor will value the collateral using valuation techniques such as the discounted cash flow method, the direct capitalization method and the comparable sales method. The Trust's Level 3 investment in the Limited Partnership was valued using the unadjusted net asset value of investments in private investment vehicles.
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 investments will be recorded as soon as the Trust 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 of discounts and amortization of premiums. Generally, when interest and/or principal payments on a loan become past due, or if the Trust otherwise does not expect the borrower to be able to service its debt and other obligations, the Trust will place the loan on non-accrual status and will generally cease recognizing interest income on that loan for financial reporting purposes until all principal and interest have been brought current through payment or due to restructuring such that the interest income is deemed to be collectible. The Trust generally restores non-accrual loans to accrual status when past due principal and interest is paid and, in the Trust's judgment, the payments are likely to remain current. As of September 30, 2016, the Trust had no non-accrual assets held in its portfolio. Gains and losses are determined on the identified cost basis, which is the same basis used for federal income tax purposes.
Expenses
The Trust bears expenses incurred specifically on its behalf as well as a portion of general Trust level expenses, which are allocated according to methods reviewed and approved annually by the Trustees. The expenses of the Trust are detailed below in Note 2.
Distributions
The Trust 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 determined in accordance with income tax regulations and are recorded on ex-dividend 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 reported period. Actual results could differ from those estimates.
Federal Income Taxes
No provision for income taxes is included in the accompanying financial statements, as the Trust 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.
(Continued)
Forefront Income Trust
Notes to Financial Statements
2. Transactions with Affiliates and Service Providers
Advisor
The Trust will not pay the Advisor a fixed management fee. The Trust will pay the Advisor an Advisory Fee annually in arrears for the previous fiscal year after the close of such fiscal year and in the first quarter following the close of such fiscal year, subject to the Trust having achieved an increase in its Pre-Advisory Fee Net Investment Income for that previous fiscal year of 8.00% (in other words, subject to the Trust having achieved an 8.00% Pre-Advisory Fee net return (the "Hurdle") for its shareholders for that previous fiscal year.) The Advisor will receive no compensation until after the Hurdle is passed. Thereafter, the Advisory Fee will be charged, and will be equal to (i) 80% of the portion, if any, of the Trust's Pre-Advisory Fee Net Investment Income (as defined below) that exceeds the 8.00% Hurdle but is less than or equal to an 18.00% return, plus (ii) 20% of the portion, if any, of the Trust's Pre-Advisory Fee Net Investment Income that exceeds an 18.00% return. For the purposes of calculating the Advisory Fee, "Pre-Advisory Fee Net Investment Income shall mean, with respect to any fiscal year, interest income, dividend income, and any other income, including (i) any fees such as commitments and origination fees received by the Trust; (ii) any structuring, diligence, consulting, and any other fees received by the Trust, or by the Advisor and accruing to the Trust, in connection with the Trust investment; and (iii) any income received from investments with a deferred interest feature (such as original interest discount, pay in kind interest, and zero coupon securities), less other expenses. Pre-Advisory Fee Net Investment Income does not include any realized or unrealized capital gains. For the purposes of calculating Pre-Advisory Fee Net Investment Income, neither the liquidation preference of any preferred shares issued by the Trust nor the aggregate amount of any borrowings for investment purposes will be deducted from the Trust's total assets. Pre-Advisory Fee Net Investment Income includes accrued income that we have not yet received in cash, such as the amount of any market discount we may accrue on debt instruments we purchase below par value. The Trust incurred $200,000 in Advisory Fees during the fiscal year ended September 30, 2016, but no Advisory fee was paid to the Advisor from the Trust during the fiscal year.
The Advisor has entered into a contractual agreement (the "Expense Limitation Agreement") with the Trust, under which it has agreed to waive or reduce its fees and to assume other expenses of the Trust, if necessary, in amounts that limit the Trust's total operating expenses (exclusive of interest, taxes, brokerage commissions, borrowing costs, fees and expenses of other investment companies in which the Trust invests, and other expenditures which are capitalized in accordance with generally accepted accounting principles, other extraordinary expenses not incurred in the ordinary course of the Trust's business, and amounts, if any, payable under a Rule 12b-1 distribution plan) to not more than 1.75% of the average daily net assets of the Trust. The current term of the Expense Limitation Agreement remains in effect until December 31, 2017. 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 Advisor paid the initial organizational expenses of the Fund, which amounted to $37,500, and are subject to repayment by the Fund, provided the Fund is able to make such repayment without causing operating expenses to exceed the annual rate of 1.75% and provided that the fees and expenses which are subject of the repayment were incurred within three years of the repayment. As of the fiscal year ended September 30, 2016, the remaining amount for recoupment by the Advisor was $37,500. The Advisor reimbursed the Fund for $208,193 during the year, of which all was related to expenses incurred for during the fiscal year from October 1, 2015 through September 30, 2016. The organizational expenses can be recouped by the Advisor on or before September 10, 2017, per the Expense Limitation Agreement of the Trust.
Organizational and Deferred Offering Costs
The Fund's organizational costs of $37,500, which were incurred prior to the commencement of operations through September 10, 2014, were reimbursed by the Advisor. The organizational costs consisted of legal fees incurred to establish and launch the Trust. The organizational costs are subject to repayment by the Fund until September 10, 2017 as noted above. The organizational costs were expensed as incurred.
The Fund's offering costs consisted of legal fees for preparing the initial prospectus and statement of additional information. These offering costs, which are subject to the Expense Limitation Agreement, were accounted for as deferred cost until the commencement of operations, and, thereafter, amortized to expense over twelve months on a straight-line basis. There were no remaining costs to be amortized or deferred for the fiscal year ended September 30, 2016.
(Continued)
Forefront Income Trust
Notes to Financial Statements
Administrator
The Trust has engaged The Nottingham Company as its Administrator (the "Administrator"). During the fiscal year ended September 30, 2016, the Trust paid the Administrator $29,906 in fees.
The Trust pays a monthly fee to The Nottingham Company (the "Administrator") based upon the average daily net assets of the Trust and calculated at the annual rates as shown in the schedule below which is subject to a minimum of $2,500 per month. The Administrator also receives a fee to procure and pay the Trust'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. A breakdown of these fees is provided below.
| Administration Fees* | Custody Fees* | Fund Accounting Fees (monthly) | Fund Accounting Fees | Blue Sky Administration Fees (annual) |
Average Net Assets | Annual Rate | Average Net Assets | Annual Rate |
| First $250 million | 0.070% | First $500 million | 0.010% | $2,500 | 0.01% | $150 per state |
| Next $250 million | 0.050% | Over $500 million | 0.0075% | | | |
| Next $500 million | 0.030% | | | | | |
| Over $1 billion | 0.020% | | | | | |
| | | *Minimum monthly fees of $2,500 and $417 for Administration and Custody, respectively. |
| | |
Compliance Services
David Wasitowksi, an officer of the Advisor, serves as the Trust's Chief Compliance Officer.
For the period from October 1, 2015 through August 4, 2016, Blue River Partners, LLC provided services as the Trust's Compliance Consultant. Blue River Partners, LLC was entitled to receive customary fees from the Trust for their services pursuant to the Compliance Services agreement with the Trust. The Trust incurred $122,432 in fees for compliance consulting services for the period from October 1, 2015 through August 4, 2016.
For the period from August 5, 2016 through September 30, 2016, Barge Consulting, LLC provided services as the Trust's Compliance Consultant. Barge Consulting, LLC is entitled to receive customary fees from the Trust for their services pursuant to the Compliance Services agreement with the Trust. The Trust incurred $11,318 in fees for compliance consulting services for the period from August 5, 2016 through September 30, 2016.
Transfer Agent
Nottingham Shareholder Services, LLC ("Transfer Agent") serves as transfer, dividend paying, and shareholder servicing agent for the Trust. For its services, the Transfer Agent is entitled to receive compensation from the Trust pursuant to the Transfer Agent's fee arrangements with the Trust. During the fiscal year ended September 30, 2016, the Trust paid the Transfer Agent $18,000 in fees.
Distributor
Capital Investment Group, Inc. (the "Distributor") serves as the Trust's principal underwriter and distributor. The Distributor receives $5,000 per year paid in monthly installments for services provided and expenses assumed.
Trustees
The Board of Trustees consists of two Independent Trustees, the Chairman, and the Chief Executive Officer of the Advisor. For the fiscal year ended September 30, 2016, the Trust incurred $37,215 in Trustee fees. Certain officers of the Trust are also officers of the Advisor.
(Continued)
Forefront Income Trust
Notes to Financial Statements
3. Shareholder Service Plan 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 Shareholder Service Plan under which certain assets of the Trust may be used to compensate the Trust's principal underwriter within meaning of the 1940 Act, and brokers, dealers, and other financial intermediaries for providing personal services to shareholders and/or the maintenance of shareholder accounts with respect to the Trust's shares of beneficial interest. For the fiscal year ended September 30, 2016, $26,892 in fees were incurred by the Trust.
4. Share Repurchase Program
The Trust makes quarterly offers to repurchase its Shares pursuant to Rule 23c-3(b) under the 1940 Act. The Trust is authorized to repurchase between 5% and 25% of its Shares outstanding on the quarterly repurchase request deadline. However, no assurance can be given that shareholders will be able to sell all of their Shares tendered to the Trust pursuant to any particular repurchase offer or than any particular Shares tendered will be accepted in such a repurchase offer. Shares tendered for repurchase within 180 days from the date of the original issuance of the Shares will be subject to a repurchase fee of 2%. The Trust's quarterly repurchase offers will end on the third Friday (or the preceding business day if such third Friday is not a business day) of each month in which a repurchase offer ends.
5. Purchases and Sales of Investment Securities
For the fiscal year ended September 30, 2016, 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 |
| $ 11,480,000 | $ 7,668,332 |
There were no long-term purchases or sales of U.S Government Obligations during the fiscal year ended September 30, 2016.
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 Trust's tax positions taken on federal income tax returns for the open tax year/period of September 30, 2015 and September 30, 2016 and concluded that the Trust does not have a liability for uncertain tax positions. The Trust recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the Statement of Operations. During the year, the Trust did not incur any interest or penalties. The Trust identifies its major tax jurisdictions as U.S. Federal and New York State where the Trust makes its significant investments. The Trust does not expect that its assessment regarding unrecognized tax positions will change over the next twelve months. There are no income tax returns currently under examination.
Distributions during the year ended were characterized for tax purposes as follows:
| | September 30, 2016 | September 30, 2015 |
| Ordinary Income | $ 525,996 | $ - |
Forefront Income Trust
Notes to Financial Statements
At September 30, 2016, the tax-basis cost of investments and components of distributable earnings were as follows:
| Cost of Investments | $ | 10,816,885 |
| | | |
| Unrealized Appreciation | | - |
| Unrealized Depreciation | | - |
| Net Unrealized Appreciation | | - |
| | | |
| Undistributed Ordinary Income | | 532,389 |
| | | |
| Distributable Earnings | $ | 532,389 |
| | | | | | |
7. 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 Trust. In addition, in the normal course of business, the Trust entered into contracts with its service providers, on behalf of the Trust, and others that provide for general indemnifications. The Trust's maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Trust. The Trust expects the risk of loss to be remote.
8. Investments in Restricted Securities
Restricted securities include securities that have not been registered under the Securities Act of 1933. The Trust may invest in restricted securities that are consistent with the Trust's investment strategy. Investments in restricted securities are valued at fair value under procedures approved by the Trust's Board of Trustees. As of September 30, 2016, the Trust was invested in the following restricted securities:
Security | Initial Purchase Date | Shares | Cost | Value | % of Net Assets |
WHPEQ, LLC | 8/10/2015 | 2,500 | $2,500,000 | $2,500,000 | 22.14% |
Auto Funding Group, LLC | 10/20/2015 | 2,680,000 | $2,680,000 | $2,680,000 | 23.73% |
Banjo & Matilda, Inc. | 6/18/2015 | 500,000 | $500,000 | $500,000 | 4.43% |
Delta Energy Natchez, LLC | 10/14/2015 | 500,000 | $500,000 | $500,000 | 4.43% |
700 Atlantic Equities, LLC | 5/2/2016 | 500,000 | $500,000 | $500,000 | 4.43% |
1501 Sheepshead Bay Road Partners | 1/19/2016 | 250,000 | $250,000 | $250,000 | 2.21% |
2020 Eastchester Road, LLC | 4/19/2016 | 550,000 | $550,000 | $550,000 | 4.87% |
Blaichbridge Driggs, LLC | 3/11/2016 | 525,000 | $525,000 | $525,000 | 4.65% |
Broadridge LA, LLC | 12/3/2015 | 500,000 | $500,000 | $500,000 | 4.43% |
(Continued)
Forefront Income Trust
Notes to Financial Statements
WB Park Avenue, LLC | 10/30/2015 | 550,000 | $550,000 | $550,000 | 4.87% |
WB West 25th Street, LLC | 12/1/2015 | 550,000 | $550,000 | $550,000 | 4.87% |
WBSH Met Tower, LLC | 6/30/2015 | 750,000 | $750,000 | $750,000 | 6.64% |
Banjo & Matilda, Inc. Warrants | 3/2/2016 | 2,000,000 | $0 | $0 | 0.00% |
9. Principal Risks
The Trust in the normal course of business makes investments in financial instruments where the risk of potential loss exists due to changes in the market (market risk), or failure or inability of the counterparty to a transaction to perform (credit and counterparty risk). See below for a detailed description of select principal risks.
Market risk. The Trust's investments in financial instruments expose it to various risks such as, but not limited to, interest rate and equity. Interest rate risk is the risk that a fixed income investment's value will change due to a change in the absolute level of interest rates, in the spread between two rates, in the shape of the yield curve or in any other interest rate relationship. Such changes usually affect securities inversely and can be reduced by diversifying (for example, investing in fixed-income securities with different durations) or hedging (for example, through an interest rate swap).
Equity risk. Equity Risk is the risk that the market values of equities, such as common stocks or equity related investments may decline due to general market conditions, such a political or macroeconomic factors. Additionally, equities may decline in value due to specific factors affecting a related industry or industries. Equity securities and equity related investments generally have greater market price volatility than fixed income securities.
Credit and counterparty risks. The Trust is exposed to credit risk to counterparties with whom it transacts with and also bears the risk of settlement default. The Trust may lose money if the issuer or guarantor of a fixed income security is unable or unwilling to make timely principal and/or interest payments, or to otherwise honor its obligations.
10. Subsequent Events
In accordance with GAAP, the Trust has evaluated the need for disclosures and/or adjustments resulting from subsequent events through the date of issuance of these financial statements. Management has evaluated subsequent events through the issuance of these financial statements.
We have audited the accompanying statement of assets and liabilities of the Forefront Income Trust (the "Trust"), including the schedule of investments, as of September 30, 2016, and the related statements of operations, the statements of changes in net assets, statement of cash flows and the financial highlights for the year then ended. These financial statements and financial highlights are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Trust is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Trusts's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of September 30, 2016, by correspondence with the custodian and brokers. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Forefront Income Trust as of September 30, 2016, the results of its operations and its changes in its net assets, its cash flow and the financial highlights for the year then ended in conformity with accounting principles generally accepted in the United States of America.
The financial statements of Forefront Income Trust as of September 30, 2015, were audited by other auditors whose report dated November 30, 2015, expressed an unmodified opinion on those statements.
BrookWeiner L.L.C.
