UNITED STATES
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2014. |
OR
| ¨ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to . |
Commission File Number: 001-34765
Teucrium Commodity Trust
(Exact name of registrant as specified in its charter)
| Delaware | 61-1604335 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
232 Hidden Lake Road, Building A
Brattleboro, Vermont 05301
(Address of principal executive offices) (Zip code)
(802) 257-1617
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
x Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ¨ | Accelerated filer x |
| Non-accelerated filer ¨ | Smaller reporting company ¨ |
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes x No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date.
| Total Number of Outstanding Shares as of November 3, 2014 | |
| Teucrium Corn Fund | 4,750,004 |
| Teucrium WTI Crude Oil Fund | 50,002 |
| Teucrium Natural Gas Fund | 100,004 |
| Teucrium Sugar Fund | 200,004 |
| Teucrium Soybean Fund | 500,004 |
| Teucrium Wheat Fund | 2,375,004 |
| Teucrium Agricultural Fund | 50,002 |
TEUCRIUM COMMODITY TRUST
Table of Contents
| 2 |
Index to Financial Statements
| 3 |
TEUCRIUM
COMMODITY TRUST
COMBINED STATEMENTS OF ASSETS AND LIABILITIES
| September 30, 2014 | December 31, 2013 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Cash and cash equivalents | $ | 132,429,843 | $ | 58,707,245 | ||||
| Interest receivable | 7,834 | 4,100 | ||||||
| Other assets | 721,742 | 382,782 | ||||||
| Equity in trading accounts: | ||||||||
| Commodity futures contracts | 3,460 | 171,580 | ||||||
| Due from broker | 30,590,984 | 11,768,320 | ||||||
| Total equity in trading accounts | 30,594,444 | 11,939,900 | ||||||
| Total assets | $ | 163,753,863 | $ | 71,034,027 | ||||
| Liabilities | ||||||||
| Management fee payable to Sponsor | 110,270 | 53,100 | ||||||
| Other liabilities | 69,015 | 55,609 | ||||||
| Equity in trading accounts: | ||||||||
| Commodity futures contracts | 22,047,265 | 5,960,806 | ||||||
| Due to broker | — | 97,602 | ||||||
| Total equity in trading accounts | 22,047,265 | 6,058,408 | ||||||
| Total liabilities | 22,226,550 | 6,167,117 | ||||||
| Net assets | $ | 141,527,313 | $ | 64,866,910 | ||||
The accompanying notes are an integral part of these financial statements.
| 4 |
TEUCRIUM
COMMODITY TRUST
COMBINED SCHEDULE OF INVESTMENTS
September 30, 2014
(Unaudited)
| Percentage of | ||||||||||||
| Description: Assets | Fair Value | Net Assets | Principal/Shares | |||||||||
| Cash equivalents | ||||||||||||
| United States Treasury obligations | ||||||||||||
| U.S. Treasury bills, 0.0125%, due December 4, 2014 (cost $9,999,684) | $ | 9,999,820 | 7.07 | % | 10,000,000 | |||||||
| Money market funds | ||||||||||||
| Dreyfus Cash Management - Institutional (cost $122,430,023) | 122,430,023 | 86.51 | 122,430,023 | |||||||||
| Total cash equivalents | $ | 132,429,843 | 93.58 | % | ||||||||
| Notional Amount | ||||||||||||
| (Long Exposure) | ||||||||||||
| Commodity futures contracts | ||||||||||||
| United States natural gas futures contracts | ||||||||||||
| NYMEX natural gas futures NOV15 (7 contracts) | $ | 430 | 0.00 | % | $ | 280,840 | ||||||
| United States WTI crude oil futures contracts | ||||||||||||
| WTI crude oil futures DEC14 (8 contracts) | 1,950 | 0.00 | 722,160 | |||||||||
| WTI crude oil futures DEC15 (8 contracts) | 1,080 | 0.00 | 696,480 | |||||||||
| Total commodity futures contracts | $ | 3,460 | 0.00 | % | $ | 1,699,480 | ||||||
| Percentage of | Notional Amount | |||||||||||
| Description: Liabilities | Fair Value | Net Assets | (Long Exposure) | |||||||||
| Commodity futures contracts | ||||||||||||
| United States corn futures contracts | ||||||||||||
| CBOT corn futures MAR15 (2,190 contracts) | $ | 5,672,712 | 4.01 | % | $ | 36,518,250 | ||||||
| CBOT corn futures MAY15 (1,832 contracts) | 1,967,987 | 1.39 | 31,327,200 | |||||||||
| CBOT corn futures DEC15 (1,992 contracts) | 8,949,038 | 6.32 | 36,528,300 | |||||||||
| United States natural gas futures contracts | ||||||||||||
| NYMEX natural gas futures MAR15 (7 contracts) | 30,030 | 0.02 | 290,850 | |||||||||
| NYMEX natural gas futures APR15 (8 contracts) | 10,800 | 0.01 | 309,840 | |||||||||
| NYMEX natural gas futures OCT15 (8 contracts) | 1,900 | 0.00 | 313,760 | |||||||||
| United States WTI crude oil futures contracts | ||||||||||||
| WTI crude oil futures JUN15 (7 contracts) | 30,550 | 0.02 | 616,210 | |||||||||
| United States soybean futures contracts | ||||||||||||
| CBOT soybean futures JAN15 (33 contracts) | 364,975 | 0.26 | 1,520,063 | |||||||||
| CBOT soybean futures MAR15 (27 contracts) | 77,875 | 0.06 | 1,255,163 | |||||||||
| CBOT soybean futures NOV15 (33 contracts) | 284,500 | 0.20 | 1,546,875 | |||||||||
| United States sugar futures contracts | ||||||||||||
| ICE sugar futures MAY15 (49 contracts) | 134,400 | 0.09 | 915,947 | |||||||||
| ICE sugar futures JUL15 (42 contracts) | 12,365 | 0.01 | 795,917 | |||||||||
| ICE sugar futures MAR16 (45 contracts) | 70,470 | 0.05 | 910,728 | |||||||||
| United States wheat futures contracts | ||||||||||||
| CBOT wheat futures MAR15 (387 contracts) | 1,347,600 | 0.95 | 9,491,175 | |||||||||
| CBOT wheat futures MAY15 (325 contracts) | 654,338 | 0.46 | 8,104,688 | |||||||||
| CBOT wheat futures DEC15 (355 contracts) | 2,437,725 | 1.72 | 9,438,563 | |||||||||
| Total commodity futures contracts | $ | 22,047,265 | 15.57 | % | $ | 139,883,529 | ||||||
| Shares | ||||||||||||
| Exchange-traded funds* | ||||||||||||
| Teucrium Corn Fund | $ | 376,964 | 0.27 | % | 16,533 | |||||||
| Teucrium Soybean Fund | 379,006 | 0.27 | 19,781 | |||||||||
| Teucrium Wheat Fund | 357,196 | 0.25 | 33,037 | |||||||||
| Teucrium Sugar Fund | 410,199 | 0.29 | 31,124 | |||||||||
| Total exchange-traded funds (cost $2,462,669) | $ | 1,523,365 | 1.08 | % | ||||||||
*The investments in securities, at fair value are not included on the combined statements of assets and liabilities due to the fact that these represent holdings of the Underlying Funds owned by the Teucrium Agricultural Fund, which are included as shares outstanding of the Underlying Funds.
The accompanying notes are an integral part of these financial statements.
| 5 |
TEUCRIUM COMMODITY TRUST
COMBINED SCHEDULE OF INVESTMENTS
December 31, 2013
| Percentage | ||||||||||||
| Description: Assets | Fair Value | of Net Assets | Shares | |||||||||
| Cash equivalents | ||||||||||||
| Money market funds | ||||||||||||
| Dreyfus Cash Management - Institutional (cost $50,707,245) | $ | 58,707,245 | 90.50 | % | 58,707,245 | |||||||
| Notional Amount | ||||||||||||
| (Long Exposure) | ||||||||||||
| Commodity futures contracts | ||||||||||||
| United States natural gas futures contracts | ||||||||||||
| NYMEX natural gas futures MAR14 (10 contracts) | $ | 21,140 | 0.03 | % | $ | 419,300 | ||||||
| NYMEX natrual gas futures APR14 (11 contracts) | 17,400 | 0.03 | 451,550 | |||||||||
| NYMEX natrual gas futures OCT14 (11 contracts) | 23,670 | 0.04 | 457,820 | |||||||||
| NYMEX natrual gas futures NOV14 (11 contracts) | 21,840 | 0.03 | 462,440 | |||||||||
| United States WTI crude oil futures contracts | ||||||||||||
| WTI crude oil futures JUN14 (7 contracts) | 61,910 | 0.10 | 680,960 | |||||||||
| WTI crude oil futures DEC14 (7 contracts) | 25,620 | 0.04 | 649,040 | |||||||||
| Total commodity futures contracts | $ | 171,580 | 0.27 | % | $ | 3,121,110 | ||||||
| Percentage | Notional Amount | |||||||||||
| Description: Liabilities | Fair Value | of Net Assets | (Long Exposure) | |||||||||
| Commodity futures contracts | ||||||||||||
| United States corn futures contracts | ||||||||||||
| CBOT corn futures MAY14 (772 contracts) | $ | 1,831,300 | 2.82 | % | $ | 16,607,650 | ||||||
| CBOT corn futures JUL14 (652 contracts) | 482,913 | 0.74 | 14,246,200 | |||||||||
| CBOT corn futures DEC14 (739 contracts) | 2,570,575 | 3.96 | 16,636,738 | |||||||||
| United States WTI crude oil futures contracts | ||||||||||||
| WTI crude oil futures DEC15 (8 contracts) | 5,080 | 0.01 | 690,320 | |||||||||
| United States soybean futures contracts | ||||||||||||
| CBOT soybean futures MAR14 (22 contracts) | 58,288 | 0.09 | 1,421,750 | |||||||||
| CBOT soybean futures MAY14 (19 contracts) | 4,775 | 0.01 | 1,213,150 | |||||||||
| CBOT Soybean futures NOV14 (25 contracts) | 125,800 | 0.19 | 1,418,750 | |||||||||
| United States sugar futures contracts | ||||||||||||
| ICE sugar futures MAY14 (47 contracts) | 60,827 | 0.09 | 871,718 | |||||||||
| ICE sugar futures JUL14 (40 contracts) | 38,976 | 0.06 | 749,504 | |||||||||
| ICE sugar futures MAR15 (43 contracts) | 83,597 | 0.13 | 854,840 | |||||||||
| United States wheat futures contracts | ||||||||||||
| CBOT wheat futures MAY14 (81 contracts) | 208,100 | 0.32 | 2,478,600 | |||||||||
| CBOT wheat futures JUL14 (69 contracts) | 84,750 | 0.13 | 2,127,788 | |||||||||
| CBOT wheat futures DEC14 (77 contracts) | 405,825 | 0.63 | 2,465,925 | |||||||||
| Total commodity futures contracts | $ | 5,960,806 | 9.18 | % | $ | 61,782,933 | ||||||
| Shares | ||||||||||||
| Exchange-traded funds* | ||||||||||||
| Teucrium Corn Fund | $ | 473,707 | 0.73 | % | 15,458 | |||||||
| Teucrium Soybean Fund | 466,670 | 0.72 | 20,331 | |||||||||
| Teucrium Wheat Fund | 459,782 | 0.71 | 30,987 | |||||||||
| Teucrium Sugar Fund | 484,838 | 0.75 | 34,374 | |||||||||
| Total exchange-traded funds (cost $2,585,338) | $ | 1,884,997 | 2.91 | % | ||||||||
*The investments in securities, at fair value are not included on the combined statements of assets and liabilities due to the fact that these represent holdings of the Underlying Funds owned by the Teucrium Agricultural Fund, which are included as shares outstanding of the Underlying Funds.
The accompanying notes are an integral part of these financial statements.
| 6 |
TEUCRIUM
COMMODITY TRUST
COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
| Three months ended | Three months ended | Nine months ended | Nine months ended | |||||||||||||
| September 30, 2014 | September 30, 2013 | September 30, 2014 | September 30, 2013 | |||||||||||||
| Income | ||||||||||||||||
| Realized and unrealized gain (loss) on trading of commodity futures contracts: | ||||||||||||||||
| Realized gain (loss) on commodity futures contracts | $ | (19,450,244 | ) | $ | (4,229,448 | ) | $ | (14,349,410 | ) | $ | (9,312,668 | ) | ||||
| Net change in unrealized appreciation or depreciation on commodity futures contracts | (10,588,412 | ) | (1,167,783 | ) | (16,254,579 | ) | (2,106,891 | ) | ||||||||
| Interest Income | 8,463 | 6,881 | 31,284 | 23,703 | ||||||||||||
| Realized gain on securities | - | 70 | - | 70 | ||||||||||||
| Total loss | (30,030,193 | ) | (5,390,280 | ) | (30,572,705 | ) | (11,395,786 | ) | ||||||||
| Expenses | ||||||||||||||||
| Management fees | 315,995 | 166,410 | 877,945 | 464,328 | ||||||||||||
| Professional fees | 267,140 | 346,061 | 620,272 | 801,372 | ||||||||||||
| Distribution and marketing fees | 496,661 | 433,922 | 1,269,569 | 1,352,705 | ||||||||||||
| Custodian fees and expenses | 43,310 | 36,256 | 121,314 | 107,800 | ||||||||||||
| Business permits and licenses fees | 17,520 | 58,635 | 150,141 | 134,646 | ||||||||||||
| General and administrative expenses | 55,147 | 79,047 | 215,625 | 174,306 | ||||||||||||
| Brokerage commissions | 52,243 | 16,809 | 99,845 | 66,619 | ||||||||||||
| Other expenses | 26,261 | 16,755 | 56,080 | 50,000 | ||||||||||||
| Total expenses | 1,274,277 | 1,153,895 | 3,410,791 | 3,151,776 | ||||||||||||
| Expenses waived by the Sponsor | (181,352 | ) | (209,121 | ) | (408,686 | ) | (675,571 | ) | ||||||||
| Reimbursement of expenses previously waived | 8,559 | 174,269 | 379,753 | 364,123 | ||||||||||||
| Total expenses, net | 1,101,484 | 1,119,043 | 3,381,858 | 2,840,328 | ||||||||||||
| Net (loss) income | (31,131,677 | ) | (6,509,323 | ) | (33,954,563 | ) | (14,236,114 | ) | ||||||||
The accompanying notes are an integral part of these financial statements.
| 7 |
TEUCRIUM
COMMODITY TRUST
COMBINED STATEMENTS OF CHANGES IN NET ASSETS
(Unaudited)
| Nine months ended | Nine months ended | |||||||
| September 30, 2014 | September 30, 2013 | |||||||
| Operations | ||||||||
| Net loss | $ | (33,954,563 | ) | $ | (14,236,114 | ) | ||
| Capital transactions | ||||||||
| Issuance of Shares | 172,806,601 | 61,512,730 | ||||||
| Change in cost of shares of the Underlying Funds aquired by Teucrium Agricultural Fund | 122,669 | 79,976 | ||||||
| Realized loss on shares of the Underlying Funds sold by Teucrium Agricultural Fund | (113,361 | ) | (68,970 | ) | ||||
| Redemption of Shares | (62,200,943 | ) | (32,885,850 | ) | ||||
| Total capital transactions | 110,614,966 | 28,637,886 | ||||||
| Net change in net assets | 76,660,403 | 14,401,772 | ||||||
| Net assets, beginning of period | 64,866,910 | 56,897,696 | ||||||
| Net assets, end of period | $ | 141,527,313 | $ | 71,299,468 | ||||
The accompanying notes are an integral part of these financial statements.
| 8 |
TEUCRIUM
COMMODITY TRUST
COMBINED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine months ended | Nine months ended | |||||||
| September 30, 2014 | September 30, 2013 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (33,954,563 | ) | $ | (14,236,114 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Net change in unrealized appreciation or depreciation on commodity futures contracts | 16,254,579 | 2,106,891 | ||||||
| Realized loss on shares of the Underlying Funds sold by Teucrium Agricultural Fund excluded from net loss | (113,361 | ) | (68,970 | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Net purchases and sales of Underlying Funds acquired by Teucrium Agricultural Fund | 122,669 | 79,976 | ||||||
| Due from broker | (18,822,664 | ) | (3,074,860 | ) | ||||
| Interest receivable | (3,734 | ) | (988 | ) | ||||
| Other assets | (338,960 | ) | (235,663 | ) | ||||
| Due to broker | (97,602 | ) | 92,567 | |||||
| Management fee payable to Sponsor | 57,170 | 3,793 | ||||||
| Other liabilities | 13,406 | 68,885 | ||||||
| Net cash used in operating activities | (36,883,060 | ) | (15,264,483 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from sale of Shares | 172,806,601 | 61,512,730 | ||||||
| Redemption of Shares | (62,200,943 | ) | (32,885,850 | ) | ||||
| Net cash provided by financing activities | 110,605,658 | 28,626,880 | ||||||
| . | ||||||||
| Net change in cash and cash equivalents | 73,722,598 | 13,362,397 | ||||||
| Cash and cash equivalents, beginning of period | 58,707,245 | 52,575,291 | ||||||
| Cash and cash equivalents, end of period | $ | 132,429,843 | $ | 65,937,688 | ||||
The accompanying notes are an integral part of these financial statements.
| 9 |
NOTES
TO COMBINED FINANCIAL STATEMENTS
September 30, 2014
(Unaudited)
Note 1 – Organization and Operation
Teucrium Commodity Trust (“Trust”), a Delaware statutory trust organized on September 11, 2009, is a series trust consisting of seven series: Teucrium Corn Fund (“CORN”), Teucrium WTI Crude Oil Fund (“CRUD”), Teucrium Natural Gas Fund (“NAGS”), Teucrium Sugar Fund (“CANE”), Teucrium Soybean Fund (“SOYB”), Teucrium Wheat Fund (“WEAT”), and Teucrium Agricultural Fund (“TAGS”). All these series of the Trust are collectively referred to as the “Funds” and singularly as the “Fund.” The Funds issue common units, called the “Shares,” representing fractional undivided beneficial interests in a Fund. The Trust and the Funds operate pursuant to the Trust’s Second Amended and Restated Declaration of Trust and Trust Agreement (the “Trust Agreement”).
On June 5, 2010, the initial Form S-1 for CORN was declared effective by the U.S. Securities and Exchange Commission (“SEC”). On June 8, 2010, four Creation Baskets for CORN were issued representing 200,000 shares and $5,000,000. CORN began trading on the New York Stock Exchange (“NYSE”) Arca on June 9, 2010.
On October 22, 2010, the initial Forms S-1 for NAGS and CRUD were declared effective by the SEC. On January 31, 2011, four Creation Baskets for NAGS were issued representing 200,000 shares and $5,000,000. NAGS began trading on the NYSE Arca on February 1, 2011. On February 22, 2011, four Creation Baskets for CRUD were issued representing 100,000 shares and $5,000,000. CRUD began trading on the NYSE Arca on February 23, 2011.
On June 17, 2011, the initial Forms S-1 for CANE, SOYB, and WEAT were declared effective by the SEC. On September 16, 2011, two Creation Baskets were issued for each Fund, representing 100,000 shares and $2,500,000, for CANE, SOYB, and WEAT. On September 19, 2011, CANE, SOYB, and WEAT started trading on the NYSE Arca.
On February 10, 2012, the Form S-1 for TAGS was declared effective by the SEC. On March 27, 2012, six Creation Baskets for TAGS were issued representing 300,000 shares and $15,000,000. TAGS began trading on the NYSE Arca on March 28, 2012.
The specific investment objective of each Fund and information regarding the organization and operation of each Fund are included in each Fund’s financial statements and accompanying notes, as well as in other sections of this Form 10-Q filing. In general, the investment objective of each Fund is to have the daily changes in percentage terms of its Shares’ Net Asset Value (“NAV”) reflect the daily changes in percentage terms of a weighted average of the closing settlement prices for certain Futures Contracts for the commodity specified for that Fund. The investment objective of TAGS is to have the daily changes in percentage terms of NAV of its common units (“Shares”) reflect the daily changes in percentage terms of a weighted average (the “Underlying Fund Average”) of the NAVs per share of four other commodity pools that are series of the Trust and are sponsored by the Sponsor: CORN, WEAT, SOYB, and CANE (collectively, the “Underlying Funds”). The Underlying Fund Average will have a weighting of 25% to each Underlying Fund, and the Fund’s assets will be rebalanced to maintain the approximate 25% allocation to each Underlying Fund.
The accompanying unaudited financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the SEC and, therefore, do not include all information and footnote disclosures required under accounting principles generally accepted in the United States of America (“GAAP”). The financial information included herein is unaudited; however, such financial information reflects all adjustments which are, in the opinion of management, necessary for the fair presentation of the Trust’s financial statements for the interim period. It is suggested that these interim financial statements be read in conjunction with the financial statements and related notes included in the Trust’s Annual Report on Form 10-K, as applicable. The operating results for the nine months ended September 30, 2014 are not necessarily indicative of the results to be expected for the full year ending December 31, 2014.
Note 2 – Principal Contracts and Agreements
In its capacity as the Custodian for the Funds, the Custodian, currently the Bank of New York Mellon, holds for each Fund its Treasury Securities, cash and/or cash equivalents pursuant to a custodial agreement. The Custodian is also the registrar and transfer agent for each Fund’s Shares. In addition, the Custodian also serves as Administrator for each Fund, performing certain administrative and accounting services and preparing certain SEC and CFTC reports on behalf of the Fund. The Custodian also acts as a broker for some, but not all, of the equity transactions related to the purchase and sale of the Underlying Funds for TAGS. For these services, the Custodian receives: for custody services: 0.0075% of average gross assets up to $1 billion, and 0.0050% of average gross assets over $1 billion, annually, plus certain per-transaction charges; for transfer agency services: 0.0075% of average gross assets annually; and for administrative services: 0.05% of average gross assets up to $1 billion, 0.04% of average gross assets between $1 billion and $3 billion, and 0.03% of average gross assets over $3 billion, annually. A combined minimum annual fee of up to $125,000 for custody, transfer agency and administrative services per Fund can be assessed.
| 10 |
The Sponsor and the Trust employ Foreside Fund Services, LLC as the Distributor for the Funds. The Distributor receives, for its services as distributor for the Funds. The Distribution Services Agreement among the Distributor, the Sponsor and the Trust calls for the Distributor to work with the Custodian in connection with the receipt and processing of orders for Creation Baskets and Redemption Baskets and the review and approval of all Fund sales literature and advertising materials. The Distributor and the Sponsor have also entered into a Securities Activities and Service Agreement (the “SASA”) under which certain employees and officers of the Sponsor are licensed as registered representatives or registered principals of the Distributor, under FINRA rules. For its services as the Distributor, Foreside receives a fee of 0.01% of the Fund’s average daily net assets and an aggregate annual fee of $100,000 for all Teucrium Funds, along with certain expense reimbursements. For its services under the SASA, Foreside receives a fee of $5,000 per registered representative and $1,000 per registered location.
Currently, Newedge USA, LLC (“Newedge USA”) serves as each Fund’s clearing broker to execute and clear the Fund’s futures and provide other brokerage-related services. For TAGS, Newedge will serve as that Fund’s clearing broker to execute and clear futures transactions. Newedge USA is a futures commission merchant and broker dealer registered with the U.S. Commodity Futures Trading Commission (“CFTC”) and the U.S. Securities and Exchange Commission (“SEC”), and is a member of FINRA. Newedge USA is a clearing member of all principal futures exchanges located in the United States as well as a member of the Chicago Board Options Exchange, International Securities Exchange, New York Stock Exchange, Options Clearing Corporation, and Government Securities Clearing Corporation. For Corn, Soybean, Sugar and Wheat Futures Contracts Newedge is paid $8.00 per round turn, and WTI Crude Oil or Natural Gas Futures Contracts Newedge is paid $6.00 per round turn.
The sole Trustee of the Trust is Wilmington Trust Company, a Delaware banking corporation. The Trustee will accept service of legal process on the Trust in the State of Delaware and will make certain filings under the Delaware Statutory Trust Act. For its services, the Trustee receives an annual fee of $3,300 from the Trust.
Note 3 – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) as detailed in the Financial Accounting Standards Board’s Accounting Standards Codification and include the accounts of the Trust, CORN, NAGS, CRUD, CANE, SOYB, WEAT and TAGS. For the periods represented by the financial statements herein the operations of the Trust contain the results of CORN, NAGS, CRUD, SOYB, CANE, WEAT, and TAGS except for eliminations for TAGS as explained below for the months during which each Fund was in operation.
Given the investment objective of TAGS as described in Note 1 above, TAGS will buy, sell and hold, as part of its normal operations, shares of the four Underlying Funds. The Trust eliminates the shares of the other series of the Trust owned by the Teucrium Agricultural Fund from its combined statements of assets and liabilities. The Trust eliminates the net change in unrealized appreciation or depreciation on securities owned by the Teucrium Agricultural Fund from its combined statements of operations. Upon the sale of the Underlying Funds by the Teucrium Agricultural Fund, the Trust includes any realized gain or loss in its combined statements of changes in net assets.
Correction of immaterial error in previously issued financial statements
Effective with the period ended June 30, 2014, expenses for the current and comparative periods are presented both gross and net of any expenses waived by or paid by the Sponsor that would have been incurred by the Funds (“expenses waived by the Sponsor”). In addition, certain expenses paid by the Sponsor on behalf of the Funds for the years ended December 31, 2012 and 2013 that were subject to possible recovery from the Funds in the following year, as had been previously disclosed in aggregate for the Trust in the Form 10-K for 2012 and 2013, have also been included in expenses and waived/reimbursed expenses in the period incurred by the Sponsor. These expenses, if reimbursed by the Funds to the Sponsor in 2013 or 2014 are then presented as a reimbursement of expenses previously waived. “Total expenses, net”, which is after the impact of any expenses waived by or reimbursed to the Sponsor, are presented in the same manner as previously reported. There is, therefore, no impact to, or change in the Net gain or Net loss in any period for the Trust and each Fund as a result of this change in presentation.
Revenue Recognition
Commodity futures contracts are recorded on the trade date. All such transactions are recorded on the identified cost basis and marked to market daily. Unrealized appreciation or depreciation on commodity futures contracts are reflected in the statements of operations as the difference between the original contract amount and the fair market value as of the last business day of the year or as of the last date of the financial statements. Changes in the appreciation or depreciation between periods are reflected in the statements of operations. Interest on cash equivalents and deposits with the Futures Commission Merchant are recognized on the accrual basis. The
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Funds earn interest on its assets denominated in U.S. dollars on deposit with the Futures Commission Merchant. In addition, the Funds earn interest on funds held at the custodian at prevailing market rates for such investments.
Brokerage Commissions
Brokerage commissions on all open commodity futures contracts are accrued on a full-turn basis.
Income Taxes
The Trust, as a Delaware statutory trust, is considered a trust for federal tax purposes and is, thus, a pass through entity. For tax purposes, the Funds will be treated as partnerships. Therefore, the Funds do not record a provision for income taxes because the partners report their share of a Fund’s income or loss on their income tax returns. The financial statements reflect the Funds’ transactions without adjustment, if any, required for income tax purposes.
The Funds are required to determine whether a tax position is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The Funds file income tax returns in the U.S. federal jurisdiction, and may file income tax returns in various U.S. states and foreign jurisdictions. For all tax years 2011 to 2013, the Funds remain subject to income tax examinations by major taxing authorities. The tax benefit recognized is measured as the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. De-recognition of a tax benefit previously recognized results in the Funds recording a tax liability that reduces net assets. Based on their analysis, the Funds have determined that they have not incurred any liability for unrecognized tax benefits as of September 30, 2014 and December 31, 2013. However, the Funds’ conclusions regarding this policy may be subject to review and adjustment at a later date based on factors including, but not limited to, ongoing analysis of and changes to tax laws, regulations, and interpretations thereof.
The Funds recognize interest accrued related to unrecognized tax benefits and penalties related to unrecognized tax benefits in income tax fees payable, if assessed. No interest expense or penalties have been recognized as of and for the periods ended September 30, 2014 and 2013.
The Funds may be subject to potential examination by U.S. federal, U.S. state, or foreign jurisdictional authorities in the area of income taxes. These potential examinations may include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions, and compliance with U.S. federal, U.S. state and foreign tax laws. The Funds’ management does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months.
Creations and Redemptions
Authorized Purchasers may purchase Creation Baskets from each Fund. The amount of the proceeds required to purchase a Creation Basket will be equal to the NAV of the shares in the Creation Basket determined as of 4:00 p.m. New York time on the day the order to create the basket is properly received.
Authorized Purchasers may redeem shares from each Fund only in blocks of shares called “Redemption Baskets.” The amount of the redemption proceeds for a Redemption Basket will be equal to the NAV of the shares in the Redemption Basket determined as of 4:00 p.m. New York time on the day the order to redeem the basket is properly received.
Each Fund receives or pays the proceeds from shares sold or redeemed within three business days after the trade date of the purchase or redemption. The amounts due from Authorized Purchasers are reflected in the statements of assets and liabilities as receivable for shares sold. Amounts payable to Authorized Purchasers upon redemption are reflected in the statements of assets and liabilities as payable for shares redeemed.
There are a minimum number of baskets and associated shares specified for each Fund in the Fund’s respective prospectus, as amended from time to time. Once the minimum number of baskets is reached, there can be no more redemptions until there has been a creation basket. These minimum levels are as follows:
CORN: 50,000 shares representing 2 baskets
NAGS: 100,000 shares representing 2 baskets (at minimum level as of September 30, 2014 and June 30, 2014)
CRUD: 50,000 shares representing 2 baskets (at minimum level as of September 30, 2014 and December 31, 2013)
SOYB: 50,000 shares representing 2 baskets
CANE: 50,000 shares representing 2 baskets
WEAT: 50,000 shares representing 2 baskets
TAGS: 50,000 shares representing 2 baskets (at minimum level as of September 30, 2014 and December 31, 2013)
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Cash Equivalents
Cash equivalents are highly-liquid investments with original maturity dates of 90 days or less when acquired. The Trust reported its cash equivalents in the statements of assets and liabilities at market value, or at carrying amounts that approximate fair value, because of their highly-liquid nature and short-term maturities. Each Fund which a series of the Trust has the balance of its assets on deposit with banks. Assets deposited with the bank may, at times, exceed federally insured limits. The Trust had a balance of $122,430,023 and $58,707,245 in money market funds at September 30, 2014 and December 31, 2013, respectively; these balances are included in cash and cash equivalents on the statements of assets and liabilities. The Trust also had investments in United States Treasury Bills with a maturity of 90 days or less when acquired with a fair value of $9,999,820 on September 30, 2014; these treasuries are recorded on the trade date.
Due from/to Broker
The amount recorded by the Trust for the amount due from and to the clearing broker includes, but is not limited to, cash held by the broker, amounts payable to the clearing broker related to open transactions and payables for commodities futures accounts liquidating to an equity balance on the clearing broker’s records.
Margin is the minimum amount of funds that must be deposited by a commodity interest trader with the trader’s broker to initiate and maintain an open position in futures contracts. A margin deposit acts to assure the trader’s performance of the futures contracts purchased or sold. Futures contracts are customarily bought and sold on initial margin that represents a very small percentage of the aggregate purchase or sales price of the contract. Because of such low margin requirements, price fluctuations occurring in the futures markets may create profits and losses that, in relation to the amount invested, are greater than are customary in other forms of investment or speculation. As discussed below, adverse price changes in the futures contract may result in margin requirements that greatly exceed the initial margin. In addition, the amount of margin required in connection with a particular futures contract is set from time to time by the exchange on which the contract is traded and may be modified from time to time by the exchange during the term of the contract. Brokerage firms, such as the Funds’ clearing brokers, carrying accounts for traders in commodity interest contracts generally require higher amounts of margin as a matter of policy to further protect themselves. Over-the-counter trading generally involves the extension of credit between counterparties, so the counterparties may agree to require the posting of collateral by one or both parties to address credit exposure.
When a trader purchases an option, there is no margin requirement; however, the option premium must be paid in full. When a trader sells an option, on the other hand, he or she is required to deposit margin in an amount determined by the margin requirements established for the underlying interest and, in addition, an amount substantially equal to the current premium for the option. The margin requirements imposed on the selling of options, although adjusted to reflect the probability that out-of-the-money options will not be exercised, can in fact be higher than those imposed in dealing in the futures markets directly. Complicated margin requirements apply to spreads and conversions, which are complex trading strategies in which a trader acquires a mixture of options positions and positions in the underlying interest.
Ongoing or “maintenance” margin requirements are computed each day by a trader’s clearing broker. When the market value of a particular open futures contract changes to a point where the margin on deposit does not satisfy maintenance margin requirements, a margin call is made by the broker. If the margin call is not met within a reasonable time, the broker may close out the trader’s position. With respect to the Funds’ trading, the Funds (and not their shareholders personally) are subject to margin calls.
Finally, many major U.S. exchanges have passed certain cross margining arrangements involving procedures pursuant to which the futures and options positions held in an account would, in the case of some accounts, be aggregated, and margin requirements would be assessed on a portfolio basis, measuring the total risk of the combined positions.
Due from/to Broker for Securities Transactions
Due from/to broker for investments in securities are securities transactions pending settlement. The Trust and the Funds are subject to credit risk to the extent any broker with whom it conducts business is unable to fulfill contractual obligations on its behalf. The management of the Trust and the Funds monitors the financial condition of such brokers and does not anticipate any losses from these counterparties. Since the inception of the Fund, the principal broker through which the Trust and TAGS clear securities transactions for TAGS is the Bank of New York Mellon Capital Markets.
Sponsor Fee, Allocation of Expenses and Related Party Transactions
The Sponsor is responsible for investing the assets of the Funds in accordance with the objectives and policies of each Fund. In addition, the Sponsor arranges for one or more third parties to provide administrative, custodial, accounting, transfer agency and other necessary services to the Trust and the Funds, including services directly attributable to the Trust and the Funds such as accounting, financial reporting, regulatory compliance and trading activities, which the Sponsor elected not to outsource. For the performance of this service, the Funds, except for TAGS which has no such fee, are contractually obligated to pay a monthly management fee to the Sponsor, based on average daily net assets, at a rate equal to 1.00% per annum.
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The Funds pay for all brokerage fees, taxes and other expenses, including licensing fees for the use of intellectual property, registration or other fees paid to the SEC, the Financial Industry Regulatory Authority (“FINRA”), formerly the National Association of Securities Dealers, or any other regulatory agency in connection with the offer and sale of subsequent Shares, after its initial registration, and all legal, accounting, printing and other expenses associated therewith. The Funds also pay the fees and expenses associated with the Trust’s tax accounting and reporting requirements. Certain aggregate expenses common to all Funds are allocated by the Sponsor to the respective funds based on activity drivers deemed most appropriate by the Sponsor for such expenses, including but not limited to relative assets under management and creation and redeem order activity. These aggregate common expenses include, but are not limited to, legal, auditing, accounting and financial reporting, tax-preparation, regulatory compliance, trading activities, and insurance costs, as well as fees paid to the Distributor, which are included in the related line item in the combined statements of operations. A portion of these aggregate common expenses are related to the Sponsor or related parties of principals of the Sponsor; these are necessary services to the Trust and the Funds, which are primarily the cost of performing accounting and financial reporting, regulatory compliance, and trading activities that are directly attributable to the Trust and the Funds. For the three months ended September 30, such expenses totaled approximately $293,000 in 2014 and $173,000 in 2013; of these amounts, approximately $19,000 and $12,000, respectively, were waived by the Sponsor. For the nine months ended September 30, such expenses were approximately $1,066,000 in 2014 and $797,000 in 2013; of these amounts, approximately $62,000 and $69,000, respectively, were waived by the Sponsor. All asset-based fees and expenses for the Funds are calculated on the prior day’s net assets.
The Sponsor has the ability to elect to pay certain expenses on behalf of the Fund or waive the management fee. This election is subject to change by the Sponsor, at its discretion. Expenses paid by the Sponsor and Management fees waived by the Sponsor are, if applicable, presented as waived expenses in the Statements of Operations for each Fund.
For the nine months ended September 30, 2014 there were $408,686 of expenses that had been identified on the Statements of Operations of the Funds as expenses that were waived by the Sponsor and subject to recovery in future periods. These were specifically: $89,249 for NAGS, $90,646 for CRUD, $50,244 for SOYB, and $105,474 for CANE, and $73,073 for TAGS. The Sponsor has determined that there will be no recovery sought for these amounts as of September 30, 2014 in any future period.
For the year ended December 31, 2013, there were approximately $590,000 of expenses recorded in the financial statements of the Sponsor which were subject to reimbursement by the Funds in 2014. At that time, the Sponsor had determined that recovery of the expense amounts was not probable. For the three and nine months ended September 30, 2014, asset growth and other changes experienced by certain Funds enabled the Sponsor to claim reimbursement, respectively, of $8,559 and $379,753 from those Funds, specifically, $6,997 and $308,312 from CORN, $227 and $25,139 from SOYB and $1,335 and $46,302 from WEAT. These amounts are reflected in the combined statements of operations for the three and nine months ended September 30, 2014 as a reimbursement of a previously waived expense for the Funds from which there was recovery in 2014. There was no recovery of amounts from the other Funds. There is no remaining balance subject to possible reimbursement in 2014.
For the year ended December 31, 2012, there were approximately $560,000 of expenses recorded in the financial statements of the Sponsor which were subject to reimbursement by the Funds in 2013. At that time, the Sponsor had determined that recovery of the expense amounts was not probable. For the three and nine months ended September 30, 2013, asset growth and other changes experienced by certain Funds enabled the Sponsor to claim reimbursement, respectively of $174,269 and $364,123 from those Funds, specifically $133,971 and $291,807 from CORN, $20,149 and $36,796 from SOYB and $20,149 and $35,520 from WEAT. These amounts are reflected in the combined statements of operations for the three and nine months ended September 30, 2013 as a reimbursement of previously waived expenses for the Funds from which there was recovery in 2013. There was no recovery of amounts from the other Funds.
On July 29, 2011, the Sponsor filed a Form 8-K with the SEC which stated that effective August 1, 2011, the Sponsor has agreed to voluntarily cap the management fee and expenses of NAGS at 1.5% per annum of the daily net assets of the Fund.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of the revenue and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value - Definition and Hierarchy
In accordance with U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.
In determining fair value, the Trust uses various valuation approaches. In accordance with U.S. GAAP, a fair value hierarchy for inputs is used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by
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requiring that the most observable inputs be used when available. Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Trust. Unobservable inputs reflect the Trust’s assumptions about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy is categorized into three levels based on the inputs as follows:
Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Trust has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 securities. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these securities does not entail a significant degree of judgment.
Level 2 - Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
The availability of valuation techniques and observable inputs can vary from security to security and is affected by a wide variety of factors including, the type of security, whether the security is new and not yet established in the marketplace, and other characteristics particular to the transaction. 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. Those estimated values do not necessarily represent the amounts that may be ultimately realized due to the occurrence of future circumstances that cannot be reasonably determined. Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower than the values that would have been used had a ready market for the securities existed. Accordingly, the degree of judgment exercised by the Trust and the Funds in determining fair value is greatest for securities categorized in Level 3. In certain cases, 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 in its entirety falls, is determined based on the lowest level input that is significant to the fair value measurement.
Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Trust’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. The Trust uses prices and inputs that are current as of the measurement date, including periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many securities. This condition could cause a security to be reclassified to a lower level within the fair value hierarchy. For instance, when Corn Futures Contracts on the Chicago Board of Trade (“CBOT”) are not actively trading due to a “limit-up” or ‘limit-down” condition, meaning that the change in the Corn Futures Contracts has exceeded the limits established, the Trust and the Fund will revert to alternative verifiable sources of valuation of its assets. When such a situation exists on a quarter close, the Sponsor will calculate the NAV on a particular day using the Level 1 valuation, but will later recalculate the NAV for the impacted Fund based upon the valuation inputs from these alternative verifiable sources (Level 2 or Level 3) and will report such NAV in its applicable financial statements and reports.
The Wheat Futures Contracts traded on the CBOT due to settle on December 14, 2015 (the “DEC15 Wheat Contracts”) did not, in the opinion of the Trust and WEAT, trade in an actively traded futures market as defined in the policy of the Trust and WEAT for portions of the three months ended September 30, 2014. Accordingly, the Trust and WEAT classified these as a Level 2 liability as of September 30, 2014. The DEC15 Wheat Contracts were, in the opinion of the Trust and WEAT, fairly valued at settlement on September 30, 2014. In addition, for portions of the three months ended June 30, 2014, the DEC15 Wheat Contracts did not, in the opinion of the Trust and WEAT, trade in an actively traded futures market as defined in the policy of the Trust and WEAT. Accordingly, the Trust and WEAT classified these as a Level 2 liability as of June 30, 2014. The DEC15 Wheat Contracts were, in the opinion of the Trust and WEAT, fairly valued at settlement on June 30, 2014.
For the quarter ended March 31, 2014, Soybean Futures Contracts traded on the CBOT which will settle on November 13, 2015 (the “NOV15 Soybean Contracts”) did not, in the opinion of the Trust and SOYB, trade in an actively traded futures market as defined in the policy of the Trust and SOYB for the entire period during which they were held. Accordingly, the Trust and SOYB have classified these as a Level 2 liability for the period ended March 31, 2014. The NOV15 Soybean Contracts were, in the opinion of the Trust and SOYB, fairly valued at settlement on March 31, 2014. These transferred back to a Level 1 liability for the quarter ended June 30, 2014.
For the quarter ended March 31, 2014, Soybean Futures Contracts traded on the CBOT which will settle on November 13, 2015 (the “NOV15 Soybean Contracts”) did not, in the opinion of the Trust and SOYB, trade in an actively traded futures market as defined in the policy of the Trust and SOYB for the entire period during which they were held. Accordingly, the Trust and SOYB have classified these as a Level 2 liability for the period ended March 31, 2014. The NOV15 Soybean Contracts were, in the opinion of the Trust and SOYB, fairly valued at settlement on March 31, 2014. These transferred back to a Level 1 liability for the quarter ended June 30, 2014.
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On March 31, 2013, the Corn Futures Contracts traded on the CBOT due to settle on July 12, 2013 (the “JUL13 Corn Contracts”) were in a “limit down” condition and, in the opinion of the Trust and CORN, the reported value at the close of market on that day did not fairly value the JUL13 Corn Contracts held by CORN. Therefore, the Trust and CORN used alternative verifiable sources to value the JUL13 Corn Contracts on March 31, 2013 and the financial statements of the Trust and the Fund have been adjusted accordingly. This adjustment resulted in a ($410,475) decrease in the unrealized change in commodity futures contracted for the Trust and CORN in excess of reported CBOT values, for the quarter ended March 31, 2013. These transferred back to a Level 1 liability for the quarter ended June 30, 2013.
For the quarter ended March 31, 2013, the Soybean Futures Contracts traded on the CBOT which will settle on November 14, 2014 (the “NOV14 Soybean Contracts”) did not, in the opinion of the Trust and SOYB, trade in an actively traded futures market as defined in the policy of the Trust and SOYB for the entire period during which they were held. Accordingly, the Trust and SOYB have classified these as a Level 2 liability for the period ended March 31, 2013. The NOV14 Soybean Contracts were, in the opinion of the Trust and SOYB, fairly valued at settlement on March 31, 2013. These transferred back to a Level 1 liability for the quarter ended June 30, 2013.
For the quarter ended June 30, 2013, Sugar Futures Contracts traded on ICE due to settle on February 27, 2015 (the “MAR15 ICE Sugar Contracts”) did not, in the opinion of the Trust and CANE, trade in an actively traded futures market as defined in the policy of the Trust and CANE for the entire period during which they were held. Accordingly, the Trust and CANE have classified these as a Level 2 liability for the period ended June 30, 2013. The MAR15 Sugar Contracts were, in the opinion of the Trust and CANE, fairly valued at settlement on June 30, 2013. These transferred back to a Level 1 liability for the quarter ended September 30, 2013.
For the quarter ended June 30, 2013, the Wheat Futures Contracts traded on the CBOT due to settle on December 12, 2014 did not, in the opinion of the Trust and WEAT, trade in an actively traded futures market as defined in the policy of the Trust and WEAT for portions of the three months ended June 30, 2013. Accordingly, the Trust and WEAT classified these as a Level 2 liability as of June 30, 2013. The DEC14 Wheat Contracts were, in the opinion of the Trust and WEAT, fairly valued at settlement on June 30, 2013. In addition, for portions of the three months ended September 30, 2013, the "DEC14 Wheat Contracts did not, in the opinion of the Trust and WEAT, trade in an actively traded futures market as defined in the policy of the Trust and WEAT. Accordingly, the Trust and WEAT classified these as a Level 2 liability as of September 30, 2013. The DEC14 Wheat Contracts were, in the opinion of the Trust and WEAT, fairly valued at settlement on September 30, 2013. All contracts traded in an active market for the quarter ended December 31, 2013.
The Funds and the Trust record their derivative activities at fair value. Gains and losses from derivative contracts are included in the statements of operations. Derivative contracts include futures contracts related to commodity prices. Futures, which are listed on a national securities exchange, such as the CBOT or the New York Mercantile Exchange (“NYMEX”), or reported on another national market, are generally categorized in Level 1 of the fair value hierarchy. OTC derivatives contracts (such as forward and swap contracts), which may be valued using models, depending on whether significant inputs are observable or unobservable, are categorized in Levels 2 or 3 of the fair value hierarchy.
Investments in the securities of the Underlying Funds are freely tradable and listed on the NYSE Arca. These investments are valued at the NAV of the Underlying Fund as of the valuation date as calculated by the administrator based on the exchange-quoted prices of the commodity futures contracts held by the Underlying Fund.
New Accounting Pronouncements
The FASB issued ASU No, 2013-07, “Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting. The amendments in this Update are being issued to clarify when an entity should apply the liquidation basis of accounting. In addition, the guidance provides principles for the recognition and measurement of assets and liabilities and requirements for financial statements prepared using the liquidation basis of accounting. The amendments are effective for entities that determine liquidation is imminent during annual reporting periods beginning after December 15, 2013, and interim reporting periods therein. The adoption did not have a significant impact on the financial statements disclosures for the Trust or the Funds.
The FASB issued ASU No, 2013-10, “Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes. The amendments in this Update permit the Fed Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to UST and LIBOR. The amendments also remove the restriction on using different benchmark rates for similar hedges. The amendments are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The adoption did not have a significant impact on the financial statements disclosures for the Trust or the Funds.
The FASB issued ASU No. 2013-08, “Financial Services-Investment Companies (Topic 946)-Amendments to the Scope, Measurement, and Disclosure Requirements”. ASU No. 2013-08 affects the scope, measurement, and disclosure requirements for investment companies under U.S. GAAP. ASU 2013-08 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2013. The adoption did not have a material impact on the financial statements for the Trust or the Funds.
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Note 4 – Fair Value Measurements
The Trust’s assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy as described in the Trust’s significant accounting policies in Note 3. The following table presents information about the Trust’s assets and liabilities measured at fair value as of September 30, 2014 and December 31, 2013:
September 30, 2014
| Assets: | Level 1 | Level 2 | Level 3 | Balance as of September 30, 2014 | ||||||||||||
| Cash equivalents | $ | 132,429,843 | $ | - | $ | - | $ | 132,429,843 | ||||||||
| Commodity futures contracts | ||||||||||||||||
| Natural gas futures contracts | 430 | - | - | 430 | ||||||||||||
| WTI crude oil futures contracts | 3,030 | - | - | 3,030 | ||||||||||||
| Total | $ | 132,433,303 | $ | - | $ | - | $ | 132,433,303 | ||||||||
| Liabilities: | Level 1 | Level 2 | Level 3 | Balance as of September 30, 2014 | ||||||||||||
| Commodity futures contracts | ||||||||||||||||
| Corn futures contracts | $ | 16,589,737 | $ | - | $ | - | $ | 16,589,737 | ||||||||
| Natural gas futures contracts | 42,730 | - | - | 42,730 | ||||||||||||
| WTI crude oil futures contracts | 30,550 | - | - | 30,550 | ||||||||||||
| Soybean futures contracts | 727,350 | - | - | 727,350 | ||||||||||||
| Sugar futures contracts | 217,235 | - | - | 217,235 | ||||||||||||
| Wheat futures contracts | 2,001,938 | 2,437,725 | - | 4,439,663 | ||||||||||||
| Total | $ | 19,609,540 | $ | 2,437,725 | $ | - | $ | 22,047,265 | ||||||||
December 31, 2013
| Assets: | Level 1 | Level 2 | Level 3 | Balance as of December 31, 2013 | ||||||||||||
| Cash equivalents | $ | 58,707,245 | $ | - | $ | - | $ | 58,707,245 | ||||||||
| Commodity futures contracts | ||||||||||||||||
| Natural gas futures contracts | 84,050 | - | - | 84,050 | ||||||||||||
| WTI crude oil futures contracts | 87,530 | - | - | 87,530 | ||||||||||||
| Total | $ | 58,878,825 | $ | - | $ | - | $ | 58,878,825 | ||||||||
| Liabilities: | Level 1 | Level 2 | Level 3 | Balance as of December 31, 2013 | ||||||||||||
| Commodity futures contracts | ||||||||||||||||
| Corn futures contracts | $ | 4,884,788 | $ | - | $ | - | $ | 4,884,788 | ||||||||
| WTI crude oil futures contracts | 5,080 | - | - | 5,080 | ||||||||||||
| Soybean futures contracts | 188,863 | - | - | 188,863 | ||||||||||||
| Sugar futures contracts | 183,400 | - | - | 183,400 | ||||||||||||
| Wheat futures contracts | 698,675 | - | - | 698,675 | ||||||||||||
| Total | $ | 5,960,806 | $ | - | $ | - | $ | 5,960,806 | ||||||||
Transfers into and out of each level of the fair value hierarchy for the MAR16 Sugar Contracts, the NOV15 Soybean Contracts and the DEC15 Wheat Contracts, for the nine months ended September 30, 2014 were as follows:
| Transfers | Transfers | Transfers | Transfers | Transfers | Transfers | |||||||||||||||||||
| into | out of | into | out of | into | out of | |||||||||||||||||||
| Level 1 | Level 1 | Level 2 | Level 2 | Level 3 | Level 3 | |||||||||||||||||||
| Assets (at fair value) | ||||||||||||||||||||||||
| Derivative contracts | ||||||||||||||||||||||||
| Sugar future contracts | $ | 17,405 | $ | 17,405 | $ | 17,405 | $ | 17,405 | $ | - | $ | - | ||||||||||||
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| Transfers | Transfers | Transfers | Transfers | Transfers | Transfers | |||||||||||||||||||
| into | out of | into | out of | into | out of | |||||||||||||||||||
| Level 1 | Level 1 | Level 2 | Level 2 | Level 3 | Level 3 | |||||||||||||||||||
| Liabilities (at fair value) | ||||||||||||||||||||||||
| Derivative contracts | ||||||||||||||||||||||||
| Soybean future contracts | $ | 12,075 | $ | 12,075 | $ | 12,075 | $ | 12,075 | $ | - | $ | - | ||||||||||||
| Wheat future contracts | 641,038 | 2,437,725 | 2,437,725 | 641,038 | - | - | ||||||||||||||||||
| Total | $ | 653,113 | $ | 2,449,800 | $ | 2,449,800 | $ | 653,113 | $ | - | $ | - | ||||||||||||
Transfers into and out of each level of the fair value hierarchy for the JUL13 Corn Contracts, NOV14 Soybean Contracts, FEB15 Sugar Contracts and the DEC14 Wheat Contracts, for the nine months ended September 30, 2013 were as follows:
| Transfers | Transfers | Transfers | Transfers | Transfers | Transfers | |||||||||||||||||||
| into | out of | into | out of | into | out of | |||||||||||||||||||
| Level 1 | Level 1 | Level 2 | Level 2 | Level 3 | Level 3 | |||||||||||||||||||
| Liabilities (at fair value) | ||||||||||||||||||||||||
| Derivative contracts | ||||||||||||||||||||||||
| Corn future contracts | $ | 1,010,962 | $ | 1,010,962 | $ | 1,010,962 | $ | 1,010,962 | $ | - | $ | - | ||||||||||||
| Soybean future contracts | 6,850 | 6,850 | 6,850 | 6,850 | - | - | ||||||||||||||||||
| Sugar future contracts | 62,082 | 62,082 | 62,082 | 62,082 | - | - | ||||||||||||||||||
| Wheat future contracts | 194,225 | 448,125 | 448,125 | 194,225 | - | - | ||||||||||||||||||
| Total | $ | 1,274,119 | $ | 1,528,019 | $ | 1,528,019 | $ | 1,274,119 | $ | - | $ | - | ||||||||||||
See the Fair Value - Definition and Hierarchy section in Note 3 above for an explanation of the transfers into and out of each level of the fair value hierarchy.
Note 5 – Derivative Instruments and Hedging Activities
In the normal course of business, the Funds utilize derivative contracts in connection with its proprietary trading activities. Investments in derivative contracts are subject to additional risks that can result in a loss of all or part of an investment. The Funds’ derivative activities and exposure to derivative contracts are classified by the following primary underlying risks: interest rate, credit, commodity price, and equity price risks. In addition to its primary underlying risks, the Funds are also subject to additional counterparty risk due to inability of its counterparties to meet the terms of their contracts. For the three months ended September 30, 2014 and 2013, the Funds invested only in commodity futures contracts specifically related to each Fund. Cleared Swaps have standardized terms similar to, and are priced by reference to, a corresponding Benchmark Component Futures Contract. Additionally, Other Commodity Interests that do not have standardized terms and are not exchange-traded, referred to as “over-the-counter” Interests, can generally be structured as the parties to the Commodity Interest contract desire. Therefore, each Fund might enter into multiple Cleared Swaps and/or over-the-counter Interests intended to exactly replicate the performance of each of the Benchmark Component Futures Contracts for the Fund, or a single over-the-counter Interest designed to replicate the performance of the Benchmark as a whole. Assuming that there is no default by a counterparty to an over-the-counter Interest, the performance of the Interest will not necessarily correlate exactly with the performance of the Benchmark or the applicable Benchmark Component Futures Contract.
Futures Contracts
The Funds are subject to commodity price risk in the normal course of pursuing their investment objectives. A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date.
The purchase and sale of futures contracts requires margin deposits with a Futures Commission Merchant (“FCM”). Subsequent payments (variation margin) are made or received by each Fund each day, depending on the daily fluctuations in the value of the contract, and are recorded as unrealized gains or losses by each Fund. Futures contracts may reduce the Funds’ exposure to counterparty risk since futures contracts are exchange-traded; and the exchange’s clearinghouse, as the counterparty to all exchange-traded futures, guarantees the futures against default.
| 18 |
The Commodity Exchange Act requires an FCM to segregate all customer transactions and assets from the FCM’s proprietary activities. A customer’s cash and other equity deposited with an FCM are considered commingled with all other customer funds subject to the FCM’s segregation requirements. In the event of an FCM’s insolvency, recovery may be limited to each Fund’s pro rata share of segregated customer funds available. It is possible that the recovery amount could be less than the total of cash and other equity deposited.
The following table discloses information about offsetting assets and liabilities presented in the statements of assets and liabilities to enable users of these financial statements to evaluate the effect or potential effect of netting arrangements for recognized assets and liabilities. These recognized assets and liabilities are presented as defined in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”) No. 2011-11 “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities” and subsequently clarified in FASB ASU 2013-01 “Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.”
The following table also identifies the fair value amounts of derivative instruments included in the statements of assets and liabilities as derivative contracts, categorized by primary underlying risk and held by the FCM, currently Newedge USA LLC, as of September 30, 2014 and December 31, 2013.
Offsetting of Financial Assets and Derivative Assets as of September 30, 2014
| (i) | (ii) | (iii) = (i) – (ii) | (iv) | (v) = (iii) – (iv) | |||||||||||||||||
| Gross
Amount Not Offset in the Statement of Assets and Liabilities |
|||||||||||||||||||||
| Description | Gross Amount of Recognized Assets |
Gross Amount Offset in the Statement of Assets and Liabilities |
Net Amount Presented in the Statement of Assets and Liabilities |
Futures Contracts Available for Offset | Collateral, Due to Broker |
Net Amount | |||||||||||||||
| Commodity price | |||||||||||||||||||||
| Natural gas futures contracts | $ | 430 | $ | - | $ | 430 | $ | 430 | $ | - | $ | - | |||||||||
| WTI crude oil futures contracts | 3,030 | - | 3,030 | 3,030 | - | - | |||||||||||||||
Offsetting of Financial Liabilities and Derivative Liabilities as of September 30, 2014
| (i) | (ii) | (iii) = (i) – (ii) | (iv) | (v) = (iii) – (iv) | |||||||||||||||
| Gross Amount Not Offset in the Statement of Assets and Liabilities |
|||||||||||||||||||
| Description | Gross Amount of Recognized Liabilities |
Gross Amount Offset in the Statement of Assets and Liabilities |
Net Amount Presented in the Statement of Assets and Liabilities |
Futures Contracts Available for Offset | Collateral, Due from Broker |
Net Amount | |||||||||||||
| Commodity price | |||||||||||||||||||
| Corn futures contracts | $ | 16,589,737 | $ | - | $ | 16,589,737 | $ | - | $ | 23,455,087 | $ | 6,865,350 | |||||||
| Natural gas futures contracts | 42,730 | - | 42,730 | 430 | 84,248 | 41,948 | |||||||||||||
| WTI crude oil futures contracts | 30,550 | - | 30,550 | 3,030 | 22,655 | 4,865 | |||||||||||||
| Soybean futures contracts | 727,350 | - | 727,350 | - | 938,888 | 211,538 | |||||||||||||
| Sugar futures contracts | 217,235 | - | 217,235 | - | 306,170 | 88,935 | |||||||||||||
| Wheat futures contracts | 4,439,663 | - | 4,439,663 | - | 5,783,936 | 1,344,273 | |||||||||||||
Offsetting of Financial Assets and Derivative Assets as of December 31, 2013
| (i) | (ii) | (iii) = (i) – (ii) | (iv) | (v) = (iii) – (iv) | |||||||||||||||
| Gross
Amount Not Offset in the Statement of Assets and Liabilities |
|||||||||||||||||||
| Description | Gross Amount of Recognized Assets |
Gross Amount Offset in the Statement of Assets and Liabilities |
Net Amount Presented in the Statement of Assets and Liabilities |
Futures Contracts Available for Offset | Collateral, Due to Broker |
Net Amount | |||||||||||||
| Commodity price | |||||||||||||||||||
| Natural gas futures contracts | $ | 84,050 | $ | - | $ | 84,050 | $ | - | $ | 74,157 | $ | 9,893 | |||||||
| WTI crude oil futures contracts | 87,530 | - | 87,530 | 5,080 | 23,445 | 59,005 | |||||||||||||
| 19 |
Offsetting of Financial Liabilities and Derivative Liabilities as of December 31, 2013
| (i) | (ii) | (iii) = (i) – (ii) | (iv) | (v) = (iii) – (iv) | |||||||||||||||
| Gross
Amount Not Offset in the Statement of Assets and Liabilities |
|||||||||||||||||||
| Description | Gross Amount of Recognized Liabilities |
Gross Amount Offset in the Statement of Assets and Liabilities |
Net Amount Presented in the Statement of Assets and Liabilities |
Futures Contracts Available for Offset | Collateral, Due from Broker |
Net Amount | |||||||||||||
| Commodity price | |||||||||||||||||||
| Corn futures contracts | $ | 4,884,788 | $ | - | $ | 4,884,788 | $ | - | $ | 9,852,213 | $ | 4,967,425 | |||||||
| WTI crude oil futures contracts | 5,080 | - | 5,080 | 5,080 | - | - | |||||||||||||
| Soybean futures contracts | 188,863 | - | 188,863 | - | 400,752 | 211,889 | |||||||||||||
| Sugar futures contracts | 183,400 | - | 183,400 | - | 261,687 | 78,287 | |||||||||||||
| Wheat futures contracts | 698,675 | - | 698,675 | - | 1,253,668 | 554,993 | |||||||||||||
The following is a summary of realized and unrealized gains (losses) of the derivative instruments utilized by the Trust:
Three months ended September 30, 2014
| Primary Underlying Risk | Realized (Loss) Gain on Derivative Instruments |
Net Change in Unrealized Loss on Derivative Instruments |
|||||||
| Commodity price | |||||||||
| Corn futures contracts | $ | (16,012,787 | ) | $ | (6,859,262 | ) | |||
| Natural gas futures contracts | 4,960 | (109,020 | ) | ||||||
| WTI crude oil futures contracts | - | (223,730 | ) | ||||||
| Soybean futures contracts | (392,525 | ) | (553,150 | ) | |||||
| Sugar futures contracts | (134,792 | ) | (222,499 | ) | |||||
| Wheat futures contracts | (2,915,100 | ) | (2,260,751 | ) | |||||
| Total commodity futures contracts | $ | (19,450,244 | ) | $ | (10,588,412 | ) | |||
Three months ended September 30, 2013
| Primary Underlying Risk | Realized (Loss) Gain on Derivative Instruments |
Net Change in Unrealized (Loss) Gain on Derivative Instruments |
||||||
| Commodity price | ||||||||
| Corn futures contracts | $ | (3,670,163 | ) | $ | (1,818,600 | ) | ||
| Natural gas futures contracts | (125,490 | ) | 65,830 | |||||
| WTI crude oil futures contracts | 9,380 | 117,800 | ||||||
| Soybean futures contracts | 183,763 | (188,626 | ) | |||||
| Sugar futures contracts | (113,288 | ) | 174,888 | |||||
| Wheat futures contracts | (513,650 | ) | 480,925 | |||||
| Total commodity futures contracts | $ | (4,229,448 | ) | $ | (1,167,783 | ) | ||
| 20 |
Nine months ended September 30, 2014
| Primary Underlying Risk | Realized (Loss) Gain on Derivative Instruments |
Net Change in Unrealized Loss on Derivative Instruments |
||||||
| Commodity price | ||||||||
| Corn futures contracts | $ | (12,120,329 | ) | $ | (11,704,949 | ) | ||
| Natural gas futures contracts | 288,110 | (126,350 | ) | |||||
| WTI crude oil futures contracts | 93,280 | (109,970 | ) | |||||
| Soybean futures contracts | (149,950 | ) | (538,487 | ) | ||||
| Sugar futures contracts | (131,409 | ) | (33,835 | ) | ||||
| Wheat futures contracts | (2,329,112 | ) | (3,740,988 | ) | ||||
| Total commodity futures contracts | $ | (14,349,410 | ) | $ | (16,254,579 | ) | ||
Nine months ended September 30, 2013
| Primary Underlying Risk | Realized (Loss) Gain on Derivative Instruments |
Net Change in Unrealized (Loss) Gain on Derivative Instruments |
||||||
| Commodity price | ||||||||
| Corn futures contracts | $ | (7,350,776 | ) | $ | (2,428,550 | ) | ||
| Natural gas futures contracts | (224,549 | ) | 130,339 | |||||
| WTI crude oil futures contracts | (77,750 | ) | 185,590 | |||||
| Soybean futures contracts | 8,838 | (35,063 | ) | |||||
| Sugar futures contracts | (398,406 | ) | 76,855 | |||||
| Wheat futures contracts | (1,270,025 | ) | (36,062 | ) | ||||
| Total commodity futures contracts | $ | (9,312,668 | ) | $ | (2,106,891 | ) | ||
Volume of Derivative Activities
The average notional market value categorized by primary underlying risk for all futures contracts held was 132.8 million and 124.2 million for the three and nine months ended September 30, 2014, respectively; and 64.9 million and 62.8 million for the same periods in 2013.
Note 6 – Subsequent Events
The subsequent events have been reviewed through the date of this filing. The following subsequent events transpired for the Trust or each of the series of the Trust:
CORN: From October 1, 2014 through November 3, 2014, the following changes occurred in Shares Outstanding: the Shares Outstanding for the Fund increased from 4,575,004 to 4,975,004; this represents an 8.74% increase.
NAGS: Nothing to Report
CRUD: Nothing to Report
SOYB: From October 1, 2014 through November 3, 2014, the following changes occurred in Shares Outstanding: the Shares Outstanding for the Fund increased from 225,004 to 500,004; this represents a 122.22% increase.
CANE: Nothing to Report
WEAT: From October 1, 2014 through November 3, 2014, the following changes occurred in Shares Outstanding: the Shares Outstanding for the Fund decreased from 2,400,004 to 2,375,004; this represents a 1.04% decrease.
TAGS: Nothing to Report
| 21 |
TEUCRIUM
CORN FUND
STATEMENTS OF ASSETS AND LIABILITIES
| September 30, 2014 | December 31, 2013 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Cash and cash equivalents | $ | 97,090,355 | $ | 42,405,220 | ||||
| Interest receivable | 5,609 | 2,976 | ||||||
| Other assets | 481,916 | 214,631 | ||||||
| Equity in trading accounts: | ||||||||
| Due from broker | 23,455,087 | 9,852,213 | ||||||
| Total assets | $ | 121,032,967 | $ | 52,475,040 | ||||
| Liabilities | ||||||||
| Management fee payable to Sponsor | 85,702 | 41,846 | ||||||
| Other liabilities | 43,907 | 48,786 | ||||||
| Equity in trading accounts: | ||||||||
| Commodity futures contracts | 16,589,737 | 4,884,788 | ||||||
| Total liabilities | 16,719,346 | 4,975,420 | ||||||
| Net assets | $ | 104,313,621 | $ | 47,499,620 | ||||
| Shares outstanding | 4,575,004 | 1,550,004 | ||||||
| Net asset value per share | $ | 22.80 | $ | 30.64 | ||||
| Market value per share | $ | 22.78 | $ | 30.58 | ||||
The accompanying notes are an integral part of these financial statements.
| 22 |
TEUCRIUM
CORN FUND
SCHEDULE OF INVESTMENTS
September 30, 2014
(Unaudited)
| Percentage of | ||||||||||||
| Description: Assets | Fair Value | Net Assets | Principal/Shares | |||||||||
| Cash equivalents | ||||||||||||
| United States Treasury obligations | ||||||||||||
| U.S. Treasury bills, 0.0125%, due December 4, 2014 (cost $9,999,684) | $ | 9,999,820 | 9.59 | % | 10,000,000 | |||||||
| Money market funds | ||||||||||||
| Dreyfus Cash Management - Institutional (cost $87,090,535) | 87,090,535 | 83.49 | 87,090,535 | |||||||||
| Total cash equivalents | $ | 97,090,355 | 93.08 | % | ||||||||
| Percentage of | Notional Amount | |||||||||||
| Description: Liabilities | Fair Value | Net Assets | (Long Exposure) | |||||||||
| Commodity futures contracts | ||||||||||||
| United States corn futures contracts | ||||||||||||
| CBOT corn futures MAR15 (2,190 contracts) | $ | 5,672,712 | 5.44 | % | $ | 36,518,250 | ||||||
| CBOT corn futures MAY15 (1,832 contracts) | 1,967,987 | 1.89 | 31,327,200 | |||||||||
| CBOT corn futures DEC15 (1,992 contracts) | 8,949,038 | 8.58 | 36,528,300 | |||||||||
| Total commodity futures contracts | $ | 16,589,737 | 15.91 | % | $ | 104,373,750 | ||||||
The accompanying notes are an integral part of these financial statements.
| 23 |
TEUCRIUM CORN FUND
SCHEDULE OF INVESTMENTS
December 31, 2013
| Percentage of | ||||||||||||
| Description: Assets | Fair Value | Net Assets | Shares | |||||||||
| Cash equivalents | ||||||||||||
| Money market funds | ||||||||||||
| Dreyfus Cash Management - Institutional (cost $42,405,220) | $ | 42,405,220 | 89.27 | % | 42,405,220 | |||||||
| Percentage of | Notional Amount | |||||||||||
| Description: Liabilities | Fair Value | Net Assets | (Long Exposure) | |||||||||
| Commodity futures contracts | ||||||||||||
| United States corn futures contracts | ||||||||||||
| CBOT corn futures MAY14 (722 contracts) | $ | 1,831,300 | 3.86 | % | $ | 16,607,650 | ||||||
| CBOT corn futures JUL14 (652 contracts) | 482,913 | 1.02 | 14,246,200 | |||||||||
| CBOT corn futures DEC14 (739 contracts) | 2,570,575 | 5.41 | 16,636,738 | |||||||||
| Total commodity futures contracts | $ | 4,884,788 | 10.29 | % | $ | 47,490,588 | ||||||
The accompanying notes are an integral part of these financial statements.
| 24 |
TEUCRIUM
CORN FUND
STATEMENTS OF OPERATIONS
(Unaudited)
| Three months ended | Three months ended | Nine months ended | Nine months ended | |||||||||||||
| September 30, 2014 | September 30, 2013 | September 30, 2014 | September 30, 2013 | |||||||||||||
| Income | ||||||||||||||||
| Realized and unrealized gain (loss) on trading of commodity futures contracts: | ||||||||||||||||
| Realized loss on commodity futures contracts | $ | (16,012,787 | ) | $ | (3,670,163 | ) | $ | (12,120,329 | ) | $ | (7,350,776 | ) | ||||
| Net change in unrealized appreciation or depreciation on commodity futures contracts | (6,859,262 | ) | (1,818,600 | ) | (11,704,949 | ) | (2,428,550 | ) | ||||||||
| Interest income | 5,823 | 4,612 | 24,843 | 16,350 | ||||||||||||
| Realized gain on securities | - | 70 | - | 70 | ||||||||||||
| Total loss | (22,866,226 | ) | (5,484,081 | ) | (23,800,435 | ) | (9,762,906 | ) | ||||||||
| Expenses | ||||||||||||||||
| Management fees | 232,677 | 112,618 | 684,921 | 307,010 | ||||||||||||
| Professional fees | 63,244 | 232,031 | 281,449 | 526,239 | ||||||||||||
| Distribution and marketing fees | 389,700 | 342,144 | 999,810 | 1,028,346 | ||||||||||||
| Custodian fees and expenses | 32,564 | 32,564 | 96,631 | 96,631 | ||||||||||||
| Business permits and licenses fees | (4,751 | ) | 21,160 | 27,779 | 62,790 | |||||||||||
| General and administrative expenses | 41,943 | 46,740 | 152,937 | 109,185 | ||||||||||||
| Brokerage commissions | 47,551 | 12,420 | 81,086 | 53,295 | ||||||||||||
| Other expenses | 18,310 | 10,396 | 38,763 | 30,849 | ||||||||||||
| Total expenses | 821,238 | 810,073 | 2,363,376 | 2,214,345 | ||||||||||||
| Expenses waived by the Sponsor | - | (106,562 | ) | - | (319,686 | ) | ||||||||||
| Reimbursement of expenses previously waived | 6,997 | 133,971 | 308,312 | 291,807 | ||||||||||||
| Total expenses, net | 828,235 | 837,482 | 2,671,688 | 2,186,466 | ||||||||||||
| Net loss | $ | (23,694,461 | ) | $ | (6,321,563 | ) | $ | (26,472,123 | ) | $ | (11,949,372 | ) | ||||
| Net loss per share | $ | (6.69 | ) | $ | (5.25 | ) | $ | (7.84 | ) | $ | (10.89 | ) | ||||
| Net loss per weighted average share | $ | (6.52 | ) | $ | (5.06 | ) | $ | (25.46 | ) | $ | (11.49 | ) | ||||
| Weighted average shares outstanding | 3,632,613 | 1,249,461 | 3,067,312 | 1,039,656 | ||||||||||||
The accompanying notes are an integral part of these financial statements.
| 25 |
TEUCRIUM
CORN FUND
STATEMENTS OF CHANGES IN NET ASSETS
(Unaudited)
| Nine months ended | Nine months ended | |||||||
| September 30, 2014 | September 30, 2013 | |||||||
| Operations | ||||||||
| Net loss | $ | (26,472,123 | ) | $ | (11,949,372 | ) | ||
| Capital transactions | ||||||||
| Issuance of Shares | 136,627,274 | 52,132,966 | ||||||
| Redemption of Shares | (53,341,150 | ) | (28,536,102 | ) | ||||
| Total capital transactions | 83,286,124 | 23,596,864 | ||||||
| Net change in net assets | 56,814,001 | 11,647,492 | ||||||
| Net assets, beginning of period | $ | 47,499,620 | $ | 37,686,512 | ||||
| Net assets, end of period | $ | 104,313,621 | $ | 49,334,004 | ||||
| Net asset value per share at beginning of period | $ | 30.64 | $ | 44.34 | ||||
| At end of period | $ | 22.80 | $ | 33.45 | ||||
| Creation of Shares | 4,625,000 | 1,325,000 | ||||||
| Redemption of Shares | 1,600,000 | 700,000 | ||||||
The accompanying notes are an integral part of these financial statements.
| 26 |
TEUCRIUM
CORN FUND
STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine months ended | Nine months ended | |||||||
| September 30, 2014 | September 30, 2013 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (26,472,123 | ) | $ | (11,949,372 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Net change in unrealized appreciation or depreciation on commodity futures contracts | 11,704,949 | 2,428,550 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Due from broker | (13,602,874 | ) | (3,285,738 | ) | ||||
| Interest receivable | (2,633 | ) | (871 | ) | ||||
| Other assets | (267,285 | ) | (110,615 | ) | ||||
| Management fee payable to Sponsor | 43,856 | 3,712 | ||||||
| Other liabilities | (4,879 | ) | 62,751 | |||||
| Net cash used in operating activities | (28,600,989 | ) | (12,851,583 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from sale of Shares | 136,627,274 | 52,132,966 | ||||||
| Redemption of Shares | (53,341,150 | ) | (28,536,102 | ) | ||||
| Net cash provided by financing activities | 83,286,124 | 23,596,864 | ||||||
| Net change in cash and cash equivalents | 54,685,135 | 10,745,281 | ||||||
| Cash and cash equivalents, beginning of period | 42,405,220 | 34,631,982 | ||||||
| Cash and cash equivalents, end of period | $ | 97,090,355 | $ | 45,377,263 | ||||
The accompanying notes are an integral part of these financial statements.
| 27 |
NOTES TO
FINANCIAL STATEMENTS
September 30, 2014
(Unaudited)
Note 1 – Organization and Operation
Teucrium Corn Fund (referred to herein as “CORN,” or the “Fund”) is a commodity pool that is a series of Teucrium Commodity Trust (“Trust”), a Delaware statutory trust formed on September 11, 2009. The Fund issues common units, called the “Shares,” representing fractional undivided beneficial interests in the Fund. The Fund continuously offers Creation Baskets consisting of 25,000 Shares at their Net Asset Value (“NAV”) to “Authorized Purchasers” through Foreside Fund Services, LLC, which is the distributor for the Fund (the “Distributor”). Authorized Purchasers sell such Shares, which are listed on the New York Stock Exchange (“NYSE”) Arca under the symbol “CORN,” to the public at per-Share offering prices that reflect, among other factors, the trading price of the Shares on the NYSE Arca, the NAV of the Fund at the time the Authorized Purchaser purchased the Creation Baskets and the NAV at the time of the offer of the Shares to the public, the supply of and demand for Shares at the time of sale, and the liquidity of the markets for corn interests. The Fund’s Shares trade in the secondary market on the NYSE Arca at prices that are lower or higher than their NAV per Share.
The investment objective of CORN is to have the daily changes in percentage terms of the Shares’ NAV reflect the daily changes in percentage terms of a weighted average of the closing settlement prices for three futures contracts for corn (“Corn Futures Contracts”) that are traded on the Chicago Board of Trade (“CBOT”), specifically (1) the second-to-expire CBOT Corn Futures Contract, weighted 35%, (2) the third-to-expire CBOT Corn Futures Contract, weighted 30%, and (3) the CBOT Corn Futures Contract expiring in the December following the expiration month of the third-to-expire contract, weighted 35%.
The Fund commenced investment operations on June 9, 2010 and has a fiscal year ending on December 31. The Fund’s sponsor is Teucrium Trading, LLC (the “Sponsor”). The Sponsor is responsible for the management of the Fund. The Sponsor is a member of the National Futures Association (the “NFA”) and became a commodity pool operator registered with the Commodity Futures Trading Commission (the “CFTC”) effective November 10, 2009.
On June 5, 2010, the Fund’s initial registration of 30,000,000 shares the Form S-1 was declared effective by the U.S. Securities and Exchange Commission (“SEC”). On June 9, 2010, the Fund listed its shares on the NYSE Arca under the ticker symbol “CORN.” On the day prior to that, the Fund issued 200,000 shares in exchange for $5,000,000 at the Fund’s initial NAV of $25 per share. The Fund also commenced investment operations on June 9, 2010 by purchasing commodity futures contracts traded on the Chicago Board of Trade (“CBOT”).
The accompanying unaudited financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the SEC and, therefore, do not include all information and footnote disclosures required under accounting principles generally accepted in the United States of America (“GAAP”). The financial information included herein is unaudited; however, such financial information reflects all adjustments which are, in the opinion of management, necessary for the fair presentation of the Fund’s financial statements for the interim period. It is suggested that these interim financial statements be read in conjunction with the financial statements and related notes included in the Trust’s Annual Report on Form 10-K, as well as the most recent Form S-1 filing, as applicable. The operating results for the nine months ended September 30, 2014 are not necessarily indicative of the results to be expected for the full year ending December 31, 2014.
Note 2 – Principal Contracts and Agreements
In its capacity as the Custodian for the Fund, the Custodian, currently the Bank of New York Mellon, holds for the Fund its Treasury Securities, cash and/or cash equivalents pursuant to a custodial agreement. The Custodian is also the registrar and transfer agent for the Fund’s Shares. In addition, the Custodian also serves as Administrator for the Fund, performing certain administrative and accounting services and preparing certain SEC and CFTC reports on behalf of the Fund. For these services, the Custodian receives: for custody services: 0.0075% of average gross assets up to $1 billion, and 0.0050% of average gross assets over $1 billion, annually, plus certain per-transaction charges; for transfer agency services: 0.0075% of average gross assets annually; and for administrative services: 0.05% of average gross assets up to $1 billion, 0.04% of average gross assets between $1 billion and $3 billion, and 0.03% of average gross assets over $3 billion, annually. A combined minimum annual fee of up to $125,000 for custody, transfer agency and administrative services per Fund can be assessed.
The Sponsor and the Trust employ Foreside Fund Services, LLC as the Distributor for the Funds. The Distributor receives, for its services as distributor for the Funds. The Distribution Services Agreement among the Distributor, the Sponsor and the Trust calls for the Distributor to work with the Custodian in connection with the receipt and processing of orders for Creation Baskets and Redemption Baskets and the review and approval of all Fund sales literature and advertising materials. The Distributor and the Sponsor have also entered into a Securities Activities and Service Agreement (the “SASA”) under which certain employees and
| 28 |
officers of the Sponsor are licensed as registered representatives or registered principals of the Distributor, under FINRA rules. For its services as the Distributor, Foreside receives a fee of 0.01% of the Fund’s average daily net assets and an aggregate annual fee of $100,000 for all Teucrium Funds, along with certain expense reimbursements. For its services under the SASA, Foreside receives a fee of $5,000 per registered representative and $1,000 per registered location.
Currently, Newedge USA, LLC (“Newedge USA”) serves as the Fund’s clearing broker to execute and clear the Fund’s futures and provide other brokerage-related services. Newedge USA is a futures commission merchant and broker dealer registered with the U.S. Commodity Futures Trading Commission (“CFTC”) and the U.S. Securities and Exchange Commission (“SEC”), and is a member of FINRA. Newedge USA is a clearing member of all principal futures exchanges located in the United States as well as a member of the Chicago Board Options Exchange, International Securities Exchange, New York Stock Exchange, Options Clearing Corporation, and Government Securities Clearing Corporation. For Corn Futures Contracts Newedge is paid $8.00 per round turn.
The sole Trustee of the Trust is Wilmington Trust Company, a Delaware banking corporation. The Trustee will accept service of legal process on the Trust in the State of Delaware and will make certain filings under the Delaware Statutory Trust Act. For its services, the Trustee receives an annual fee of $3,300 from the Trust.
Note 3 – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) as detailed in the Financial Accounting Standards Board’s Accounting Standards Codification.
Correction of immaterial error in previously issued financial statements
Effective with the period ended June 30, 2014, expenses for the current and comparative periods are presented both gross and net of any expenses waived by or paid by the Sponsor that would have been incurred by the Funds (“expenses waived by the Sponsor”). In addition, certain expenses paid by the Sponsor on behalf of the Funds for the years ended December 31, 2012 and 2013 that were subject to possible recovery from the Funds in the following year, as had been previously disclosed in aggregate for the Trust in the Form 10-K for 2012 and 2013, have also been included in expenses and waived/reimbursed expenses in the period incurred by the Sponsor. These expenses, if reimbursed by the Funds to the Sponsor in 2013 or 2014 are then presented as a reimbursement of expenses previously waived. “Total expenses, net”, which is after the impact of any expenses waived by or reimbursed to the Sponsor, are presented in the same manner as previously reported. There is, therefore, no impact to, or change in the Net gain or Net loss in any period for the Trust and each Fund as a result of this change in presentation.
Revenue Recognition
Commodity futures contracts are recorded on the trade date. All such transactions are recorded on the identified cost basis and marked to market daily. Unrealized appreciation or depreciation on commodity futures contracts are reflected in the statements of operations as the difference between the original contract amount and the fair market value as of the last business day of the year or as of the last date of the financial statements. Changes in the appreciation or depreciation between periods are reflected in the statements of operations. Interest on cash equivalents and deposits with the Futures Commission Merchant are recognized on the accrual basis. The Fund earns interest on its assets denominated in U.S. dollars on deposit with the Futures Commission Merchant. In addition, the Fund earns interest on funds held at the custodian at prevailing market rates for such investments.
Brokerage Commissions
Brokerage commissions on all open commodity futures contracts are accrued on a full-turn basis.
Income Taxes
For tax purposes, the Fund will be treated as a partnership. The Fund does not record a provision for income taxes because the partners report their share of the Fund’s income or loss on their income tax returns. The financial statements reflect the Fund’s transactions without adjustment, if any, required for income tax purposes.
The Fund is required to determine whether a tax position is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The Fund files an income tax return in the U.S. federal jurisdiction, and may file income tax returns in various U.S. states and foreign jurisdictions. For all tax years 2011 to 2013, the Fund remains subject to income tax examinations by major taxing authorities. The tax benefit recognized is measured as the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon
| 29 |
ultimate settlement. De-recognition of a tax benefit previously recognized results in the Fund recording a tax liability that reduces net assets. Based on its analysis, the Fund has determined that it has not incurred any liability for unrecognized tax benefits as of September 30, 2014 and December 31, 2013. However, the Fund’s conclusions regarding this policy may be subject to review and adjustment at a later date based on factors including, but not limited to, ongoing analysis of and changes to tax laws, regulations, and interpretations thereof.
The Fund recognizes interest accrued related to unrecognized tax benefits and penalties related to unrecognized tax benefits in income tax fees payable, if assessed. No interest expense or penalties have been recognized as of and for the periods ended September 30, 2014 and 2013.
The Fund may be subject to potential examination by U.S. federal, U.S. state, or foreign jurisdictional authorities in the area of income taxes. These potential examinations may include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions, and compliance with U.S. federal, U.S. state and foreign tax laws. The Fund’s management does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months.
Creations and Redemptions
Authorized Purchasers may purchase Creation Baskets consisting of 25,000 shares from CORN. The amount of the proceeds required to purchase a Creation Basket will be equal to the NAV of the shares in the Creation Basket determined as of 4:00 p.m. New York time on the day the order to create the basket is properly received.
Authorized Purchasers may redeem shares from the Fund only in blocks of 25,000 shares called “Redemption Baskets.” The amount of the redemption proceeds for a Redemption Basket will be equal to the NAV of the shares in the Redemption Basket determined as of 4:00 p.m. New York time on the day the order to redeem the basket is properly received.
The Fund receives or pays the proceeds from shares sold or redeemed within three business days after the trade date of the purchase or redemption. The amounts due from Authorized Purchasers are reflected in the Fund’s statements of assets and liabilities as receivable for shares sold. Amounts payable to Authorized Purchasers upon redemption are reflected in the Fund’s statements of assets and liabilities as payable for shares redeemed.
As outlined in the most recent Form S-1 filing, 50,000 shares represents two Redemption Baskets for the Fund and a minimum level of shares.
Allocation of Shareholder Income and Losses
Profit or loss is allocated among the shareholders of the Fund in proportion to the number of shares each shareholder holds as of the close of each month.
Cash Equivalents
Cash equivalents are highly-liquid investments with original maturity dates of 90 days or less when acquired. The Fund reported its cash equivalents in the statements of assets and liabilities at market value, or at carrying amounts that approximate fair value, because of their highly-liquid nature and short-term maturities. The Fund has these balances of its assets on deposit with banks. Assets deposited with the bank may, at times, exceed federally insured limits. The Fund had a balance of $87,090,535 and $42,405,220 in money market funds at September 30, 2014 and December 31, 2013, respectively; these balances are included in cash and cash equivalents on the statements of assets and liabilities. The Fund had investments in United States Treasury Bills with a maturity date of 90 days or less when acquired with a fair value of $9,999,820 on September 30, 2014; these treasuries are recorded on the trade date.
Due from/to Broker
The amount recorded by the Fund for the amount due from and to the clearing broker includes, but is not limited to, cash held by the broker, amounts payable to the clearing broker related to open transactions and payables for commodities futures accounts liquidating to an equity balance on the clearing broker’s records.
Margin is the minimum amount of funds that must be deposited by a commodity interest trader with the trader’s broker to initiate and maintain an open position in futures contracts. A margin deposit acts to assure the trader’s performance of the futures contracts purchased or sold. Futures contracts are customarily bought and sold on initial margin that represents a very small percentage of the aggregate purchase or sales price of the contract. Because of such low margin requirements, price fluctuations occurring in the futures markets may create profits and losses that, in relation to the amount invested, are greater than are customary in other forms of investment or speculation. As discussed below, adverse price changes in the futures contract may result in margin requirements that greatly exceed the initial margin. In addition, the amount of margin required in connection with a particular futures contract is set from
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time to time by the exchange on which the contract is traded and may be modified from time to time by the exchange during the term of the contract. Brokerage firms, such as the Fund’s clearing brokers, carrying accounts for traders in commodity interest contracts generally require higher amounts of margin as a matter of policy to further protect themselves. Over-the-counter trading generally involves the extension of credit between counterparties, so the counterparties may agree to require the posting of collateral by one or both parties to address credit exposure.
When a trader purchases an option, there is no margin requirement; however, the option premium must be paid in full. When a trader sells an option, on the other hand, he or she is required to deposit margin in an amount determined by the margin requirements established for the underlying interest and, in addition, an amount substantially equal to the current premium for the option. The margin requirements imposed on the selling of options, although adjusted to reflect the probability that out-of-the-money options will not be exercised, can in fact be higher than those imposed in dealing in the futures markets directly. Complicated margin requirements apply to spreads and conversions, which are complex trading strategies in which a trader acquires a mixture of options positions and positions in the underlying interest.
Ongoing or “maintenance” margin requirements are computed each day by a trader’s clearing broker. When the market value of a particular open futures contract changes to a point where the margin on deposit does not satisfy maintenance margin requirements, a margin call is made by the broker. If the margin call is not met within a reasonable time, the broker may close out the trader’s position. With respect to the Fund’s trading, the Fund (and not its shareholders personally) is subject to margin calls.
Finally, many major U.S. exchanges have passed certain cross margining arrangements involving procedures pursuant to which the futures and options positions held in an account would, in the case of some accounts, be aggregated and margin requirements would be assessed on a portfolio basis, measuring the total risk of the combined positions.
Calculation of Net Asset Value
The Fund’s NAV is calculated by:
| · | Taking the current market value of its total assets and |
| · | Subtracting any liabilities. |
The administrator, the Bank of New York Mellon, calculates the NAV of the Fund once each trading day. It calculates the NAV as of the earlier of the close of the NYSE or 4:00 p.m. New York time. The NAV for a particular trading day is released after 4:15 p.m. New York time.
In determining the value of Corn Futures Contracts, the administrator uses the CBOT closing price. The administrator determines the value of all other Fund investments as of the earlier of the close of the NYSE or 4:00 p.m. New York time. The value of over-the-counter corn interests is determined based on the value of the commodity or futures contract underlying such corn interest, except that a fair value may be determined if the Sponsor believes that the Fund is subject to significant credit risk relating to the counterparty to such corn interest. For purposes of financial statements and reports, the Sponsor will recalculate the NAV where necessary to reflect the “fair value” of a Futures Contract when the Futures Contract closes at its price fluctuation limit for the day. Treasury securities held by the Fund are valued by the administrator using values received from recognized third-party vendors and dealer quotes. NAV includes any unrealized profit or loss on open corn interests and any other income or expense accruing to the Fund but unpaid or not received by the Fund.
Sponsor Fee, Allocation of Expenses and Related Party Transactions
The Sponsor is responsible for investing the assets of the Fund in accordance with the objectives and policies of the Fund. In addition, the Sponsor arranges for one or more third parties to provide administrative, custodial, accounting, transfer agency and other necessary services to the Fund, including services directly attributable to the Fund such as accounting, financial reporting, regulatory compliance and trading activities, which the Sponsor elected not to outsource. For these services, the Fund is contractually obligated to pay a monthly management fee to the Sponsor, based on average daily net assets, at a rate equal to 1.00% per annum.
The Fund generally pays for all brokerage fees, taxes and other expenses, including licensing fees for the use of intellectual property, registration or other fees paid to the SEC, the Financial Industry Regulatory Authority (“FINRA”), formerly the National Association of Securities Dealers, or any other regulatory agency in connection with the offer and sale of subsequent Shares after its initial registration and all legal, accounting, printing and other expenses associated therewith. The Fund also pays its portion of the fees and expenses associated with the Trust’s tax accounting and reporting requirements. Certain aggregate expenses common to all Funds are allocated by the Sponsor to the respective funds based on activity drivers deemed most appropriate by the Sponsor for such expenses, including but not limited to relative assets under management and creation and redeem order activity. These aggregate common expenses include, but are not limited to, legal, auditing, accounting and financial reporting, tax-preparation, regulatory compliance, trading activities, and insurance costs, as well as fees paid to the Distributor, which are included in the related line item in the statements of operations. A portion of these aggregate common expenses are related to the Sponsor or related parties of principals of the Sponsor; these are necessary services to the Funds, which are primarily the cost of performing accounting and financial reporting, regulatory compliance, and trading activities that are directly attributable to the Fund. For the Fund, for the three months ended September 30, such expenses totaled approximately $215,000 in 2014 and $121,000 in 2013; none of these amounts were waived by the Sponsor. For the nine months ended September 30, such expenses were approximately $839,000 in 2014 and $582,000 in 2013; none of these amounts were waived by the Sponsor. All asset-based fees and expenses are calculated on the prior day’s net assets.
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For the nine months ended September 30, 2014 there were no expenses that had been identified on the Statements of Operations of the Fund as expenses that were waived by the Sponsor and are subject to recovery in future periods.
For the year ended December 31, 2013, there were approximately $425,000 of expenses recorded in the financial statements of the Sponsor which were subject to reimbursement by CORN in 2014. At that time, the Sponsor had determined that recovery of the expense amounts was not probable. For the three and nine months ended September 30, 2014, asset growth and other changes experienced by CORN enabled the Sponsor to claim reimbursement of $6,997 and $308,312 respectively from the Fund. These amounts are reflected in the statements of operations for the three and nine months ended September 30, 2014 as a reimbursement of previously waived expenses.
For the year ended December 31, 2012, there were approximately $426,000 of expenses recorded in the financial statements of the Sponsor which were subject to reimbursement by CORN in 2013. At that time, the Sponsor had determined that recovery of the expense amounts was not probable. For the three and nine months ended September 30, 2013, asset growth and other changes experienced by CORN enabled the Sponsor to claim reimbursement of $133,971 and $291,807 respectively from the Fund. These amounts are reflected in the statements of operations for the three and nine months ended September 30, 2013 as a reimbursement of previously waived expenses.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of the revenue and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value - Definition and Hierarchy
In accordance with U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.
In determining fair value, the Fund uses various valuation approaches. In accordance with GAAP, a fair value hierarchy for inputs is used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Fund. Unobservable inputs reflect the Fund’s assumptions about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy is categorized into three levels based on the inputs as follows:
Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Fund has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 securities. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these securities does not entail a significant degree of judgment.
Level 2 - Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
The availability of valuation techniques and observable inputs can vary from security to security and is affected by a wide variety of factors including, the type of security, whether the security is new and not yet established in the marketplace, and other characteristics particular to the transaction. 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. Those estimated values do not necessarily represent the amounts that may be ultimately realized due to the occurrence of future circumstances that cannot be reasonably determined. Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower than the values that would have been used had a ready market for the securities existed. Accordingly, the degree of judgment exercised by the Fund in determining fair value is
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greatest for securities categorized in Level 3. In certain cases, 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 in its entirety falls, is determined based on the lowest level input that is significant to the fair value measurement.
Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Fund’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. The Fund uses prices and inputs that are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many securities. This condition could cause a security to be reclassified to a lower level within the fair value hierarchy. For instance, when Corn Futures Contracts on the CBOT are not actively trading due to a “limit-up” or limit-down” condition, meaning that the change in the Corn Futures Contracts has exceeded the limits established, the Trust and the Fund will revert to alternative verifiable sources of valuation of its assets. When such a situation exists on a quarter close, the Sponsor will calculate the Net Asset Value (“NAV”) on a particular day using the Level 1 valuation, but will later recalculate the NAV for the impacted Fund based upon the valuation inputs from these alternative verifiable sources (Level 2 or Level 3) and will report such NAV in its applicable financial statements and reports.
On September 30, 2014 and December 31, 2013, in the opinion of the Trust and the Fund, the reported value of the Corn Futures Contracts traded on the CBOT fairly reflected the value of the Corn Futures Contracts held by the Fund, and no adjustments were necessary.
On March 31, 2013, the Corn Futures Contracts traded on the CBOT due to settle on July 12, 2013 (the “JUL13 Corn Contracts”) were in a “limit down” condition and, in the opinion of the Trust and CORN, the reported value at the close of market on that day did not fairly value the JUL13 Corn Contracts held by CORN. Therefore, the Trust and CORN used alternative verifiable sources to value the JUL13 Corn Contracts on March 31, 2013 and the financial statements of the Trust and the Fund have been adjusted accordingly. This adjustment resulted in a ($410,475) decrease in the unrealized change in commodity futures contracted for the Trust and CORN in excess of reported CBOT values, for the quarter ended March 31, 2013. These transferred back to a Level 1 liability for the quarter ended June 30, 2013.
The Fund records its derivative activities at fair value. Gains and losses from derivative contracts are included in the statements of operations. Derivative contracts include futures contracts related to commodity prices. Futures, which are listed on a national securities exchange, such as the Chicago Board of Trade (“CBOT”) or the New York Mercantile Exchange (“NYMEX”), or reported on another national market, are generally categorized in Level 1 of the fair value hierarchy. OTC derivatives contracts (such as forward and swap contracts) which may be valued using models, depending on whether significant inputs are observable or unobservable, are categorized in Levels 2 or 3 of the fair value hierarchy.
Net Income (Loss) per Share
Net income (loss) per share is the difference between the NAV per unit at the beginning of each period and at the end of each period. The weighted average number of units outstanding was computed for purposes of disclosing net income (loss) per weighted average unit. The weighted average units are equal to the number of units outstanding at the end of the period, adjusted proportionately for units created or redeemed based on the amount of time the units were outstanding during such period.
New Accounting Pronouncements
The FASB issued ASU No, 2013-07, “Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting. The amendments in this Update are being issued to clarify when an entity should apply the liquidation basis of accounting. In addition, the guidance provides principles for the recognition and measurement of assets and liabilities and requirements for financial statements prepared using the liquidation basis of accounting. The amendments are effective for entities that determine liquidation is imminent during annual reporting periods beginning after December 15, 2013, and interim reporting periods therein. The adoption did not have a significant impact on the financial statements disclosures for the Trust or the Funds.
The FASB issued ASU No, 2013-10, “Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes. The amendments in this Update permit the Fed Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to UST and LIBOR. The amendments also remove the restriction on using different benchmark rates for similar hedges. The amendments are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The adoption did not have a significant impact on the financial statements disclosures for the Trust or the Funds.
The FASB issued ASU No. 2013-08, “Financial Services-Investment Companies (Topic 946)-Amendments to the Scope, Measurement, and Disclosure Requirements”. ASU No. 2013-08 affects the scope, measurement, and disclosure requirements for investment companies under U.S. GAAP. ASU 2013-08 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2013. The adoption did not have a material impact on the financial statements for the Trust or the Funds.
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Note 4 – Fair Value Measurements
The Fund’s assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy as described in the Fund’s significant accounting policies in Note 3. The following table presents information about the Fund’s assets and liabilities measured at fair value as of September 30, 2014 and December 31, 2013:
September 30, 2014
| Assets: | Level 1 | Level 2 | Level 3 | Balance as of September 30, 2014 | |||||||
| Cash equivalents | $ | 97,090,355 | $ | - | $ | - | $ | 97,090,355 | |||
|
Liabilities: |
Level 1 | Level 2 | Level 3 | Balance as of September 30, 2014 |
|||||||
| Corn futures contracts | $ | 16,589,737 | $ | - | $ | - | $ | 16,589,737 | |||
December 31, 2013 |
|||||||||||
| Assets: | Level 1 | Level 2 | Level 3 | Balance as of December 31, 2013 | |||||||
| Cash equivalents | $ | 42,405,220 | $ | - | $ | - | $ | 42,405,220 | |||
| Liabilities: | Level 1 | Level 2 | Level 3 | Balance as of December 31, 2013 | |||||||
| Corn futures contracts | $ | 4,884,788 | $ | - | $ | - | $ | 4,884,788 | |||
For the nine months ended September 30, 2014, the Fund did not have any significant transfers between any of the levels of the fair value hierarchy.
Transfers into and out of each level of the fair value hierarchy for the JUL13 Corn Contracts for the nine months ended September 30, 2013 were as follows:
| Transfers into Level 1 |
|
Transfers out of Level 1 |
|
Transfers into Level 2 |
|
Transfers out of Level 2 |
|
Transfers into Level 3 |
|
Transfers out of Level 3 | |||||||
| Liabilities (at fair value) | |||||||||||||||||
| Derivative contracts | |||||||||||||||||
| Corn future contracts | $ | 1,010,962 | $ | 1,010,962 | $ | 1,010,962 | $ | 1,010,962 | $ | - | $ | - | |||||
See the Fair Value - Definition and Hierarchy section in Note 3 above for an explanation of the transfers into and out of each level of the fair value hierarchy.
Note 5 -Derivative Instruments and Hedging Activities
In the normal course of business, the Fund utilizes derivative contracts in connection with its proprietary trading activities. Investments in derivative contracts are subject to additional risks that can result in a loss of all or part of an investment. The Fund’s derivative activities and exposure to derivative contracts are classified by the following primary underlying risks: interest rate, credit, commodity price, and equity price risks. In addition to its primary underlying risks, the Fund is also subject to additional counterparty risk due to inability of its counterparties to meet the terms of their contracts. For the nine months ended September 30, 2014 and 2013 the Fund invested only in commodity futures contracts. Cleared Corn Swaps have standardized terms similar to, and are priced by reference to, the corresponding Benchmark Component Futures Contract. Additionally, Other Corn Interests that do not have standardized terms and are not exchange-traded, referred to as “over-the-counter” Corn Interests, can generally be structured as the parties to the Corn Interest contract desire. Therefore, the Fund might enter into multiple Cleared Swaps and/or over-the-counter Interests intended to exactly replicate the performance of the Benchmark Component Futures Contracts for the Fund, or a single over-the-counter Interest designed to replicate the performance of the Benchmark as a whole. Assuming that there is no default by a counterparty to an over-the-counter Interest, the performance of the Interest will not necessarily correlate exactly with the performance of the Benchmark or the applicable Benchmark Component Futures Contract.
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Futures Contracts
The Fund is subject to commodity price risk in the normal course of pursuing its investment objectives. A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date.
The purchase and sale of futures contracts requires margin deposits with a Futures Commission Merchant (“FCM”). Subsequent payments (variation margin) are made or received by the Fund each day, depending on the daily fluctuations in the value of the contract, and are recorded as unrealized gains or losses by the Fund. Futures contracts may reduce the Fund’s exposure to counterparty risk since futures contracts are exchange-traded; and the exchange’s clearinghouse, as the counterparty to all exchange-traded futures, guarantees the futures against default.
The Commodity Exchange Act requires an FCM to segregate all customer transactions and assets from the FCM’s proprietary activities. A customer’s cash and other equity deposited with an FCM are considered commingled with all other customer funds subject to the FCM’s segregation requirements. In the event of an FCM’s insolvency, recovery may be limited to the Fund’s pro rata share of segregated customer funds available. It is possible that the recovery amount could be less than the total of cash and other equity deposited.
The following table discloses information about offsetting assets and liabilities presented in the statements of assets and liabilities to enable users of these financial statements to evaluate the effect or potential effect of netting arrangements for recognized assets and liabilities. These recognized assets and liabilities are presented as defined in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”) No. 2011-11 “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities” and subsequently clarified in FASB ASU 2013-01 “Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.”
The following table also identifies the fair value amounts of derivative instruments included in the statements of assets and liabilities as derivative contracts, categorized by primary underlying risk and held by the FCM, currently Newedge USA LLC, as of September 30, 2014 and December 31, 2013.
Offsetting of Financial Liabilities and Derivative Liabilities as of September 30, 2014
| (i) | (ii) | (iii) = (i) – (ii) | (iv) | (v) = (iii) – (iv) | ||||||||||||||
| Gross
Amount Not Offset in the Statement of Assets and Liabilities |
||||||||||||||||||
| Description | Gross Amount of Recognized Liabilities |
Gross Amount Offset in the Statement of Assets and Liabilities |
Net Amount Presented in the Statement of Assets and Liabilities |
Futures Contracts Available for Offset | Collateral, Due from Broker |
Net Amount | ||||||||||||
| Commodity price | ||||||||||||||||||
| Corn futures contracts | $ | 16,589,737 | $ | - | $ | 16,589,737 | $ | - | $ | 23,455,087 | $ | 6,865,350 | ||||||
Offsetting of Financial Liabilities and Derivative Liabilities as of December 31, 2013 | ||||||||||||||||||
| (i) | (ii) | (iii) = (i) – (ii) | (iv) | (v) = (iii) – (iv) | ||||||||||||||
| Gross
Amount Not Offset in the Statement of Assets and Liabilities |
||||||||||||||||||
| Description | Gross Amount of Recognized Liabilities |
Gross Amount Offset in the Statement of Assets and Liabilities |
Net Amount Presented in the Statement of Assets and Liabilities |
Futures Contracts Available for Offset | Collateral, Due from Broker |
Net Amount | ||||||||||||
| Commodity price | ||||||||||||||||||
| Corn futures contracts | $ | 4,884,788 | $ | - | $ | 4,884,788 | $ | - | $ | 9,852,213 | $ | 4,967,425 | ||||||
The following tables identify the net gain and loss amounts included in the statements of operations as realized and unrealized gains and losses on trading of commodity futures contracts categorized by primary underlying risk:
Three months ended September 30, 2014
| Primary Underlying Risk |
|
Realized Loss on Derivative Instruments |
Net Change in Unrealized Loss on Derivative Instruments |
|||||
| Commodity Price | ||||||||
| Corn futures contracts | $ | (16,012,787 | ) | $ | (6,859,262 | ) | ||
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Three months ended September 30, 2013
| Primary Underlying Risk |
|
Realized Loss on Derivative Instruments |
Net Change in Unrealized Loss on Derivative Instruments |
|||||
| Commodity Price | ||||||||
| Corn futures contracts | $ | (3,670,163 | ) | $ | (1,818,600 | ) | ||
Nine months ended September 30, 2014
| Primary Underlying Risk |
|
Realized Loss on Derivative Instruments |
Net Change in Unrealized Loss on Derivative Instruments |
|||||
| Commodity Price | ||||||||
| Corn futures contracts | $ | (12,120,329 | ) | $ | (11,704,949 | ) | ||
Nine months ended September 30, 2013
| Primary Underlying Risk |
|
Realized Loss on Derivative Instruments |
Net Change in Unrealized Loss on Derivative Instruments |
|||||
| Commodity Price | ||||||||
| Corn futures contracts | $ | (7,350,776 | ) | $ | (2,428,550 | ) | ||
Volume of Derivative Activities
The average notional market value categorized by primary underlying risk for the futures contracts held was 97.6 million and 94.7 million for the three and nine months ended September 30, 2014, respectively; and 47.9 million and 43.4 million for the same periods in 2013.
Note 6 - Financial Highlights
The following tables present per unit performance data and other supplemental financial data for the nine months ended September 30, 2014 and 2013. This information has been derived from information presented in the financial statements and is presented with total expenses gross of expenses waived by the Sponsor and with total expenses net of expenses waived by the Sponsor, as appropriate.
| Per Share Operation Performance | Nine months ended September 30, 2014 |
Nine months ended September 30, 2013 |
||||
| Net asset value at beginning of period | $ | 30.64 | $ | 44.34 | ||
| Income from investment operations: | ||||||
| Investment income | 0.01 | 0.01 | ||||
| Net realized and unrealized loss on commodity futures contracts | (6.98 | ) | (8.80 | ) | ||
| Total expenses | (0.87 | ) | (2.10 | ) | ||
| Net decrease in net asset value | (7.84 | ) | (10.89 | ) | ||
| Net asset value at end of period | $ | 22.80 | $ | 33.45 | ||
| Total Return | (25.59 | )% | (24.56 | )% | ||
| Ratios to Average Net Assets (Annualized) | ||||||
| Total expenses | 3.44 | % | 7.20 | % | ||
| Total expense, net | 3.89 | % | 7.11 | % | ||
| Net investment loss | (3.85 | )% | (7.06 | )% | ||
Total returns are calculated based on the change in value during the period. An individual shareholder’s total return and ratios may vary from the above total returns and ratios based on the timing of contributions to and withdrawals from the Fund. The ratios have been annualized.
The financial highlights per share data are calculated using the average of the daily shares outstanding for the reporting period, which is inclusive of the last day of the period under report. The asset-based per share data in the financial highlights are calculated using the prior day’s net assets consistent with the methodology used to calculate asset-based fees and expenses.
| 36 |
Note 7 - Organizational and Offering Costs
Expenses incurred in organizing of the Trust and the initial offering of the Shares of the Fund, including applicable SEC registration fees were borne directly by the Sponsor. The Fund will not be obligated to reimburse the Sponsor.
Note 8 – Subsequent Events
The subsequent events have been reviewed through the date of this filing. The following subsequent events transpired for the Fund:
From October 1, 2014 through November 3, 2014, the following changes occurred in Shares Outstanding: the Shares Outstanding for the Fund increased from 4,575,004 to 4,975,004; this represents an 8.74% increase.
| 37 |
TEUCRIUM
NATURAL GAS FUND
STATEMENTS OF ASSETS AND LIABILITIES
| September 30, 2014 | December 31, 2013 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Cash and cash equivalents | $ | 1,161,130 | $ | 1,752,722 | ||||
| Interest receivable | 74 | 126 | ||||||
| Other assets | 17,297 | 12,337 | ||||||
| Equity in trading accounts: | ||||||||
| Commodity futures contracts | 430 | 84,050 | ||||||
| Due from broker | 84,248 | - | ||||||
| Total equity in trading accounts | 84,678 | 84,050 | ||||||
| Total assets | $ | 1,263,179 | $ | 1,849,235 | ||||
| Liabilities | ||||||||
| Management fee payable to Sponsor | - | 1,671 | ||||||
| Other liabilities | 3,086 | 152 | ||||||
| Equity in trading accounts: | ||||||||
| Commodity futures contracts | 42,730 | - | ||||||
| Due to broker | - | 74,157 | ||||||
| Total equity in trading accounts | 42,730 | 74,157 | ||||||
| Total liabilities | 45,816 | 75,980 | ||||||
| Net assets | $ | 1,217,363 | $ | 1,773,255 | ||||
| Shares outstanding | 100,004 | 150,004 | ||||||
| Net asset value per share | $ | 12.17 | $ | 11.82 | ||||
| Market value per share | $ | 12.05 | $ | 12.00 | ||||
The accompanying notes are an integral part of these financial statements.
| 38 |
TEUCRIUM NATURAL
GAS FUND
SCHEDULE OF INVESTMENTS
September 30, 2014
(Unaudited)
| Percentage of | ||||||||||||
| Description: Assets | Fair Value | Net Assets | Shares | |||||||||
| Cash equivalents | ||||||||||||
| Money market funds | ||||||||||||
| Dreyfus Cash Management - Institutional (cost $1,161,130) | $ | 1,161,130 | 95.38 | % | 1,161,130 | |||||||
| Notional Amount | ||||||||||||
| (Long Exposure) | ||||||||||||
| Commodity futures contracts | ||||||||||||
| United States natural gas futures contracts | ||||||||||||
| NYMEX natural gas futures NOV15 (7 contracts) | $ | 430 | 0.04 | % | $ | 280,840 | ||||||
| Percentage of | Notional Amount | |||||||||||
| Description: Liabilities | Fair Value | Net Assets | (Long Exposure) | |||||||||
| Commodity futures contracts | ||||||||||||
| United States natural gas futures contracts | ||||||||||||
| NYMEX natural gas futures MAR15 (7 contracts) | $ | 30,030 | 2.47 | % | $ | 290,850 | ||||||
| NYMEX natural gas futures APR15 (8 contracts) | 10,800 | 0.89 | 309,840 | |||||||||
| NYMEX natural gas futures OCT15 (8 contracts) | 1,900 | 0.16 | 313,760 | |||||||||
| Total commodity futures contracts | $ | 42,730 | 3.52 | % | $ | 914,450 | ||||||
The accompanying notes are an integral part of these financial statements.
| 39 |
TEUCRIUM NATURAL GAS FUND
SCHEDULE OF INVESTMENTS
December 31, 2013
| Percentage of | ||||||||||||
| Description: Assets | Fair Value | Net Assets | Shares | |||||||||
| Cash equivalents | ||||||||||||
| Money market funds | ||||||||||||
| Dreyfus Cash Management - Institutional (cost $1,752,722) | $ | 1,752,722 | 98.84 | % | 1,752,722 | |||||||
| Percentage of | Notional Amount | |||||||||||
| Description: Liabilities | Fair Value | Net Assets | (Long Exposure) | |||||||||
| Commodity futures contracts | ||||||||||||
| United States natural gas futures contracts | ||||||||||||
| NYMEX natural gas futures MAR14 (10 contracts) | $ | 21,140 | 1.19 | % | $ | 419,300 | ||||||
| NYMEX natural gas futures APR14 (11 contracts) | 17,400 | 0.98 | 451,550 | |||||||||
| NYMEX natural gas futures OCT14 (11 contracts) | 23,670 | 1.34 | 457,820 | |||||||||
| NYMEX natural gas futures NOV14 (11 contracts) | 21,840 | 1.23 | 462,440 | |||||||||
| Total commodity futures contracts | $ | 84,050 | 4.74 | % | $ | 1,791,110 | ||||||
The accompanying notes are an integral part of these financial statements.
| 40 |
TEUCRIUM NATURAL
GAS FUND
STATEMENTS OF OPERATIONS
(Unaudited)
| Three months ended | Three months ended | Nine months ended | Nine months ended | |||||||||||||
| September 30, 2014 | September 30, 2013 | September 30, 2014 | September 30, 2013 | |||||||||||||
| Income | ||||||||||||||||
| Realized and unrealized gain (loss) on trading of commodity futures contracts: | ||||||||||||||||
| Realized gain (loss) on commodity futures contracts | $ | 4,960 | $ | (125,490 | ) | $ | 288,110 | $ | (224,549 | ) | ||||||
| Net change in unrealized appreciation or depreciation on commodity futures contracts | (109,020 | ) | 65,830 | (126,350 | ) | 130,339 | ||||||||||
| Interest income | 71 | 314 | 340 | 1,094 | ||||||||||||
| Total (loss) income | (103,989 | ) | (59,346 | ) | 162,100 | (93,116 | ) | |||||||||
| Expenses | ||||||||||||||||
| Management fees | 3,070 | 8,459 | 11,504 | 27,999 | ||||||||||||
| Professional fees | 28,145 | 9,130 | 39,559 | 27,913 | ||||||||||||
| Distribution and marketing fees | 4,780 | 7,235 | 16,891 | 29,740 | ||||||||||||
| Custodian fees and expenses | 1,500 | 632 | 4,527 | 2,091 | ||||||||||||
| Business permits and licenses fees | - | 5,770 | 25,000 | 10,783 | ||||||||||||
| General and administrative expenses | 742 | 1,676 | 8,396 | 5,898 | ||||||||||||
| Brokerage commissions | - | 213 | 349 | 755 | ||||||||||||
| Other expenses | 231 | 644 | 651 | 1,512 | ||||||||||||
| Total expenses | 38,468 | 33,759 | 106,877 | 106,691 | ||||||||||||
| Expenses waived by the Sponsor | (34,052 | ) | (21,315 | ) | (89,249 | ) | (65,578 | ) | ||||||||
| Reimbursement of expenses previously waived | - | - | - | - | ||||||||||||
| Total expenses, net | 4,416 | 12,444 | 17,628 | 41,113 | ||||||||||||
| Net (loss) income | $ | (108,405 | ) | $ | (71,790 | ) | $ | 144,472 | $ | (134,229 | ) | |||||
| Net (loss) income per share | $ | (1.09 | ) | $ | (0.24 | ) | $ | 0.35 | $ | (0.63 | ) | |||||
| Net (loss) income per weighted average share | $ | (1.08 | ) | $ | (0.24 | ) | $ | 1.18 | $ | (0.42 | ) | |||||
| Weighted average shares outstanding | 100,004 | 300,004 | 122,715 | 317,403 | ||||||||||||
The accompanying notes are an integral part of these financial statements.
| 41 |
TEUCRIUM NATURAL
GAS FUND
STATEMENTS OF CHANGES IN NET ASSETS
(Unaudited)
| Nine months ended | Nine months ended | |||||||
| September 30, 2014 | September 30, 2013 | |||||||
| Operations | ||||||||
| Net income (loss) | $ | 144,472 | $ | (134,229 | ) | |||
| Capital transactions | ||||||||
| Issuance of Shares | - | - | ||||||
| Redemption of Shares | (700,364 | ) | (1,211,767 | ) | ||||
| Total capital transactions | (700,364 | ) | (1,211,767 | ) | ||||
| Net change in net assets | (555,892 | ) | (1,345,996 | ) | ||||
| Net assets, beginning of period | $ | 1,773,255 | $ | 4,625,621 | ||||
| Net assets, end of period | $ | 1,217,363 | $ | 3,279,625 | ||||
| Net asset value per share at beginning of period | $ | 11.82 | $ | 11.56 | ||||
| At end of period | $ | 12.17 | $ | 10.93 | ||||
| Creation of Shares | - | - | ||||||
| Redemption of Shares | 50,000 | 100,000 | ||||||
The accompanying notes are an integral part of these financial statements.
| 42 |
TEUCRIUM
NATURAL GAS FUND
STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine months ended | Nine months ended | |||||||
| September 30, 2014 | September 30, 2013 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | 144,472 | $ | (134,229 | ) | |||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
| Net change in unrealized appreciation or depreciation on commodity futures contracts | 126,350 | (130,339 | ) | |||||
| Changes in operating assets and liabilities: | ||||||||
| Due from broker | (84,248 | ) | 175,151 | |||||
| Interest receivable | 52 | 95 | ||||||
| Other assets | (4,960 | ) | (4,203 | ) | ||||
| Due to broker | (74,157 | ) | (1,273 | ) | ||||
| Management fee payable to Sponsor | (1,671 | ) | - | |||||
| Other liabilities | 2,934 | 524 | ||||||
| Net cash provided by (used in) operating activities | 108,772 | (94,274 | ) | |||||
| Cash flows from financing activities: | ||||||||
| Proceeds from sale of Shares | - | - | ||||||
| Redemption of Shares | (700,364 | ) | (1,211,767 | ) | ||||
| Net cash used in financing activities | (700,364 | ) | (1,211,767 | ) | ||||
| Net change in cash and cash equivalents | (591,592 | ) | (1,306,041 | ) | ||||
| Cash and cash equivalents, beginning of period | 1,752,722 | 4,476,336 | ||||||
| Cash and cash equivalents, end of period | $ | 1,161,130 | $ | 3,170,295 | ||||
The accompanying notes are an integral part of these financial statements.
| 43 |
NOTES TO
FINANCIAL STATEMENTS
September 30, 2014
(Unaudited)
Note 1 – Organization and Operation
Teucrium Natural Gas Fund (referred to herein as “NAGS,” or the “Fund”) is a commodity pool that is a series of Teucrium Commodity Trust (“Trust”), a Delaware statutory trust formed on September 11, 2009. The Fund issues common units, called the “Shares,” representing fractional undivided beneficial interests in the Fund. The Fund continuously offers Creation Baskets consisting of 50,000 Shares at their Net Asset Value (“NAV”) to “Authorized Purchasers” through Foreside Fund Services, LLC, which is the distributor for the Fund (the “Distributor”). Authorized Purchasers sell such Shares, which are listed on the New York Stock Exchange (“NYSE”) Arca under the symbol “NAGS,” to the public at per-Share offering prices that reflect, among other factors, the trading price of the Shares on the NYSE Arca, the NAV of the Fund at the time the Authorized Purchaser purchased the Creation Baskets and the NAV at the time of the offer of the Shares to the public, the supply of and demand for Shares at the time of sale, and the liquidity of the markets for natural gas interests. The Fund’s Shares trade in the secondary market on the NYSE Arca at prices that are lower or higher than their NAV per Share.
The investment objective of NAGS is to have the daily changes in percentage terms of the Shares’ NAV reflect the daily changes in percentage terms of a weighted average of the following: the nearest to spot month March, April, October and November Henry Hub Natural Gas Futures Contracts traded on the New York Mercantile Exchange (“NYMEX”), weighted 25% equally in each contract month.
The Fund commenced investment operations on February 1, 2011 and has a fiscal year ending December 31. The Fund’s sponsor is Teucrium Trading, LLC (the “Sponsor”). The Sponsor is responsible for the management of the Fund. The Sponsor is a member of the National Futures Association (the “NFA”) and became a commodity pool operator registered with the Commodity Futures Trading Commission (the “CFTC”) effective November 10, 2009.
On October 22, 2010, the Fund’s initial registration of 40,000,000 shares on Form S-1 was declared effective by the U.S. Securities and Exchange Commission (“SEC”). On February 1, 2011, the Fund listed its shares on the NYSE Arca under the ticker symbol “NAGS”. On the day prior to that, the Fund issued 200,000 shares in exchange for $5,000,000 at NAGS’ initial NAV of $25 per share. The Fund also commenced investment operations on February 1, 2011 by purchasing commodity futures contracts traded on the NYMEX. On December 31, 2010, the Fund had two shares outstanding which were owned by the Sponsor.
The accompanying unaudited financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the SEC and, therefore, do not include all information and footnote disclosures required under accounting principles generally accepted in the United States of America (“GAAP”). The financial information included herein is unaudited; however, such financial information reflects all adjustments which are, in the opinion of management, necessary for the fair presentation of the Fund’s financial statements for the interim period. It is suggested that these interim financial statements be read in conjunction with the financial statements and related notes included in the Trust’s Annual Report on Form 10-K, as well as the most recent Form S-1 filing, as applicable. The operating results for the nine months ended September 30, 2014 are not necessarily indicative of the results to be expected for the full year ending December 31, 2014.
Note 2 – Principal Contracts and Agreements
In its capacity as the Custodian for the Fund, the Custodian, currently the Bank of New York Mellon, holds for the Fund its Treasury Securities, cash and/or cash equivalents pursuant to a custodial agreement. The Custodian is also the registrar and transfer agent for the Fund’s Shares. In addition, the Custodian also serves as Administrator for the Fund, performing certain administrative and accounting services and preparing certain SEC and CFTC reports on behalf of the Fund. For these services, the Custodian receives: for custody services: 0.0075% of average gross assets up to $1 billion, and 0.0050% of average gross assets over $1 billion, annually, plus certain per-transaction charges; for transfer agency services: 0.0075% of average gross assets annually; and for administrative services: 0.05% of average gross assets up to $1 billion, 0.04% of average gross assets between $1 billion and $3 billion, and 0.03% of average gross assets over $3 billion, annually. A combined minimum annual fee of up to $125,000 for custody, transfer agency and administrative services per Fund can be assessed.
The Sponsor and the Trust employ Foreside Fund Services, LLC as the Distributor for the Funds. The Distributor receives, for its services as distributor for the Funds. The Distribution Services Agreement among the Distributor, the Sponsor and the Trust calls for the Distributor to work with the Custodian in connection with the receipt and processing of orders for Creation Baskets and Redemption Baskets and the review and approval of all Fund sales literature and advertising materials. The Distributor and the Sponsor have also entered into a Securities Activities and Service Agreement (the “SASA”) under which certain employees and officers of the Sponsor are licensed as registered representatives or registered principals of the Distributor, under FINRA rules. For its
| 44 |
services as the Distributor, Foreside receives a fee of 0.01% of the Fund’s average daily net assets and an aggregate annual fee of $100,000 for all Teucrium Funds, along with certain expense reimbursements. For its services under the SASA, Foreside receives a fee of $5,000 per registered representative and $1,000 per registered location.
Currently, Newedge USA, LLC (“Newedge USA”) serves as the Fund’s clearing broker to execute and clear the Fund’s futures and provide other brokerage-related services. Newedge USA is a futures commission merchant and broker dealer registered with the U.S. Commodity Futures Trading Commission (“CFTC”) and the U.S. Securities and Exchange Commission (“SEC”), and is a member of FINRA. Newedge USA is a clearing member of all principal futures exchanges located in the United States as well as a member of the Chicago Board Options Exchange, International Securities Exchange, New York Stock Exchange, Options Clearing Corporation, and Government Securities Clearing Corporation. For Natural Gas Futures Contracts Newedge is paid $6.00 per round turn.
The sole Trustee of the Trust is Wilmington Trust Company, a Delaware banking corporation. The Trustee will accept service of legal process on the Trust in the State of Delaware and will make certain filings under the Delaware Statutory Trust Act. For its services, the Trustee receives an annual fee of $3,300 from the Trust.
Note 3 – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) as detailed in the Financial Accounting Standards Board’s Accounting Standards Codification.
Correction of immaterial error in previously issued financial statements.
Effective with the period ended June 30, 2014, expenses for the current and comparative periods are presented both gross and net of any expenses waived by or paid by the Sponsor that would have been incurred by the Funds (“expenses waived by the Sponsor”). In addition, certain expenses paid by the Sponsor on behalf of the Funds for the years ended December 31, 2012 and 2013 that were subject to possible recovery from the Funds in the following year, as had been previously disclosed in aggregate for the Trust in the Form 10-K for 2012 and 2013, have also been included in expenses and waived/reimbursed expenses in the period incurred by the Sponsor. These expenses, if reimbursed by the Funds to the Sponsor in 2013 or 2014 are then presented as a reimbursement of expenses previously waived. “Total expenses, net”, which is after the impact of any expenses waived by or reimbursed to the Sponsor, are presented in the same manner as previously reported. There is, therefore, no impact to, or change in the Net gain or Net loss in any period for the Trust and each Fund as a result of this change in presentation.
Revenue Recognition
Commodity futures contracts are recorded on the trade date. All such transactions are recorded on the identified cost basis and marked to market daily. Unrealized appreciation or depreciation on commodity futures contracts are reflected in the statements of operations as the difference between the original contract amount and the fair market value as of the last business day of the year or as of the last date of the financial statements. Changes in the appreciation or depreciation between periods are reflected in the statements of operations. Interest on cash equivalents and deposits with the Futures Commission Merchant are recognized on the accrual basis. The Fund earns interest on its assets denominated in U.S. dollars on deposit with the Futures Commission Merchant. In addition, the Fund earns interest on funds held at the custodian at prevailing market rates for such investments.
Brokerage Commissions
Brokerage commissions on all open commodity futures contracts are accrued on a full-turn basis.
Income Taxes
For tax purposes, the Fund will be treated as a partnership. The Fund does not record a provision for income taxes because the partners report their share of the Fund’s income or loss on their income tax returns. The financial statements reflect the Fund’s transactions without adjustment, if any, required for income tax purposes.
The Fund is required to determine whether a tax position is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The Fund files an income tax return in the U.S. federal jurisdiction, and may file income tax returns in various U.S. states and foreign jurisdictions. For all tax years 2011 to 2013, the Fund remains subject to income tax examinations by major taxing authorities. The tax benefit recognized is measured as the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. De-recognition of a tax benefit previously recognized results in the Fund recording a tax liability that reduces net assets. Based on its analysis, the Fund has determined that it has not incurred any liability for unrecognized tax benefits as of
| 45 |
September 30, 2014 and December 31, 2013. However, the Fund’s conclusions regarding this policy may be subject to review and adjustment at a later date based on factors including, but not limited to, ongoing analysis of and changes to tax laws, regulations, and interpretations thereof.
The Fund recognizes interest accrued related to unrecognized tax benefits and penalties related to unrecognized tax benefits in income tax fees payable, if assessed. No interest expense or penalties have been recognized as of and for the periods ended September 30, 2014 and 2013.
The Fund may be subject to potential examination by U.S. federal, U.S. state, or foreign jurisdictional authorities in the area of income taxes. These potential examinations may include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions, and compliance with U.S. federal, U.S. state and foreign tax laws. The Fund’s management does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months.
Creations and Redemptions
Authorized Purchasers may purchase Creation Baskets consisting of 50,000 shares from the Fund. The amount of the proceeds required to purchase a Creation Basket will be equal to the NAV of the shares in the Creation Basket determined as of 4:00 p.m. New York time on the day the order to create the basket is properly received.
Authorized Purchasers may redeem shares from the Fund only in blocks of 50,000 shares called “Redemption Baskets.” The amount of the redemption proceeds for a Redemption Basket will be equal to the NAV of the shares in the Redemption Basket determined as of 4:00 p.m. New York time on the day the order to redeem the basket is properly received.
The Fund receives or pays the proceeds from shares sold or redeemed within three business days after the trade date of the purchase or redemption. The amounts due from Authorized Purchasers are reflected in the Fund’s statements of assets and liabilities as receivable for shares sold. Amounts payable to Authorized Purchasers upon redemption are reflected in the Fund’s statements of assets and liabilities as payable for shares redeemed.
As outlined in the most recent Form S-1 filing, 100,000 shares represents two Redemption Baskets for the Fund and a minimum level of shares.
Effective May 5, 2014, the Fund had a minimum number of shares outstanding and this situation continued through September 30, 2014. No redemptions can be made until additional shares are created.
Allocation of Shareholder Income and Losses
Profit or loss is allocated among the shareholders of the Fund in proportion to the number of shares each shareholder holds as of the close of each month.
Cash Equivalents
Cash equivalents are highly-liquid investments with original maturity dates of 90 days or less when acquired. The Fund reported its cash equivalents in the statements of assets and liabilities at market value, or at carrying amounts that approximate fair value, because of their highly-liquid nature and short-term maturities. The Fund has these balances of its assets on deposit with banks. Assets deposited with the bank may, at times, exceed federally insured limits. The Fund had a balance of $1,161,130 and $1,752,722 in money market funds on September 30, 2014 and December 31, 2013, respectively; these balances are included in cash and cash equivalents on the statements of assets and liabilities.
Due from/to Broker
The amount recorded by the Fund for the amount due from and to the clearing broker includes, but is not limited to, cash held by the broker, amounts payable to the clearing broker related to open transactions and payables for commodities futures accounts liquidating to an equity balance on the clearing broker’s records.
Margin is the minimum amount of funds that must be deposited by a commodity interest trader with the trader’s broker to initiate and maintain an open position in futures contracts. A margin deposit acts to assure the trader’s performance of the futures contracts purchased or sold. Futures contracts are customarily bought and sold on initial margin that represents a very small percentage of the aggregate purchase or sales price of the contract. Because of such low margin requirements, price fluctuations occurring in the futures markets may create profits and losses that, in relation to the amount invested, are greater than are customary in other forms of investment or speculation. As discussed below, adverse price changes in the futures contract may result in margin requirements that greatly exceed the initial margin. In addition, the amount of margin required in connection with a particular futures contract is set from
| 46 |
time to time by the exchange on which the contract is traded and may be modified from time to time by the exchange during the term of the contract. Brokerage firms, such as the Fund’s clearing brokers, carrying accounts for traders in commodity interest contracts generally require higher amounts of margin as a matter of policy to further protect themselves. Over-the-counter trading generally involves the extension of credit between counterparties, so the counterparties may agree to require the posting of collateral by one or both parties to address credit exposure.
When a trader purchases an option, there is no margin requirement; however, the option premium must be paid in full. When a trader sells an option, on the other hand, he or she is required to deposit margin in an amount determined by the margin requirements established for the underlying interest and, in addition, an amount substantially equal to the current premium for the option. The margin requirements imposed on the selling of options, although adjusted to reflect the probability that out-of-the-money options will not be exercised, can in fact be higher than those imposed in dealing in the futures markets directly. Complicated margin requirements apply to spreads and conversions, which are complex trading strategies in which a trader acquires a mixture of options positions and positions in the underlying interest.
Ongoing or “maintenance” margin requirements are computed each day by a trader’s clearing broker. When the market value of a particular open futures contract changes to a point where the margin on deposit does not satisfy maintenance margin requirements, a margin call is made by the broker. If the margin call is not met within a reasonable time, the broker may close out the trader’s position. With respect to the Fund’s trading, the Fund (and not its shareholders personally) is subject to margin calls.
Finally, many major U.S. exchanges have passed certain cross margining arrangements involving procedures pursuant to which the futures and options positions held in an account would, in the case of some accounts, be aggregated and margin requirements would be assessed on a portfolio basis, measuring the total risk of the combined positions.
Calculation of Net Asset Value
The Fund’s NAV is calculated by:
| · | Taking the current market value of its total assets and |
| · | Subtracting any liabilities. |
The administrator, the Bank of New York Mellon, calculates the NAV of the Fund once each trading day. It calculates the NAV as of the earlier of the close of the NYSE or 4:00 p.m. New York time. The NAV for a particular trading day is released after 4:15 p.m. New York time.
In determining the value of Natural Gas Futures Contracts, the administrator uses the NYMEX closing price. The administrator determines the value of all other Fund investments as of the earlier of the close of the NYSE or 4:00 p.m. New York time. The value of over-the-counter natural gas interests is determined based on the value of the commodity or futures contract underlying such natural gas interest, except that a fair value may be determined if the Sponsor believes that the Fund is subject to significant credit risk relating to the counterparty to such natural gas interest. For purposes of financial statements and reports, the Sponsor will recalculate the NAV where necessary to reflect the “fair value” of a Futures Contract when the Futures Contract closes at its price fluctuation limit for the day. Treasury securities held by the Fund are valued by the administrator using values received from recognized third-party vendors and dealer quotes. NAV includes any unrealized profit or loss on open natural gas interests and any other income or expense accruing to the Fund but unpaid or not received by the Fund.
Market value per share represents the closing price on the last trading day of the quarter as reported by the NYSE Arca. If such a closing price is not available, the bid/ask midpoint at 4 p.m. as reported by the NYSE Arca was used.
Sponsor Fee, Allocation of Expenses and Related Party Transactions
The Sponsor is responsible for investing the assets of the Fund in accordance with the objectives and policies of the Fund. In addition, the Sponsor arranges for one or more third parties to provide administrative, custodial, accounting, transfer agency and other necessary services to the Fund, including services directly attributable to the Fund such as accounting, financial reporting, regulatory compliance and trading activities, which the Sponsor elected not to outsource. For these services, the Fund is contractually obligated to pay a monthly management fee to the Sponsor, based on average daily net assets, at a rate equal to 1.00% per annum.
| 47 |
The Fund generally pays for all brokerage fees, taxes and other expenses, including licensing fees for the use of intellectual property, registration or other fees paid to the SEC, the Financial Industry Regulatory Authority (“FINRA”), formerly the National Association of Securities Dealers, or any other regulatory agency in connection with the offer and sale of subsequent Shares after its initial registration and all legal, accounting, printing and other expenses associated therewith. The Fund also pays its portion of the fees and expenses associated with the Trust’s tax accounting and reporting requirements. Certain aggregate expenses common to all Funds are allocated by the Sponsor to the respective funds based on activity drivers deemed most appropriate by the Sponsor for such expenses, including but not limited to relative assets under management and creation and redeem order activity. These aggregate common expenses include, but are not limited to, legal, auditing, accounting and financial reporting, tax-preparation, regulatory compliance, trading activities, and insurance costs, as well as fees paid to the Distributor, which are included in the related line item in the statements of operations. A portion of these aggregate common expenses are related to the Sponsor or related parties of principals of the Sponsor; these are necessary services to the Funds, which are primarily the cost of performing accounting and financial reporting, regulatory compliance, and trading activities that are directly attributable to the Fund. For the Fund, for the three months ended September 30, such expenses totaled approximately $4,000 in 2014 and $4,000 in 2013; all of these amounts were waived by the Sponsor. For the nine months ended September 30, such expenses were approximately $12,000 in 2014 and $19,000 in 2013; all of these amounts were waived by the Sponsor. All asset-based fees and expenses are calculated on the prior day’s net assets. On July 29, 2011, the Sponsor filed a Form 8-K with the SEC which stated that effective August 1, 2011, the Sponsor has agreed to voluntarily cap the management fee and expenses of NAGS at 1.5% per annum of the daily net assets of the Fund. The cap may be terminated by the Sponsor at any time with 90 days’ notice. Expenses in 2014 which are identified as waived by the Sponsor are subject to reimbursement in the remainder of 2014 or in 2015, although the total expense ratio may not exceeded the 1.50% without notice provided as described above.
For the nine-months ended September 30, 2014 there were $89,249 of expenses that had been identified on the Statements of Operations of the Fund as expenses that were waived by the Sponsor and subject to recovery in future periods. The Sponsor has determined that there will be no recovery sought for these amounts in any future period.
For the year ended December 31, 2013, there were approximately $15,400 of expenses recorded in the financial statements of the Sponsor which were subject to reimbursement by NAGS in 2013. At that time, the Sponsor had determined that recovery of the expense amounts was not probable. For the three and nine months ended September 30, 2013, the Sponsor received no subsequent reimbursement for the expenses.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of the revenue and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value - Definition and Hierarchy
In accordance with U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.
In determining fair value, the Fund uses various valuation approaches. In accordance with U.S. GAAP, a fair value hierarchy for inputs is used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Fund. Unobservable inputs reflect the Fund’s assumptions about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy is categorized into three levels based on the inputs as follows:
Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Fund has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 securities. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these securities does not entail a significant degree of judgment.
Level 2 - Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
The availability of valuation techniques and observable inputs can vary from security to security and is affected by a wide variety of factors including, the type of security, whether the security is new and not yet established in the marketplace, and other characteristics particular to the transaction. 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. Those estimated values do not necessarily represent the amounts that may be ultimately realized due to the occurrence of future circumstances that cannot be reasonably determined. Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower than the values that would have been used had a ready market for the securities existed. Accordingly, the degree of judgment exercised by the Fund in determining fair value is
| 48 |
greatest for securities categorized in Level 3. In certain cases, 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 in its entirety falls, is determined based on the lowest level input that is significant to the fair value measurement.
Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Fund’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. The Fund uses prices and inputs that are current as of the measurement date, including periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many securities. This condition could cause a security to be reclassified to a lower level within the fair value hierarchy. When such a situation exists on a quarter close, the Sponsor will calculate the NAV on a particular day using the Level 1 valuation, but will later recalculate the NAV for the impacted Fund based upon the valuation inputs from these alternative verifiable sources (Level 2 or Level 3) and will report such NAV in its applicable financial statements and reports.
On September 30, 2014 and December 31, 2013, in the opinion of the Trust and the Fund, the reported value of the Natural Gas Futures Contracts traded on the NYMEX fairly reflected the value of the Natural Gas Futures Contracts held by the Fund, and no adjustments were necessary.
The Fund records its derivative activities at fair value. Gains and losses from derivative contracts are included in the statements of operations. Derivative contracts include futures contracts related to commodity prices. Futures, which are listed on a national securities exchange, such as the CBOT or the NYMEX, or reported on another national market, are generally categorized in Level 1 of the fair value hierarchy. OTC derivatives contracts (such as forward and swap contracts) which may be valued using models, depending on whether significant inputs are observable or unobservable, are categorized in Levels 2 or 3 of the fair value hierarchy.
Net Income (Loss) per Share
Net income (loss) per share is the difference between the NAV per unit at the beginning of each period and at the end of each period. The weighted average number of units outstanding was computed for purposes of disclosing net income (loss) per weighted average unit. The weighted average units are equal to the number of units outstanding at the end of the period, adjusted proportionately for units created or redeemed based on the amount of time the units were outstanding during such period.
New Accounting Pronouncements
The FASB issued ASU No, 2013-07, “Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting. The amendments in this Update are being issued to clarify when an entity should apply the liquidation basis of accounting. In addition, the guidance provides principles for the recognition and measurement of assets and liabilities and requirements for financial statements prepared using the liquidation basis of accounting. The amendments are effective for entities that determine liquidation is imminent during annual reporting periods beginning after December 15, 2013, and interim reporting periods therein. The adoption did not have a significant impact on the financial statements disclosures for the Trust or the Funds.
The FASB issued ASU No, 2013-10, “Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes. The amendments in this Update permit the Fed Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to UST and LIBOR. The amendments also remove the restriction on using different benchmark rates for similar hedges. The amendments are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The adoption did not have a significant impact on the financial statements disclosures for the Trust or the Funds.
The FASB issued ASU No. 2013-08, “Financial Services-Investment Companies (Topic 946)-Amendments to the Scope, Measurement, and Disclosure Requirements”. ASU No. 2013-08 affects the scope, measurement, and disclosure requirements for investment companies under U.S. GAAP. ASU 2013-08 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2013. The adoption did not have a material impact on the financial statements for the Trust or the Funds.
Note 4 – Fair Value Measurements
The Fund’s assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy as described in the Fund’s significant accounting policies in Note 3. The following table presents information about the Fund’s assets and liabilities measured at fair value as of September 30, 2014 and December 31, 2013:
September 30, 2014
| Assets: | Level 1 | Level 2 | Level 3 | Balance as of September 30, 2014 | |||||||
| Cash equivalents | $ | 1,161,130 | $ | - | $ | - | $ | 1,161,130 | |||
| Natural gas futures contracts | 430 | - | - | 430 | |||||||
| Total | $ | 1,161,560 | $ | - | $ | - | $ | 1,161,560 | |||
| 49 |
| Liabilities: | Level 1 | Level 2 | Level 3 | Balance as of September 30, 2014 | |||||||
| Natural gas futures contracts | $ | 42,730 | $ | - | $ | - | $ | 42,730 | |||
December 31, 2013 |
|||||||||||
| Assets: | Level 1 | Level 2 | Level 3 | Balance as of December 31, 2013 | |||||||
| Cash equivalents | $ | 1,752,722 | $ | - | $ | - | $ | 1,752,722 | |||
| Natural gas futures contracts | 84,050 | - | - | 84,050 | |||||||
| Total | $ | 1,836,772 | $ | - | $ | - | $ | 1,836,772 | |||
For the nine months ended September 30, 2014 and 2013, the Fund did not have any significant transfers between any of the levels of the fair value hierarchy.
See the Fair Value - Definition and Hierarchy section in Note 3 above for an explanation of the transfers into and out of each level of the fair value hierarchy.
Note 5 -Derivative Instruments and Hedging Activities
In the normal course of business, the Fund utilizes derivative contracts in connection with its proprietary trading activities. Investments in derivative contracts are subject to additional risks that can result in a loss of all or part of an investment. The Fund’s derivative activities and exposure to derivative contracts are classified by the following primary underlying risks: interest rate, credit, commodity price, and equity price risks. In addition to its primary underlying risks, the Fund is also subject to additional counterparty risk due to inability of its counterparties to meet the terms of their contracts. For the nine months ended September 30, 2014 and 2013, the Fund invested only in commodity futures contracts.
Futures Contracts
The Fund is subject to commodity price risk in the normal course of pursuing its investment objectives. A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date.
The purchase and sale of futures contracts requires margin deposits with a Futures Commission Merchant (“FCM”). Subsequent payments (variation margin) are made or received by the Fund each day, depending on the daily fluctuations in the value of the contract, and are recorded as unrealized gains or losses by the Fund. Futures contracts may reduce the Fund’s exposure to counterparty risk since futures contracts are exchange-traded; and the exchange’s clearinghouse, as the counterparty to all exchange-traded futures, guarantees the futures against default.
The Commodity Exchange Act requires an FCM to segregate all customer transactions and assets from the FCM’s proprietary activities. A customer’s cash and other equity deposited with an FCM are considered commingled with all other customer funds subject to the FCM’s segregation requirements. In the event of an FCM’s insolvency, recovery may be limited to the Fund’s pro rata share of segregated customer funds available. It is possible that the recovery amount could be less than the total of cash and other equity deposited.
The following table discloses information about offsetting assets and liabilities presented in the statements of assets and liabilities to enable users of these financial statements to evaluate the effect or potential effect of netting arrangements for recognized assets and liabilities. These recognized assets and liabilities are presented as defined in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”) No. 2011-11 “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities” and subsequently clarified in FASB ASU 2013-01 “Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.”
The following table also identifies the fair value amounts of derivative instruments included in the statements of assets and liabilities as derivative contracts, categorized by primary underlying risk and held by the FCM, currently Newedge USA LLC, as of September 30, 2014 and December 31, 2013.
| 50 |
Offsetting of Financial Assets and Derivative Assets as of September 30, 2014
| (i) | (ii) | (iii) = (i) – (ii) | (iv) | (v) = (iii) – (iv) | |||||||||||||||||
| Gross
Amount Not Offset in the Statement of Assets and Liabilities |
|||||||||||||||||||||
| Description | Gross Amount of Recognized Assets |
Gross Amount Offset in the Statement of Assets and Liabilities |
Net Amount Presented in the Statement of Assets and Liabilities |
Futures Contracts Available for Offset | Collateral, Due to Broker |
Net Amount | |||||||||||||||
| Commodity price | |||||||||||||||||||||
| Natural gas futures contracts | $ | 430 | $ | - | $ | 430 | $ | 430 | $ | - | $ | - | |||||||||
Offsetting of Financial Liabilities and Derivative Liabilities as of September 30, 2014
| (i) | (ii) | (iii) = (i) – (ii) | (iv) | (v) = (iii) – (iv) | ||||||||||||||||
| Gross
Amount Not Offset in the Statement of Assets and Liabilities |
||||||||||||||||||||
| Description | Gross Amount of Recognized Liabilities |
Gross Amount Offset in the Statement of Assets and Liabilities |
Net Amount Presented in the Statement of Assets and Liabilities |
Futures Contracts Available for Offset | Collateral, Due from Broker |
Net Amount | ||||||||||||||
| Commodity price | ||||||||||||||||||||
| Natural gas futures contracts | $ | 42,730 | $ | - | $ | 42,730 | $ | 430 | $ | 84,248 | $ | 41,948 | ||||||||
Offsetting of Financial Assets and Derivative Assets as of December 31, 2013 | ||||||||||||||||||||
| (i) | (ii) | (iii) = (i) – (ii) | (iv) | (v) = (iii) – (iv) | ||||||||||||||||
| Gross
Amount Not Offset in the Statement of Assets and Liabilities |
||||||||||||||||||||
| Description | Gross Amount of Recognized Assets |
Gross Amount Offset in the Statement of Assets and Liabilities |
Net Amount Presented in the Statement of Assets and Liabilities |
Futures Contracts Available for Offset | Collateral, Due to Broker |
Net Amount | ||||||||||||||
| Commodity price | ||||||||||||||||||||
| Natural gas futures contracts | $ | 84,050 | $ | - | $ | 84,050 | $ | - | $ | 74,157 | $ | 9,893 | ||||||||
The following tables identify the net gain and loss amounts included in the statements of operations as realized and unrealized gains and losses on trading of commodity futures contracts categorized by primary underlying risk:
Three months ended September 30, 2014
| Primary Underlying Risk | Realized Gain on Derivative Instruments |
Net Change in Unrealized Loss on Derivative Instruments | |||||
| Commodity price | |||||||
| Natural gas futures contracts | $ | 4,960 | $ | (109,020) | |||
Three months ended September 30, 2013
| Primary Underlying Risk | Realized Loss on Derivative Instruments |
Net Change in Unrealized Gain on Derivative Instruments | |||||
| Commodity price | |||||||
| Natural gas futures contracts | $ | (125,490 | ) | $ | 65,830 | ||
Nine months ended September 30, 2014
| Primary Underlying Risk | Realized Gain on Derivative Instruments |
Net Change in Unrealized Loss on Derivative Instruments | |||||
| Commodity price | |||||||
| Natural gas futures contracts | $ | 288,110 | $ | (126,350) | |||
| 51 |
Nine months ended September 30, 2013
| Primary Underlying Risk | Realized Loss on Derivative Instruments |
Net Change in Unrealized Gain on Derivative Instruments | |||||
| Commodity price | |||||||
| Natural gas futures contracts | $ | (224,549 | ) | $ | 130,339 | ||
Volume of Derivative Activities
The average notional market value categorized by primary underlying risk for all futures contracts held was 1.18 million and 1.49 million for the three and nine months ended September 30, 2014, respectively; and 3.31 million and 3.56 million for the same periods in 2013.
Note 6 - Financial Highlights
The following table presents per unit performance data and other supplemental financial data for the nine months ended September 30, 2014 and 2013. This information has been derived from information presented in the financial statements. This information has been derived from information presented in the financial statements and is presented with total expenses gross of expenses waived by the Sponsor and with total expenses net of expenses waived by the Sponsor, as appropriate.
| Per Share Operation Performance | Nine months ended September 30, 2014 |
Nine months ended September 30, 2013 |
|||||
| Net asset value at beginning of period | $ | 11.82 | $ | 11.56 | |||
| Income from investment operations: | |||||||
| Investment income | - | - | |||||
| Net realized and unrealized gain (loss) on commodity futures contracts | 0.49 | (0.49 | ) | ||||
| Total expenses | (0.14 | ) | (0.14 | ) | |||
| Net increase (decrease) in net asset value | 0.35 | (0.63 | ) | ||||
| Net asset value at end of period | $ | 12.17 | $ | 10.93 | |||
| Total Return | 2.96 | % | (5.45 | )% | |||
| Ratios to Average Net Assets (Annualized) | |||||||
| Total expense | 8.95 | % | 3.81 | % | |||
| Total expense, net | 1.48 | % | 1.47 | % | |||
| Net investment loss | (1.45 | )% | (1.43 | )% | |||
Total returns are calculated based on the change in value during the period. An individual shareholder’s total return and ratios may vary from the above total returns and ratios based on the timing of contributions to and withdrawals from the Fund. The ratios have been annualized.
The financial highlights per share data are calculated using the average of the daily shares outstanding for the reporting period, which is inclusive of the last day of the period under report. The asset-based per share data in the financial highlights are calculated using the prior day’s net assets consistent with the methodology used to calculate asset-based fees and expenses.
On July 29, 2011, the Sponsor filed a Form 8-K with the SEC which stated that effective August 1, 2011, the Sponsor has agreed to voluntarily cap the management fee and expenses of NAGS at 1.5% per annum of the daily net assets of the Fund. The cap may be terminated by the Sponsor at any time with 90 days’ notice.
Note 7 - Organizational and Offering Costs
Expenses incurred in organizing of the Trust and the initial offering of the Shares of the Fund, including applicable SEC registration fees were borne directly by the Sponsor. The Fund will not be obligated to reimburse the Sponsor.
Note 8 – Subsequent Events
The subsequent events have been reviewed through the date of this filing.
From October 1, 2014 through November 3, 2014, there was nothing to report.
| 52 |
TEUCRIUM
WTI CRUDE OIL FUND
STATEMENTS OF ASSETS AND LIABILITIES
| September 30, 2014 | December 31, 2013 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Cash and cash equivalents | $ | 1,973,894 | $ | 1,962,616 | ||||
| Interest receivable | 130 | 131 | ||||||
| Other assets | 44,049 | 27,546 | ||||||
| Equity in trading accounts: | ||||||||
| Commodity futures contracts | 3,030 | 87,530 | ||||||
| Due from broker | 22,655 | - | ||||||
| Total equity in trading accounts | 25,685 | 87,530 | ||||||
| Total assets | $ | 2,043,758 | $ | 2,077,823 | ||||
| Liabilities | ||||||||
| Other liabilities | 7,654 | 170 | ||||||
| Equity in trading accounts: | ||||||||
| Commodity futures contracts | 30,550 | 5,080 | ||||||
| Due to broker | - | 23,445 | ||||||
| Total equity in trading accounts | 30,550 | 28,525 | ||||||
| Total liabilities | 38,204 | 28,695 | ||||||
| Net assets | $ | 2,005,554 | $ | 2,049,128 | ||||
| Shares outstanding | 50,002 | 50,002 | ||||||
| Net asset value per share | $ | 40.11 | $ | 40.98 | ||||
| Market value per share | $ | 40.40 | $ | 40.34 | ||||
The accompanying notes are an integral part of these financial statements.
| 53 |
TEUCRIUM
WTI CRUDE OIL FUND
SCHEDULE OF INVESTMENTS
September 30, 2014
(Unaudited)
| Percentage of | ||||||||||||
| Description: Assets | Fair Value | Net Assets | Shares | |||||||||
| Cash equivalents | ||||||||||||
| Money market funds | ||||||||||||
| Dreyfus Cash Management - Institutional (cost 1,973,894) | $ | 1,973,894 | 98.42 | % | 1,973,894 | |||||||
| Notional Amount | ||||||||||||
| (Long Exposure) | ||||||||||||
| Commodity futures contracts | ||||||||||||
| United States WTI crude oil futures contracts | ||||||||||||
| WTI crude oil futures DEC14 (8 contracts) | $ | 1,950 | 0.10 | % | $ | 722,160 | ||||||
| WTI crude oil futures DEC15 (8 contracts) | 1,080 | 0.05 | 696,480 | |||||||||
| Total commodity futures contracts | $ | 3,030 | 0.15 | % | $ | 1,418,640 | ||||||
| Percentage of | Notional Amount | |||||||||||
| Description: Liabilities | Fair Value | Net Assets | (Long Exposure) | |||||||||
| Commodity futures contracts | ||||||||||||
| United States WTI crude oil futures contracts | ||||||||||||
| WTI crude oil futures JUN15 (7 contracts) | $ | 30,550 | 1.52 | % | $ | 616,210 | ||||||
The accompanying notes are an integral part of these financial statements.
| 54 |
TEUCRIUM WTI CRUDE OIL FUND
SCHEDULE OF INVESTMENTS
December 31, 2013
| Percentage of | ||||||||||||
| Description: Assets | Fair Value | Net Assets | Shares | |||||||||
| Cash equivalents | ||||||||||||
| Money market funds | ||||||||||||
| Dreyfus Cash Management - Institutional (cost 1,962,616) | $ | 1,962,616 | 95.78 | % | 1,962,616 | |||||||
| Notional Amount | ||||||||||||
| (Long Exposure) | ||||||||||||
| Commodity futures contracts | ||||||||||||
| United States WTI crude oil futures contracts | ||||||||||||
| WTI crude oil futures JUN14 (7 contracts) | $ | 61,910 | 3.02 | % | $ | 680,960 | ||||||
| WTI crude oil futures DEC14 (7 contracts) | 25,620 | 1.25 | 649,040 | |||||||||
| Total commodity futures contracts | $ | 87,530 | 4.27 | % | $ | 1,330,000 | ||||||
| Percentage of | Notional Amount | |||||||||||
| Description: Liabilities | Fair Value | Net Assets | (Long Exposure) | |||||||||
| Commodity futures contracts | ||||||||||||
| United States WTI crude oil futures contracts | ||||||||||||
| WTI crude oil futures DEC15 (8 contracts) | $ | 5,080 | 0.25 | % | $ | 690,320 | ||||||
The accompanying notes are an integral part of these financial statements.
| 55 |
TEUCRIUM
WTI CRUDE OIL FUND
STATEMENTS OF OPERATIONS
(Unaudited)
| Three months ended | Three months ended | Nine months ended | Nine months ended | |||||||||||||
| September 30, 2014 | September 30, 2013 | September 30, 2014 | September 30, 2013 | |||||||||||||
| Income | ||||||||||||||||
| Realized and unrealized gain (loss) on trading of commodity futures contracts: | ||||||||||||||||
| Realized gain (loss) on commodity futures contracts | $ | - | $ | 9,380 | $ | 93,280 | $ | (77,750 | ) | |||||||
| Net change in unrealized appreciation or depreciation on commodity futures contracts | (223,730 | ) | 117,800 | (109,970 | ) | 185,590 | ||||||||||
| Interest income | 145 | 229 | 508 | 731 | ||||||||||||
| Total (loss) income | (223,585 | ) | 127,409 | (16,182 | ) | 108,571 | ||||||||||
| Expenses | ||||||||||||||||
| Management fees | 5,219 | 5,230 | 15,619 | 15,230 | ||||||||||||
| Professional fees | 22,754 | 10,784 | 39,577 | 29,482 | ||||||||||||
| Distribution and marketing fees | 8,297 | 4,013 | 25,475 | 20,369 | ||||||||||||
| Custodian fees and expenses | 1,230 | - | 3,679 | - | ||||||||||||
| Business permits and licenses fees | - | 5,060 | 25,000 | 10,071 | ||||||||||||
| General and administrative expenses | 578 | 760 | 7,951 | 5,936 | ||||||||||||
| Brokerage commissions | - | - | - | - | ||||||||||||
| Other expenses | 216 | 271 | 737 | 1,224 | ||||||||||||
| Total expenses | 38,294 | 26,118 | 118,038 | 82,312 | ||||||||||||
| Expenses waived by the Sponsor | (29,985 | ) | (18,209 | ) | (90,646 | ) | (59,637 | ) | ||||||||
| Reimbursement of expenses previously waived | - | - | - | - | ||||||||||||
| Total expenses, net | 8,309 | 7,909 | 27,392 | 22,675 | ||||||||||||
| Net (loss) income | $ | (231,894 | ) | $ | 119,500 | $ | (43,574 | ) | $ | 85,896 | ||||||
| Net (loss) income per share | $ | (4.64 | ) | $ | 2.39 | $ | (0.87 | ) | $ | 1.72 | ||||||
| Net (loss) income per weighted average share | $ | (4.64 | ) | $ | 2.39 | $ | (0.87 | ) | $ | 1.72 | ||||||
| Weighted average shares outstanding | 50,002 | 50,002 | 50,002 | 50,002 | ||||||||||||
The accompanying notes are an integral part of these financial statements.
| 56 |
TEUCRIUM
WTI CRUDE OIL FUND
STATEMENTS OF CHANGES IN NET ASSETS
(Unaudited)
| Nine months ended | Nine months ended | |||||||
| September 30, 2014 | September 30, 2013 | |||||||
| Operations | ||||||||
| Net income (loss) | $ | (43,574 | ) | $ | 85,896 | |||
| Net change in net assets | (43,574 | ) | 85,896 | |||||
| Net assets, beginning of period | $ | 2,049,128 | $ | 1,993,747 | ||||
| Net assets, end of period | $ | 2,005,554 | $ | 2,079,643 | ||||
| Net asset value per share at beginning of period | $ | 40.98 | $ | 39.87 | ||||
| At end of period | $ | 40.11 | $ | 41.59 | ||||
| Creation of Shares | - | - | ||||||
| Redemption of Shares | - | - | ||||||
The accompanying notes are an integral part of these financial statements.
| 57 |
TEUCRIUM
WTI CRUDE OIL FUND
STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine months ended | Nine months ended | |||||||
| September 30, 2014 | September 30, 2013 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | (43,574 | ) | $ | 85,896 | |||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
| Net change in unrealized appreciation or depreciation on commodity futures contracts | 109,970 | (185,590 | ) | |||||
| Changes in operating assets and liabilities: | ||||||||
| Due from broker | (22,655 | ) | 137,328 | |||||
| Interest receivable | 1 | (9,317 | ) | |||||
| Other assets | (16,503 | ) | (8 | ) | ||||
| Due to broker | (23,445 | ) | 92,567 | |||||
| Management fee payable to Sponsor | - | (1,626 | ) | |||||
| Other liabilities | 7,484 | (509 | ) | |||||
| Net cash provided by operating activities | 11,278 | 118,741 | ||||||
| Net change in cash and cash equivalents | 11,278 | 118,741 | ||||||
| Cash and cash equivalents, beginning of period | 1,962,616 | 1,845,910 | ||||||
| Cash and cash equivalents, end of period | $ | 1,973,894 | $ | 1,964,651 | ||||
The accompanying notes are an integral part of these financial statements.
| 58 |
NOTES
TO FINANCIAL STATEMENTS
September 30, 2014
(Unaudited)
Note 1 – Organization and Operation
Teucrium WTI Crude Oil Fund (referred to herein as “CRUD” or the “Fund”) is a commodity pool that is a series of Teucrium Commodity Trust (“Trust”), a Delaware statutory trust formed on September 11, 2009. The Fund issues common units, called the “Shares,” representing fractional undivided beneficial interests in the Fund. The Fund continuously offers Creation Baskets consisting of 25,000 Shares at their Net Asset Value (“NAV”) to “Authorized Purchasers” through Foreside Fund Services, LLC, which is the distributor for the Fund (the “Distributor”). Authorized Purchasers sell such Shares, which are listed on the New York Stock Exchange (“NYSE”) Arca under the symbol “CRUD,” to the public at per-Share offering prices that reflect, among other factors, the trading price of the Shares on the NYSE Arca, the NAV of the Fund at the time the Authorized Purchaser purchased the Creation Baskets and the NAV at the time of the offer of the Shares to the public, the supply of and demand for Shares at the time of sale, and the liquidity of the markets for crude oil interests. The Fund’s Shares trade in the secondary market on the NYSE Arca at prices that are lower or higher than their NAV per Share.
The investment objective of CRUD is to have the daily changes in percentage terms of the Shares’ NAV reflect the daily changes in percentage terms of a weighted average of the closing settlement prices for futures contracts for WTI crude oil, also known as Texas Light Sweet crude oil (“Oil Futures Contracts”) traded on the NYMEX, specifically (1) the nearest to spot June or December Oil Futures Contract, weighted 35%; (2) the June or December Oil Futures Contract following the aforementioned (1), weighted 30%; and (3) the next December Oil Future Contract that immediately follows the aforementioned (2), weighted 35%.
The Fund commenced investment operations on February 23, 2011 and has a fiscal year ending December 31. The Fund’s sponsor is Teucrium Trading, LLC (the “Sponsor”). The Sponsor is responsible for the management of the Fund. The Sponsor is a member of the National Futures Association (the “NFA”) and became a commodity pool operator registered with the Commodity Futures Trading Commission (the “CFTC”) effective November 10, 2009.
On October 22, 2010, the Fund’s initial registration of 15,000,000 shares on Form S-1 was declared effective by the SEC. On February 23, 2011, the Fund listed its shares on the NYSE Arca under the ticker symbol “CRUD.” On the day prior to that, the Fund issued 100,000 shares in exchange for $5,000,000 at the Fund’s initial NAV of $50 per share. The Fund also commenced investment operations on February 23, 2011 by purchasing commodity futures contracts traded on the NYMEX. On December 31, 2010, the Fund had two shares outstanding, which were owned by the Sponsor.
The accompanying unaudited financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the SEC and, therefore, do not include all information and footnote disclosures required under accounting principles generally accepted in the United States of America (“GAAP”). The financial information included herein is unaudited; however, such financial information reflects all adjustments which are, in the opinion of management, necessary for the fair presentation of the Fund’s financial statements for the interim period. It is suggested that these interim financial statements be read in conjunction with the financial statements and related notes included in the Trust’s Annual Report on Form 10-K, as well as the most recent Form S-1 filing, as applicable. The operating results for the nine months ended September 30, 2014 are not necessarily indicative of the results to be expected for the full year ending December 31, 2014.
Note 2 – Principal Contracts and Agreements
In its capacity as the Custodian for the Fund, the Custodian, currently the Bank of New York Mellon, holds for the Fund its Treasury Securities, cash and/or cash equivalents pursuant to a custodial agreement. The Custodian is also the registrar and transfer agent for the Fund’s Shares. In addition, the Custodian also serves as Administrator for the Fund, performing certain administrative and accounting services and preparing certain SEC and CFTC reports on behalf of the Fund. For these services, the Custodian receives: for custody services: 0.0075% of average gross assets up to $1 billion, and 0.0050% of average gross assets over $1 billion, annually, plus certain per-transaction charges; for transfer agency services: 0.0075% of average gross assets annually; and for administrative services: 0.05% of average gross assets up to $1 billion, 0.04% of average gross assets between $1 billion and $3 billion, and 0.03% of average gross assets over $3 billion, annually. A combined minimum annual fee of up to $125,000 for custody, transfer agency and administrative services per Fund can be assessed.
The Sponsor and the Trust employ Foreside Fund Services, LLC as the Distributor for the Funds. The Distributor receives, for its services as distributor for the Funds. The Distribution Services Agreement among the Distributor, the Sponsor and the Trust calls for the Distributor to work with the Custodian in connection with the receipt and processing of orders for Creation Baskets and Redemption Baskets and the review and approval of all Fund sales literature and advertising materials. The Distributor and the Sponsor have also entered into a Securities Activities and Service Agreement (the “SASA”) under which certain employees and
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officers of the Sponsor are licensed as registered representatives or registered principals of the Distributor, under FINRA rules. For its services as the Distributor, Foreside receives a fee of 0.01% of the Fund’s average daily net assets and an aggregate annual fee of $100,000 for all Teucrium Funds, along with certain expense reimbursements. For its services under the SASA, Foreside receives a fee of $5,000 per registered representative and $1,000 per registered location.
Currently, Newedge USA, LLC (“Newedge USA”) serves as the Fund’s clearing broker to execute and clear the Fund’s futures and provide other brokerage-related services. Newedge USA is a futures commission merchant and broker dealer registered with the U.S. Commodity Futures Trading Commission (“CFTC”) and the U.S. Securities and Exchange Commission (“SEC”), and is a member of FINRA. Newedge USA is a clearing member of all principal futures exchanges located in the United States as well as a member of the Chicago Board Options Exchange, International Securities Exchange, New York Stock Exchange, Options Clearing Corporation, and Government Securities Clearing Corporation. For WTI Crude Oil Futures Contracts Newedge is paid $6.00 per round turn.
The sole Trustee of the Trust is Wilmington Trust Company, a Delaware banking corporation. The Trustee will accept service of legal process on the Trust in the State of Delaware and will make certain filings under the Delaware Statutory Trust Act. For its services, the Trustee receives an annual fee of $3,300 from the Trust.
Note 3 – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) as detailed in the Financial Accounting Standards Board’s Accounting Standards Codification.
Correction of immaterial error in previously issued financial statements.
Effective with the period ended June 30, 2014, expenses for the current and comparative periods are presented both gross and net of any expenses waived by or paid by the Sponsor that would have been incurred by the Funds (“expenses waived by the Sponsor”). In addition, certain expenses paid by the Sponsor on behalf of the Funds for the years ended December 31, 2012 and 2013 that were subject to possible recovery from the Funds in the following year, as had been previously disclosed in aggregate for the Trust in the Form 10-K for 2012 and 2013, have also been included in expenses and waived/reimbursed expenses in the period incurred by the Sponsor. These expenses, if reimbursed by the Funds to the Sponsor in 2013 or 2014 are then presented as a reimbursement of expenses previously waived. “Total expenses, net”, which is after the impact of any expenses waived by or reimbursed to the Sponsor, are presented in the same manner as previously reported. There is, therefore, no impact to, or change in the Net gain or Net loss in any period for the Trust and each Fund as a result of this change in presentation.
Revenue Recognition
Commodity futures contracts are recorded on the trade date. All such transactions are recorded on the identified cost basis and marked to market daily. Unrealized appreciation or depreciation on commodity futures contracts are reflected in the statements of operations as the difference between the original contract amount and the fair market value as of the last business day of the year or as of the last date of the financial statements. Changes in the appreciation or depreciation between periods are reflected in the statements of operations. Interest on cash equivalents and deposits with the Futures Commission Merchant are recognized on the accrual basis. The Fund earns interest on its assets denominated in U.S. dollars on deposit with the Futures Commission Merchant. In addition, the Fund earns interest on funds held at the custodian at prevailing market rates for such investments.
Brokerage Commissions
Brokerage commissions on all open commodity futures contracts are accrued on a full-turn basis.
Income Taxes
For tax purposes, the Fund will be treated as a partnership. The Fund does not record a provision for income taxes because the partners report their share of the Fund’s income or loss on their income tax returns. The financial statements reflect the Fund’s transactions without adjustment, if any, required for income tax purposes.
The Fund is required to determine whether a tax position is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The Fund files an income tax return in the U.S. federal jurisdiction, and may file income tax returns in various U.S. states and foreign jurisdictions. For all tax years 2011 to 2013, the Fund remains subject to income tax examinations by major taxing authorities. The tax benefit recognized is measured as the largest amount of benefit that has a greater than fifty percent likelihood of being realized upon
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ultimate settlement. De-recognition of a tax benefit previously recognized results in the Fund recording a tax liability that reduces net assets. Based on its analysis, the Fund has determined that it has not incurred any liability for unrecognized tax benefits as of September 30, 2014 and December 31, 2013. However, the Fund’s conclusions regarding this policy may be subject to review and adjustment at a later date based on factors including, but not limited to, ongoing analysis of and changes to tax laws, regulations, and interpretations thereof.
The Fund recognizes interest accrued related to unrecognized tax benefits and penalties related to unrecognized tax benefits in income tax fees payable, if assessed. No interest expense or penalties have been recognized as of and for the periods ended September 30, 2014 and 2013.
The Fund may be subject to potential examination by U.S. federal, U.S. state or foreign jurisdictional authorities in the area of income taxes. These potential examinations may include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions, and compliance with U.S. federal, U.S. state and foreign tax laws. The Fund’s management does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months.
Creations and Redemptions
Authorized Purchasers may purchase Creation Baskets consisting of 25,000 shares from the Fund. The amount of the proceeds required to purchase a Creation Basket will be equal to the NAV of the shares in the Creation Basket determined as of 4:00 p.m. New York time on the day the order to create the basket is properly received.
Authorized Purchasers may redeem shares from the Fund only in blocks of 25,000 shares called “Redemption Baskets.” The amount of the redemption proceeds for a Redemption Basket will be equal to the NAV of the shares in the Redemption Basket determined as of 4:00 p.m. New York time on the day the order to redeem the basket is properly received.
The Fund receives or pays the proceeds from shares sold or redeemed within three business days after the trade date of the purchase or redemption. The amounts due from Authorized Purchasers are reflected in the Fund’s statements of assets and liabilities as receivable for shares sold. Amounts payable to Authorized Purchasers upon redemption are reflected in the Fund’s statements of assets and liabilities as payable for shares redeemed.
As outlined in the most recent Form S-1 filing, 50,000 shares represents two Redemption Baskets for the Fund and a minimum level of shares. Effective May 18, 2012, the Fund had a minimum number of shares and this situation continued through September 30, 2014. No redemptions can be made until additional shares are created.
Allocation of Shareholder Income and Losses
Profit or loss is allocated among the shareholders of the Fund in proportion to the number of shares each shareholder holds as of the close of each month.
Cash Equivalents
Cash equivalents are highly-liquid investments with original maturity dates of 90 days or less when acquired. The Fund reported its cash equivalents in the statements of assets and liabilities at market value, or at carrying amounts that approximate fair value, because of their highly-liquid nature and short-term maturities. The Fund has these balances of its assets on deposit with banks. Assets deposited with the bank may, at times, exceed federally insured limits. The Fund had a balance of $1,973,894 and $1,962,616 in money market funds at September 30, 2014 and December 31, 2013, respectively; these balances are included in cash and cash equivalents on the statements of assets and liabilities.
Due from/to Broker
The amount recorded by the Fund for the amount due from and to the clearing broker includes, but is not limited to, cash held by the broker, amounts payable to the clearing broker related to open transactions and payables for commodities futures accounts liquidating to an equity balance on the clearing broker’s records.
Margin is the minimum amount of funds that must be deposited by a commodity interest trader with the trader’s broker to initiate and maintain an open position in futures contracts. A margin deposit acts to assure the trader’s performance of the futures contracts purchased or sold. Futures contracts are customarily bought and sold on initial margin that represents a very small percentage of the aggregate purchase or sales price of the contract. Because of such low margin requirements, price fluctuations occurring in the futures markets may create profits and losses that, in relation to the amount invested, are greater than are customary in other forms of investment or speculation. As discussed below, adverse price changes in the futures contract may result in margin requirements that greatly exceed the initial margin. In addition, the amount of margin required in connection with a particular futures contract is set from time to time by the exchange on which the contract is traded and may be modified from time to time by the exchange during the term
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of the contract. Brokerage firms, such as the Fund’s clearing brokers, carrying accounts for traders in commodity interest contracts generally require higher amounts of margin as a matter of policy to further protect themselves. Over-the-counter trading generally involves the extension of credit between counterparties, so the counterparties may agree to require the posting of collateral by one or both parties to address credit exposure.
When a trader purchases an option, there is no margin requirement; however, the option premium must be paid in full. When a trader sells an option, on the other hand, he or she is required to deposit margin in an amount determined by the margin requirements established for the underlying interest and, in addition, an amount substantially equal to the current premium for the option. The margin requirements imposed on the selling of options, although adjusted to reflect the probability that out-of-the-money options will not be exercised, can in fact be higher than those imposed in dealing in the futures markets directly. Complicated margin requirements apply to spreads and conversions, which are complex trading strategies in which a trader acquires a mixture of options positions and positions in the underlying interest.
Ongoing or “maintenance” margin requirements are computed each day by a trader’s clearing broker. When the market value of a particular open futures contract changes to a point where the margin on deposit does not satisfy maintenance margin requirements, a margin call is made by the broker. If the margin call is not met within a reasonable time, the broker may close out the trader’s position. With respect to the Fund’s trading, the Fund (and not its shareholders personally) is subject to margin calls.
Finally, many major U.S. exchanges have passed certain cross margining arrangements involving procedures pursuant to which the futures and options positions held in an account would, in the case of some accounts, be aggregated and margin requirements would be assessed on a portfolio basis, measuring the total risk of the combined positions.
Calculation of Net Asset Value
The Fund’s NAV is calculated by:
| · | Taking the current market value of its total assets and |
| · | Subtracting any liabilities. |
The administrator, the Bank of New York Mellon, calculates the NAV of the Fund once each trading day. It calculates the NAV as of the earlier of the close of the NYSE or 4:00 p.m. New York time. The NAV for a particular trading day is released after 4:15 p.m. New York time.
In determining the value of WTI Crude Oil Futures Contracts, the administrator uses the NYMEX closing price. The administrator determines the value of all other Fund investments as of the earlier of the close of the NYSE or 4:00 p.m. New York time. The value of over-the-counter crude oil interests is determined based on the value of the commodity or futures contract underlying such crude oil interest, except that a fair value may be determined if the Sponsor believes that the Fund is subject to significant credit risk relating to the counterparty to such crude oil interest. For purposes of financial statements and reports, the Sponsor will recalculate the NAV where necessary to reflect the “fair value” of a Futures Contract when the Futures Contract closes at its price fluctuation limit for the day. Treasury securities held by the Fund are valued by the administrator using values received from recognized third-party vendors and dealer quotes. NAV includes any unrealized profit or loss on open crude oil interests and any other income or expense accruing to the Fund but unpaid or not received by the Fund.
Sponsor Fee, Allocation of Expenses and Related Party Transactions
The Sponsor is responsible for investing the assets of the Fund in accordance with the objectives and policies of the Fund. In addition, the Sponsor arranges for one or more third parties to provide administrative, custodial, accounting, transfer agency and other necessary services to the Fund, including services directly attributable to the Fund such as accounting, financial reporting, regulatory compliance and trading activities, which the Sponsor elected not to outsource. For these services, the Fund is contractually obligated to pay a monthly management fee to the Sponsor, based on average daily net assets, at a rate equal to 1.00% per annum.
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The Fund generally pays for all brokerage fees, taxes and other expenses, including licensing fees for the use of intellectual property, registration or other fees paid to the SEC, the Financial Industry Regulatory Authority (“FINRA”), formerly the National Association of Securities Dealers, or any other regulatory agency in connection with the offer and sale of subsequent Shares after its initial registration and all legal, accounting, printing and other expenses associated therewith. The Fund also pays its portion of the fees and expenses associated with the Trust’s tax accounting and reporting requirements. Certain aggregate expenses common to all Funds are allocated by the Sponsor to the respective funds based on activity drivers deemed most appropriate by the Sponsor for such expenses, including but not limited to relative assets under management and creation and redeem order activity. These aggregate common expenses include, but are not limited to, legal, auditing, accounting and financial reporting, tax-preparation, regulatory compliance, trading activities, and insurance costs, as well as fees paid to the Distributor, which are included in the related line item in the statements of operations. A portion of these aggregate common expenses are related to the Sponsor or related parties of principals of the Sponsor; these are necessary services to the Funds, which are primarily the cost of performing accounting and financial reporting, regulatory compliance, and trading activities that are directly attributable to the Fund. For the Fund, for the three months ended September 30, such expenses totaled approximately $5,000 in 2014 and $3,000 in 2013; all of these amounts were waived by the Sponsor. For the nine months ended September 30, such expenses were approximately $15,000 in 2014 and $16,000 in 2013; all of these amounts were waived by the Sponsor. All asset-based fees and expenses are calculated on the prior day’s net assets.
For the nine months ended September 30, 2014 there were $90,646 of expenses that had been identified on the Statements of Operations of the Fund as expenses that were waived by the Sponsor and subject to recovery in future periods. The Sponsor has determined that there will be no recovery sought for these amounts in any future period.
For the year ended December 31, 2013, there were approximately $6,600 of expenses recorded in the financial statements of the Sponsor which were subject to reimbursement by CRUD in 2013. At that time, the Sponsor had determined that recovery of the expense amounts was not probable. For the three and nine months ended September 30, 2013, the Sponsor received no subsequent reimbursement for the expenses.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of the revenue and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value - Definition and Hierarchy
In accordance with U.S. GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.
In determining fair value, the Fund uses various valuation approaches. In accordance with U.S. GAAP, a fair value hierarchy for inputs is used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are those that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Fund. Unobservable inputs reflect the Fund’s assumptions about the inputs market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy is categorized into three levels based on the inputs as follows:
Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Fund has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 securities. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these securities does not entail a significant degree of judgment.
Level 2 - Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
The availability of valuation techniques and observable inputs can vary from security to security and is affected by a wide variety of factors including, the type of security, whether the security is new and not yet established in the marketplace, and other characteristics particular to the transaction. 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. Those estimated values do not necessarily represent the amounts that may be ultimately realized due to the occurrence of future circumstances that cannot be reasonably determined. Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower than the values that would have been used had a ready market for the securities existed. Accordingly, the degree of judgment exercised by the Fund in determining fair value is greatest for securities categorized in Level 3. In certain cases, 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 in its entirety falls, is determined based on the lowest level input that is significant to the fair value measurement.
Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Fund’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. The Fund uses prices and inputs that are current as of the measurement date, including periods of market dislocation. In periods of market dislocation, the observability of prices and inputs
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may be reduced for many securities. This condition could cause a security to be reclassified to a lower level within the fair value hierarchy. When such a situation exists on a quarter close, the Sponsor will calculate the NAV on a particular day using the Level 1 valuation, but will later recalculate the NAV for the impacted Fund based upon the valuation inputs from these alternative verifiable sources (Level 2 or Level 3) and will report such NAV in its applicable financial statements and reports.
On September 30, 2014 and December 31, 2013, in the opinion of the Trust and the Fund, the reported value of the WTI Crude Oil Futures Contracts traded on the NYMEX fairly reflected the value of the WTI Crude Oil Futures Contracts held by the Fund, and no adjustments were necessary.
The Fund records its derivative activities at fair value. Gains and losses from derivative contracts are included in the statements of operations. Derivative contracts include futures contracts related to commodity prices. Futures, which are listed on a national securities exchange, such as the CBOT or the NYMEX, or reported on another national market, are generally categorized in Level 1 of the fair value hierarchy. OTC derivatives contracts (such as forward and swap contracts) which may be valued using models, depending on whether significant inputs are observable or unobservable, are categorized in Levels 2 or 3 of the fair value hierarchy.
Net Income (Loss) per Share
Net income (loss) per share is the difference between the NAV per unit at the beginning of each period and at the end of each period. The weighted average number of units outstanding was computed for purposes of disclosing net income (loss) per weighted average unit. The weighted average units are equal to the number of units outstanding at the end of the period, adjusted proportionately for units created or redeemed based on the amount of time the units were outstanding during such period.
New Accounting Pronouncements
The FASB issued ASU No, 2013-07, “Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting. The amendments in this Update are being issued to clarify when an entity should apply the liquidation basis of accounting. In addition, the guidance provides principles for the recognition and measurement of assets and liabilities and requirements for financial statements prepared using the liquidation basis of accounting. The amendments are effective for entities that determine liquidation is imminent during annual reporting periods beginning after December 15, 2013, and interim reporting periods therein. The adoption did not have a significant impact on the financial statements disclosures for the Trust or the Funds.
The FASB issued ASU No, 2013-10, “Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes. The amendments in this Update permit the Fed Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to UST and LIBOR. The amendments also remove the restriction on using different benchmark rates for similar hedges. The amendments are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The adoption did not have a significant impact on the financial statements disclosures for the Trust or the Funds.
The FASB issued ASU No. 2013-08, “Financial Services-Investment Companies (Topic 946)-Amendments to the Scope, Measurement, and Disclosure Requirements”. ASU No. 2013-08 affects the scope, measurement, and disclosure requirements for investment companies under U.S. GAAP. ASU 2013-08 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2013. The adoption did not have a material impact on the financial statements for the Trust or the Funds.
Note 4 – Fair Value Measurements
The Fund’s assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy as described in the Fund’s significant accounting policies in Note 3. The following table presents information about the Fund’s assets and liabilities measured at fair value as of September 30, 2014 and December 31, 2013:
September 30, 2014
| Assets: | Level 1 | Level 2 | Level 3 | Balance as of September 30, 2014 | ||||||||
| Cash equivalents | $ | 1,973,894 | $ | - | $ | - | $ | 1,973,894 | ||||
| WTI crude oil futures contracts | 3,030 | - | - | 3,030 | ||||||||
| Total | $ | 1,976,924 | $ | - | $ | - | $ | 1,976,924 | ||||
|
Liabilities: |
Level 1 | Level 2 | Level 3 | Balance as of September 30, 2014 | ||||||||
| WTI crude oil futures contracts | $ | 30,550 | $ | - | $ | - | $ | 30,550 | ||||
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December 31, 2013
| Assets: | Level 1 | Level 2 | Level 3 | Balance as of December 31, 2013 | ||||||||
| Cash equivalents | $ | 1,962,616 | $ | - | $ | - | $ | 1,962,616 | ||||
| WTI crude oil futures contracts | 87,530 | - | - | 87,530 | ||||||||
| Total | $ | 2,050,146 | $ | - | $ | - | $ | 2,050,146 | ||||
| Liabilities: | Level 1 | Level 2 | Level 3 | Balance as of December 31, 2013 | ||||||||
| WTI crude oil futures contracts | $ | 5,080 | $ | - | $ | - | $ | 5,080 | ||||
For the nine months ended September 30, 2014 and 2013, the Fund did not have any significant transfers between any of the levels of the fair value hierarchy.
See the Fair Value - Definition and Hierarchy section in Note 3 above for an explanation of the transfers into and out of each level of the fair value hierarchy.
Note 5 – Derivative Instruments and Hedging Activities
In the normal course of business, the Fund utilizes derivative contracts in connection with its proprietary trading activities. Investments in derivative contracts are subject to additional risks that can result in a loss of all or part of an investment. The Fund’s derivative activities and exposure to derivative contracts are classified by the following primary underlying risks: interest rate, credit, commodity price, and equity price risks. In addition to its primary underlying risks, the Fund is also subject to additional counterparty risk due to inability of its counterparties to meet the terms of their contracts. For the nine months ended September 30, 2014 and 2013, the Fund invested only in commodity futures contracts.
Futures Contracts
The Fund is subject to commodity price risk in the normal course of pursuing its investment objectives. A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date.
The purchase and sale of futures contracts requires margin deposits with a Futures Commission Merchant (“FCM”). Subsequent payments (variation margin) are made or received by the Fund each day, depending on the daily fluctuations in the value of the contract, and are recorded as unrealized gains or losses by the Fund. Futures contracts may reduce the Fund’s exposure to counterparty risk since futures contracts are exchange-traded; and the exchange’s clearinghouse, as the counterparty to all exchange-traded futures, guarantees the futures against default.
The Commodity Exchange Act requires an FCM to segregate all customer transactions and assets from the FCM’s proprietary activities. A customer’s cash and other equity deposited with an FCM are considered commingled with all other customer funds subject to the FCM’s segregation requirements. In the event of an FCM’s insolvency, recovery may be limited to the Fund’s pro rata share of segregated customer funds available. It is possible that the recovery amount could be less than the total of cash and other equity deposited.
The following table discloses information about offsetting assets and liabilities presented in the statements of assets and liabilities to enable users of these financial statements to evaluate the effect or potential effect of netting arrangements for recognized assets and liabilities. These recognized assets and liabilities are presented as defined in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”) No. 2011-11 “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities” and subsequently clarified in FASB ASU 2013-01 “Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.”
The following table also identifies the fair value amounts of derivative instruments included in the statements of assets and liabilities as derivative contracts, categorized by primary underlying risk and held by the FCM, currently Newedge USA LLC, as of September 30, 2014 and December 31, 2013.
Offsetting of Financial Assets and Derivative Assets as of September 30, 2014
| (i) | (ii) | (iii) = (i) – (ii) | (iv) | (v) = (iii) – (iv) | ||||||||||||||
| Gross
Amount Not Offset in the Statement of Assets and Liabilities |
||||||||||||||||||
| Description | Gross Amount of Recognized Assets |
Gross Amount Offset in the Statement of Assets and Liabilities |
Net Amount Presented in the Statement of Assets and Liabilities |
Futures
|
Collateral, Due to Broker |
Net Amount | ||||||||||||
| Commodity price | ||||||||||||||||||
| WTI crude oil futures contracts | $ | 3,030 | $ | - | $ | 3,030 | $ | 3,030 | $ | - | $ | - | ||||||
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Offsetting of Financial Liabilities and Derivative Liabilities as of September 30, 2014
| (i) | (ii) | (iii) = (i) – (ii) | (iv) | (v) = (iii) – (iv) | ||||||||||||||
| Gross
Amount Not Offset in the Statement of Assets and Liabilities |
||||||||||||||||||
| Description | Gross Amount of Recognized Liabilities |
Gross Amount Offset in the Statement of Assets and Liabilities |
Net Amount Presented in the Statement of Assets and Liabilities |
Futures |
Collateral, Due from Broker |
Net Amount | ||||||||||||
| Commodity price | ||||||||||||||||||
| WTI crude oil futures contracts | $ | 30,550 | $ | - | $ | 30,550 | $ | 3,030 | $ | 22,655 | $ | 4,865 | ||||||
Offsetting of Financial Assets and Derivative Assets as of December 31, 2013
| (i) | (ii) | (iii) = (i) – (ii) | (iv) | (v) = (iii) – (iv) | ||||||||||||||
| Gross
Amount Not Offset in the Statement of Assets and Liabilities |
||||||||||||||||||
| Description | Gross Amount of Recognized Assets |
Gross Amount Offset in the Statement of Assets and Liabilities |
Net Amount Presented in the Statement of Assets and Liabilities |
Futures
|
Collateral, Due to Broker |
Net Amount | ||||||||||||
| Commodity price | ||||||||||||||||||
| WTI crude oil futures contracts | $ | 87,530 | $ | - | $ | 87,530 | $ | 5,080 | $ | 23,445 | $ | 59,005 | ||||||
Offsetting of Financial Liabilities and Derivative Liabilities as of December 31, 2013
| (i) | (ii) | (iii) = (i) – (ii) | (iv) | (v) = (iii) – (iv) | ||||||||||||||
| Gross
Amount Not Offset in the Statement of Assets and Liabilities |
||||||||||||||||||
| Description | Gross Amount of Recognized Liabilities |
Gross Amount Offset in the Statement of Assets and Liabilities |
Net Amount Presented in the Statement of Assets and Liabilities |
Futures |
Collateral, Due from Broker |
Net Amount | ||||||||||||
| Commodity price | ||||||||||||||||||
| WTI crude oil futures contracts | $ | 5,080 | $ | - | $ | 5,080 | $ | 5,080 | $ | - | $ | - | ||||||
The following tables identify the net gain and loss amounts included in the statements of operations as realized and unrealized gains and losses on trading of commodity futures contracts categorized by primary underlying risk:
Three months ended September 30, 2014
| Primary Underlying Risk | Realized Gain (Loss) on Derivative Instruments |
Net Change in Unrealized Loss on Derivative Instruments | |||||
| Commodity price | |||||||
| WTI crude oil futures contracts | $ | - | $ | (223,730) | |||
Three months ended September 30, 2013
| Primary Underlying Risk | Realized Gain on Derivative Instruments |
Net Change in Unrealized Gain on Derivative Instruments | |||||
| Commodity price | |||||||
| WTI crude oil futures contracts | $ | 9,380 | $ | 117,800 | |||
| 66 |
Nine months ended September 30, 2014
| Primary Underlying Risk | Realized Gain on Derivative Instruments |
Net Change in Unrealized Loss on Derivative Instruments | |||||
| Commodity price | |||||||
| WTI crude oil futures contracts | $ | 93,280 | $ | (109,970) | |||
| Nine months ended September 30, 2013 |
|||||||
| Primary Underlying Risk | Realized Loss on Derivative Instruments |
Net Change in Unrealized Gain on Derivative Instruments | |||||
| Commodity price | |||||||
| WTI crude oil futures contracts | $ | (77,750 | ) | $ | 185,590 | ||
Volume of Derivative Activities
The average notional market value categorized by primary underlying risk for all futures contracts held was 2.11 million and 2.10 million for the three and nine months ended September 30, 2014, respectively; and 2.10 million and 2.04 million for the same periods in 2013.
Note 6 - Financial Highlights
The following tables present per unit performance data and other supplemental financial data for the nine months ended September 30, 2014 and 2013. This information has been derived from information presented in the financial statements. This information has been derived from information presented in the financial statements and is presented with total expenses gross of expenses waived by the Sponsor and with total expenses net of expenses waived by the Sponsor, as appropriate.
| Per Share Operation Performance | Nine months ended September 30, 2014 |
Nine months ended September 30, 2013 |
||||
| Net asset value at beginning of period | $ | 40.98 | $ | 39.87 | ||
| Income from investment operations: | ||||||
| Investment income | 0.01 | 0.01 | ||||
| Net realized and unrealized (loss) gain on commodity futures contracts | (0.33 | ) | 2.16 | |||
| Total expenses | (0.55 | ) | (0.45 | ) | ||
| Net (decrease) increase in net asset value | (0.87 | ) | 1.72 | |||
| Net asset value at end of period | $ | 40.11 | $ | 41.59 | ||
| Total Return | (2.12 | )% | 4.31 | % | ||
| Ratios to Average Net Assets (Annualized) | ||||||
| Total expenses | 7.51 | % | 5.44 | % | ||
| Total expenses, net | 1.74 | % | 1.50 | % | ||
| Net investment loss | (1.71 | )% | (1.45 | )% | ||
Total returns are calculated based on the change in value during the period. An individual shareholder’s total return and ratios may vary from the above total returns and ratios based on the timing of contributions to and withdrawals from the Fund. The ratios have been annualized.
The financial highlights per share data are calculated using the average of the daily shares outstanding for the reporting period, which is inclusive of the last day of the period under report. The asset-based per share data in the financial highlights are calculated using the prior day’s net assets consistent with the methodology used to calculate asset-based fees and expenses.
Note 7 - Organizational and Offering Costs
Expenses incurred in organizing of the Trust and the initial offering of the Shares of the Fund, including applicable SEC registration fees, were borne directly by the Sponsor. The Fund will not be obligated to reimburse the Sponsor.
| 67 |
Note 8 – Subsequent Events
The subsequent events have been reviewed through the date of this filing.
From October 1, 2014 through November 3, 2014, there was nothing to report.
| 68 |
TEUCRIUM
SOYBEAN FUND
STATEMENTS OF ASSETS AND LIABILITIES
| September 30, 2014 | December 31, 2013 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Cash and cash equivalents | $ | 4,054,430 | $ | 3,765,791 | ||||
| Interest receivable | 247 | 258 | ||||||
| Other assets | 51,023 | 45,500 | ||||||
| Equity in trading accounts: | ||||||||
| Due from broker | 938,888 | 400,752 | ||||||
| Total assets | $ | 5,044,588 | $ | 4,212,301 | ||||
| Liabilities | ||||||||
| Management fee payable to Sponsor | 3,324 | 3,491 | ||||||
| Other liabilities | 2,805 | 2,975 | ||||||
| Equity in trading accounts: | ||||||||
| Commodity futures contracts | 727,350 | 188,863 | ||||||
| Total liabilities | 733,479 | 195,329 | ||||||
| Net assets | $ | 4,311,109 | $ | 4,016,972 | ||||
| Shares outstanding | 225,004 | 175,004 | ||||||