Attached files

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EX-31.1 - CERTIFICATION OF CO-CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - CION Investment Corpex31-1.htm
EX-32.1 - CERTIFICATION OF CO-CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - CION Investment Corpex32-1.htm
EX-31.2 - CERTIFICATION OF CO-CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - CION Investment Corpex31-2.htm
EX-32.3 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - CION Investment Corpex32-3.htm
EX-32.2 - CERTIFICATION OF CO-CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - CION Investment Corpex32-2.htm
EX-31.3 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - CION Investment Corpex31-3.htm

 

 

 

 

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 March 31, 2013

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: 000-54755

CĪON Investment Corporation  

(Exact name of registrant as specified in its charter)

Maryland

 

45-3058280

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

3 Park Avenue, 36th Floor
New York, New York

 

10016

(Address of principal executive offices)

 

(Zip Code)

(212) 418-4700

(Registrant’s telephone number, including area code)

Not applicable

(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.

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).

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

 

 

 

Non-Accelerated Filer (Do not check if a smaller reporting company)

 

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 No

The number of shares of the registrant’s common stock, $0.001 par value, outstanding as of May 10, 2013 was 2,699,587.

 

 

 


 

 

 

CĪON INVESTMENT CORPORATION

TABLE OF CONTENTS

FORM 10-Q

 

 

 

Page

PART I - FINANCIAL INFORMATION

 

 

 

 

Item 1.  Financial Statements

 

 

 

 

Consolidated Balance Sheets as of March 31, 2013 (unaudited) and December 31, 2012

1

 

 

 

Consolidated Statement of Operations for the three months ended March 31, 2013 (unaudited)

2

 

 

 

Consolidated Statements of Changes in Net Assets for the three months ended March 31, 2013 and for the Period from January 31, 2012 (Inception) through March 31, 2012 (unaudited)

3

 

 

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and for the Period from January 31, 2012 (Inception) through March 31, 2012 (unaudited)

4

 

 

 

Consolidated Schedule of Investments as of March 31, 2013 (unaudited) and December 31, 2012

5

  

 

 

Notes to Consolidated Financial Statements (unaudited)

7

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

27

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

43

 

 

 

Item 4. Controls and Procedures

43

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

Item 1. Legal Proceedings

 

45

 

 

 

Item 1A. Risk Factors

 

45

 

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

45

 

 

 

Item 3. Defaults Upon Senior Securities

45

 

 

 

Item 4. Mine Safety Disclosures

45

 

 

 

Item 5. Other Information

 

45

 

 

 

Item 6. Exhibits

 

46

 

 

 

Signatures

 

48

 

 


 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

CĪON Investment Corporation

 

Consolidated Balance Sheets

 

 

 

March 31,

2013

 

December 31,

2012

 

 

 

(unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Investments, at fair value (amortized cost of $12,731,185 and $3,787,873, respectively)

$

 12,865,400 

 

$

 3,797,806 

 

Cash

 

 9,550 

 

 

 - 

 

Due from counterparty

 

 3,490,731 

 

 

 729,325 

 

Reimbursement from IIG, net(1) 

 

 336,307 

 

 

 25,807 

 

Deferred offering expenses, net

 

 712,329 

 

 

 958,904 

 

Prepaid expenses

 

 61,370 

 

 

 105,802 

 

Interest receivable on investments

 

 40,737 

 

 

 187 

 

Receivable due on investments sold and repaid

 

 519,375 

 

 

 - 

 

Unrealized appreciation on total return swap(2) 

 

 343,783 

 

 

 12,493 

 

Receivable due on total return swap(2) 

 

 334,080 

 

 

 - 

 

 

Total assets

$

 18,713,662 

 

$

 5,630,324 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

Liabilities

 

 

 

 

 

 

Payable for investments purchased

$

 2,487,500 

 

$

 990,000 

 

Shareholders' distributions payable(3) 

 

 91,161 

 

 

 - 

 

Accounts payable and accrued expenses

 

 427,096 

 

 

 57,427 

 

Commissions payable

 

 - 

 

 

 23,100 

 

Financing arrangement

 

 18,260 

 

 

 72,682 

 

 

Total liabilities

 

 3,024,017 

 

 

 1,143,209 

 

 

 

 

 

 

 

 

 

Commitments and contingencies(Note 10)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' Equity

 

 

 

 

 

 

Common stock, $0.001 par value; 500,000,000 shares authorized;

 

 

 

 

 

 

 

1,712,123 and 500,338 shares issued and outstanding, respectively

 

 1,712 

 

 

 500 

 

Capital in excess of par value

 

 15,252,393 

 

 

 4,461,453 

 

Accumulated undistributed net investment (loss) income

 

 (43,992) 

 

 

 2,692 

 

Accumulated undistributed net realized gain from investments

 

 1,534 

 

 

 44 

 

Accumulated net unrealized appreciation on investments

 

 134,215 

 

 

 9,933 

 

Accumulated net unrealized appreciation on total return swap(2) 

 

 343,783 

 

 

 12,493 

 

 

Total shareholders' equity

 

 15,689,645 

 

 

 4,487,115 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders' equity

$

 18,713,662 

 

$

 5,630,324 

 

 

 

 

 

 

 

 

 

Net asset value per share of common stock at end of period

$

 9.16 

 

$

 8.97 

 

Shares of common stock outstanding

 

 1,712,123 

 

 

 500,338 

 

 

 

 

 

 

 

 

 

(1) See Note 3 for a discussion of expense reimbursements from ICON Investment Group, LLC, or IIG.

 

(2) See Note 6 for a discussion of the Company’s total return swap agreement.

 

(3) See Note 4 for a discussion of the source of distributions paid by the Company.

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

1

 


 

 

 

CĪON Investment Corporation

Consolidated Statement of Operations

(unaudited)

 

 

 

Three Months Ended

March 31, 2013(1) 

Investment income

 

 

Interest income

$

 68,126 

 

 

 

 

Operating expenses

 

 

Management fees

 

 44,742 

Administrative services expense

 

 263,555 

Capital gains incentive fee(2) 

 

 117,023 

General and administrative(3) 

 

 508,863 

 

Total expenses

 

 934,183 

 

Less: expense reimbursement from IIG(4) 

 

 (819,373) 

 

Net operating expenses

 

 114,810 

 

Net investment loss

 

 (46,684) 

 

 

 

 

Realized and unrealized gain

 

 

Net realized gain from investments

 

 4,533 

Net change in unrealized appreciation on investments

 

 124,282 

Net realized gain on total return swap(5) 

 

 205,723 

Net change in unrealized appreciation on total return swap(5) 

 

 331,290 

 

Total net realized and unrealized gain

 

 665,828 

 

 

 

 

Net increase in net assets resulting from operations

$

 619,144 

 

 

 

 

Per share information—basic and diluted

 

 

 

 

 

 

Net increase in net assets per share resulting from operations

$

 0.53 

 

 

 

 

Weighted average shares of common stock outstanding

 

 1,164,423 

 

 

 

 

(1)

The Company commenced operations on December 17, 2012. Accordingly, there is no consolidated statement of operations data available for the three months ended March 31, 2012.

(2)

See Note 2 for a discussion of the methodology employed by the Company in calculating the capital gains incentive fee.

(3)

See Note 8 for further details of the Company's general and administrative expenses.

(4)

See Note 3 for a discussion of expense reimbursements received by the Company from IIG.

(5)

See Note 6 for a discussion of the Company’s total return swap agreement.

 

 

See accompanying notes to consolidated financial statements.

 

2

 


 

 

 

CĪON Investment Corporation

Consolidated Statements of Changes in Net Assets

(unaudited)

 

 

 

 

Three Months Ended

March 31, 2013

 

For the Period from January 31, 2012 (Inception) through March 31, 2012

 

 

 

 

 

 

 

 

Changes in net assets from operations:

 

 

 

 

 

 

Net investment loss

$

 (46,684) 

 

$

 - 

 

Net realized gain from investments

 

 4,533 

 

 

 - 

 

Net change in unrealized appreciation on investments

 

 124,282 

 

 

 - 

 

Net realized gain on total return swap(1) 

 

 205,723 

 

 

 - 

 

Net change in unrealized appreciation on total return swap(1) 

 

 331,290 

 

 

 - 

 

 

Net increase in net assets resulting from operations

 

 619,144 

 

 

 - 

Shareholder distributions:

 

 

 

 

 

 

Distributions from net realized gains

 

 (208,766) 

 

 

 - 

 

 

Net decrease in net assets from shareholder distributions

 

 (208,766) 

 

 

 - 

Changes in net assets from capital share transactions:

 

 

 

 

 

 

Issuance of common stock, net of issuance costs of $1,127,904 and $0, respectively

 

 11,007,314 

 

 

 1,000 

 

Reinvestment of shareholder distributions

 

 31,413 

 

 

 - 

 

Amortization of deferred offering expenses

 

 (246,575) 

 

 

 - 

 

 

Net increase in net assets resulting from capital share transactions

 

 10,792,152 

 

 

 1,000 

 

 

 

 

 

 

 

 

 

 

Total increase in net assets

 

 11,202,530 

 

 

 1,000 

Net assets at beginning of period

 

 4,487,115 

 

 

 - 

Net assets at end of period

$

 15,689,645 

 

$

 1,000 

 

 

 

 

 

 

 

 

Net asset value per share of common stock at end of period

$

 9.16 

 

$

 9.00 

Shares of common stock outstanding at end of period

 

 1,712,123 

 

 

 111 

 

 

 

 

 

 

 

 

Undistributed net investment income at end of period

$

 - 

 

$

 - 

 

 

 

 

 

 

 

 

(1) See Note 6 for a discussion of the Company’s total return swap agreement.

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

3

 


 

 

 

CĪON Investment Corporation

Consolidated Statements of Cash Flows

(unaudited)

 

 

 

 

 

Three Months Ended

March 31, 2013

 

For the Period from January 31, 2012 (Inception) through March 31, 2012

Operating activities:

 

 

 

 

 

Net increase in net assets resulting from operations

$

 619,144 

 

$

 - 

Adjustments to reconcile net increase in net assets resulting from

 

 

 

 

 

 

operations to net cash used in operating activities:

 

 

 

 

 

 

 

Net accretion of discount on investments

 

 (2,151) 

 

 

 - 

 

 

Proceeds from principal repayment of investments

 

 15,000 

 

 

 - 

 

 

Purchase of investments

 

 (6,653,990) 

 

 

 - 

 

 

Net change in short term investments

 

 (2,802,013) 

 

 

 - 

 

 

Proceeds from sale of investments

 

 504,375 

 

 

 - 

 

 

Net realized gain from investments

 

 (4,533) 

 

 

 - 

 

 

Net change in unrealized appreciation on investments

 

 (124,282) 

 

 

 - 

 

 

Net change in unrealized appreciation on total return swap

 

 (331,290) 

 

 

 - 

 

 

Due from counterparty

 

 (2,761,406) 

 

 

 - 

 

 

Reimbursement from IIG, net

 

 (310,500) 

 

 

 - 

 

 

Prepaid expenses

 

 44,432 

 

 

 - 

 

 

Interest receivable on investments

 

 (40,550) 

 

 

 - 

 

 

Receivable due on investments sold and repaid

 

 (519,375) 

 

 

 - 

 

 

Receivable due on total return swap

 

 (334,080) 

 

 

 - 

 

 

Payable for investments purchased

 

 1,497,500 

 

 

 - 

 

 

Accounts payable and accrued expenses

 

 369,518 

 

 

 - 

Net cash used in operating activities

 

 (10,834,201) 

 

 

 - 

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

Gross proceeds from issuance of common stock

 

 12,135,218 

 

 

 1,000 

 

 

Commissions and dealer manager fees paid

 

 (1,150,853) 

 

 

 - 

 

 

Reinvestment of shareholder distributions

 

 31,413 

 

 

 - 

 

 

Shareholder distributions paid

 

 (117,605) 

 

 

 - 

 

 

Repayment of financing arrangement

 

 (54,422) 

 

 

 - 

Net cash provided by financing activities

 

 10,843,751 

 

 

 1,000 

 

 

 

 

 

 

 

 

 

Net increase in cash

 

 9,550 

 

 

 1,000 

Cash, beginning of period

 

 - 

 

 

 - 

Cash, end of period

$

 9,550 

 

$

 1,000 

 

 

 

 

 

 

 

 

 

Supplemental non-cash financing activities:

 

 

 

 

 

 

Deferred offering expenses charged to shareholders' equity

$

 246,575 

 

$

 - 

 

Shareholders' distributions payable

$

 91,161 

 

$

 - 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

4

 


 

 

 

CĪON Investment Corporation

Consolidated Schedule of Investments

March 31, 2013

(unaudited)

 

Portfolio Company(a) 

 

Industry

 

Principal/Par

Amount

 

Amortized

Cost

 

Fair Value(b)

Senior Secured First Lien Term Loans - 36.4%

 

 

 

 

 

 

 

 

 

 

 

 

Captive Resources Midco, LLC, L+550, 1.25% LIBOR Floor, 10/31/2018

 

Insurance

 

$

 995,000 

 

$

978,509 

 

$

977,588 

 

CHI Overhead Doors, L+425, 1.25% LIBOR Floor, 3/18/2019(c) 

 

Building Materials

 

 

 1,000,000 

 

 

995,000 

 

 

1,009,375 

 

Merrill Corp., L+625, 1.00% LIBOR Floor, 3/8/2018

 

Printing & Publishing

 

 

 701,000 

 

 

694,027 

 

 

702,577 

 

Orbitz Worldwide, L+675, 1.25% LIBOR Floor, 3/25/2019(d) 

 

Entertainment & Leisure

 

 

 500,000 

 

 

495,004 

 

 

505,938 

 

Plano Molding Co Inc., L+425, 1.00% LIBOR Floor, 12/21/2017

 

Chemicals

 

 

 987,500 

 

 

978,241 

 

 

992,437 

 

Total Safety W3, L+450, 1.25% LIBOR Floor, 3/13/2020(c) 

 

Professional & Business Services

 

 

 500,000 

 

 

497,500 

 

 

505,210 

 

Westway Group, L+400, 1.00% LIBOR Floor, 2/27/2020

 

Food & Beverage

 

 

 1,000,000 

 

 

995,101 

 

 

1,009,375 

Total Senior Secured First Lien Term Loans

 

 

 

 

 

 

 

5,633,382 

 

 

5,702,500 

Senior Secured Second Lien Term Loans - 16.2%

 

 

 

 

 

 

 

 

 

 

 

 

Centaur Gaming, L+750, 1.25% LIBOR Floor, 2/20/2020(c) 

 

Gaming & Hotels

 

 

500,000 

 

 

495,000 

 

 

510,000 

 

GCA Services Group, Inc., L+800, 1.25% LIBOR Floor, 11/1/2020

 

Professional & Business Services

 

 

1,000,000 

 

 

995,335 

 

 

1,004,375 

 

Healogics, Inc, L+800, 1.25% LIBOR Floor, 2/5/2020

 

Healthcare

 

 

500,000 

 

 

495,019 

 

 

516,250 

 

SESAC Holdco II, LLC, L+875, 1.25% LIBOR Floor, 8/8/2019

 

Media

 

 

500,000 

 

 

492,674 

 

 

512,500 

Total Senior Secured Second Lien Term Loans

 

 

 

 

 

 

 

2,478,028 

 

 

2,543,125 

Short Term Investments - 29.4%(e) 

 

 

 

 

 

 

 

 

 

 

 

 

First American Treasury Obligations Fund, Class Z Shares(f) 

 

 

 

 

4,619,775 

 

 

4,619,775 

 

 

4,619,775 

Total Short Term Investments

 

 

 

 

 

 

 

4,619,775 

 

 

4,619,775 

TOTAL INVESTMENTS - 82.0%

 

 

 

 

 

 

$

 12,731,185 

 

$

 12,865,400 

OTHER ASSETS IN EXCESS OF LIABILITIES - 18.0%

 

 

 

 

 

 

 

 

 

$

 2,824,245 

NET ASSETS - 100%

 

 

 

 

 

 

 

 

 

$

 15,689,645 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL RETURN SWAP - 2.2%

 

 

 

Notional Amount

 

 

 

 

Unrealized Appreciation

 

Citibank TRS Facility (see Note 6)

 

 

 

$

13,961,686 

 

 

 

 

$

 343,783 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

All of the Company's debt investments are issued by eligible U.S. portfolio companies, as defined in the Investment Company Act of 1940, except for investments specifically identified as non-qualifying. The Company does not control and is not an affiliate of any of the portfolio companies in its investment portfolio.

(b)

Fair value determined by the Company’s board of directors (see Note 7).

(c)

Position or portion thereof unsettled as of March 31, 2013.

(d)

The investment is not a qualifying asset under the Investment Company Act of 1940, as amended. A business development company may not acquire any asset other than qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the Company’s total assets as defined under Section 55 of the 1940 Act. As of March 31, 2013, 96.8% of the Company’s total assets represented qualifying assets. In addition, as described in Note 6, the Company calculates its compliance with the qualifying asset test on a “look through” basis by treating each loan underlying the total return swap as either a qualifying asset or non-qualifying asset based on whether the obligor is an eligible portfolio company. On this basis, 86.4% of the Company’s total assets represented qualifying assets as of March 31, 2013.

(e)

Short term investments represent highly liquid investments with original maturity dates of three months or less.

(f)

Effective yield as of March 31, 2013 is <0.01%.

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

5

 


 

 

 

 

CĪON Investment Corporation

Consolidated Schedule of Investments

December 31, 2012

 

Portfolio Company(a) 

 

Industry

 

Principal/Par

Amount

 

Amortized

Cost

 

Fair Value(b) 

Senior Secured First Lien Term Loans - 44.1%

 

 

 

 

 

 

 

 

 

 

 

 

Captive Resources Midco, LLC, L+550, 1.25% LIBOR Floor, 10/31/2018

 

Insurance

 

$

 997,500 

 

$

 980,111 

 

$

 980,044 

 

Plano Molding Co Inc., L+450, 1.25% LIBOR Floor, 12/21/2017(c) 

 

Chemicals

 

 

 1,000,000 

 

 

990,000 

 

 

1,000,000 

Total Senior Secured First Lien Term Loans

 

 

 

 

 

 

 

1,970,111 

 

 

1,980,044 

Short Term Investments - 40.5%(d) 

 

 

 

 

 

 

 

 

 

 

 

 

First American Treasury Obligations Fund, Class Z Shares(e) 

 

 

 

 

1,817,762 

 

 

1,817,762 

 

 

1,817,762 

Total Short Term Investments

 

 

 

 

 

 

 

1,817,762 

 

 

1,817,762 

TOTAL INVESTMENTS - 84.6%

 

 

 

 

 

 

$

 3,787,873 

 

$

 3,797,806 

OTHER ASSETS IN EXCESS OF LIABILITIES - 15.4%

 

 

 

 

 

 

 

 

 

$

 689,309 

NET ASSETS - 100%

 

 

 

 

 

 

 

 

 

$

 4,487,115 

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL RETURN SWAP - 0.3%

 

 

 

Notional Amount

 

 

 

 

Unrealized Appreciation

 

Citibank TRS Facility (see Note 6)

 

 

 

$

 2,883,100 

 

 

 

 

$

 12,493 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

All of the Company's debt investments are issued by eligible U.S. portfolio companies, as defined in the Investment Company Act of 1940. The Company does not control and is not an affiliate of any of the portfolio companies in its investment portfolio.

(b)

Fair value determined by the Company’s board of directors (see Note 7).

 

(c)

Position or portion thereof unsettled as of December 31, 2012.

 

(d)

Short term investments represent highly liquid investments with original maturity dates of three months or less.

 

(e)

Effective yield as of December 31, 2012 is <0.01%.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

6

 


 

CĪON INVESTMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

March 31, 2013 

(unaudited)

 

Note 1. Organization and Principal Business

CĪON Investment Corporation, or the Company, was incorporated under the general corporation laws of the State of Maryland on August 9, 2011. On December 17, 2012, the Company successfully raised gross proceeds from unaffiliated outside investors of at least $2,500,000, or the minimum offering requirement, and commenced operations. The Company is an externally managed, non-diversified closed-end management investment company that has elected to be regulated as a business development company, or BDC, under the Investment Company Act of 1940, as amended, or the 1940 Act. The Company intends to elect to be treated for federal income tax purposes as a regulated investment company, or RIC, as defined under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code.

The Company’s investment objective is to generate current income and, to a lesser extent, capital appreciation for investors. The Company anticipates that its portfolio will be comprised primarily of investments in senior secured loans and, to a lesser extent, second lien loans and long-term subordinated loans, referred to as mezzanine loans, of private and thinly traded U.S. middle-market companies.

The Company is managed by CĪON Investment Management, LLC, or CIM, a registered investment adviser and an affiliate of the Company. CIM oversees the management of the Company’s activities and is responsible for making investment decisions for the Company’s investment portfolio. The Company and CIM have engaged Apollo Investment Management, L.P., or AIM, a subsidiary of Apollo Global Management, LLC, or, together with its subsidiaries, Apollo, a leading global alternative investment manager, to act as the Company’s investment sub-adviser.

Since commencing its initial public offering and through May 10, 2013, the Company has sold 2,699,587 shares of common stock for gross proceeds of approximately $26,735,000 at an average price per share of $9.90. As of March 31, 2013, the Company sold 1,712,123 shares for gross proceeds of approximately $16,806,000 at an average price per share of $9.82.

 

On December 28, 2012, January 31, 2013, March 14, 2013 and May 15, 2013, the Company’s board of directors increased the public offering price per share of common stock under the Company’s offering to $10.04, $10.13, $10.19 and $10.24 per share, respectively, to ensure that the associated net offering price per share, exclusive of sales load ($9.04, $9.12, $9.17 and $9.22 per share, respectively) equaled or exceeded the net asset value per share on each subsequent subscription closing date and distribution reinvestment date.

 

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. For a more complete discussion of significant accounting policies and certain other information, the Company’s interim unaudited consolidated financial statements should be read in conjunction with its audited consolidated financial statements as of December 31, 2012 and for the period from January 31, 2012 (Inception) through December 31, 2012 included in the Company’s annual report on Form 10-K. Operating results for the three months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2013. The December 31, 2012 consolidated balance sheet and the consolidated schedule of investments are derived from the 2012 audited consolidated financial statements.

Prior to satisfying the minimum offering requirement on December 17, 2012, the Company had no operating activities except for matters relating to its organization and registration as a non-diversified, closed-end management investment company. As a result, there is no consolidated statement of operations data for the three months ended March 31, 2012.

 

7

 


 

CĪON INVESTMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

March 31, 2013 

(unaudited)

 

Certain reclassifications have been made to the accompanying consolidated financial statements in prior periods to conform to the current period presentation.

Cash and Cash Equivalents

Cash and cash equivalents include cash in banks and highly liquid investments with original maturity dates of three months or less. The Company’s cash and cash equivalents are held principally at one financial institution and at times may exceed insured limits. The Company periodically evaluates the creditworthiness of this institution and has not experienced any losses on such deposits.

Short Term Investments

Short term investments include an investment in a U.S. Treasury Obligations Fund, which seeks to provide current income and daily liquidity by purchasing U.S. Treasury securities and repurchase agreements that are collateralized by such securities. The Company had $4,619,775 of such investments at March 31, 2013, which are included in investments, at fair value on the accompanying consolidated balance sheets and on the consolidated schedule of investments.

Organization Costs

Organization costs include, among other things, the cost of organizing the Company as a Maryland corporation, including the cost of legal services and other fees pertaining to the organization of the Company. All organization costs have been funded by IIG and its affiliates and there is no liability for these organization costs to the Company until IIG submits such costs for reimbursement. The Company will expense organization costs when incurred, if and when IIG submits such costs for reimbursement. At March 31, 2013, IIG and its affiliates have incurred approximately $192,000 of organization costs, which may be subject to reimbursement by the Company. No additional organization costs have been incurred subsequent to March 31, 2013 (see Note 3).

Offering Expenses

Offering expenses include, among other things, legal fees and other costs pertaining to the preparation of the Company’s registration statement in connection with the public offering of the Company’s shares. Certain offering expenses have been funded by IIG and its affiliates and there is no liability for these offering expenses to the Company until IIG and its affiliates submit such costs for reimbursement. Upon meeting the minimum offering requirement on December 17, 2012, the Company incurred and capitalized offering expenses of $1,000,000 that were submitted for reimbursement by IIG. These expenses are amortized over a twelve month period as an adjustment to capital in excess of par value. The Company will expense any additional offering expenses if and when IIG submits such costs for reimbursement. The unamortized balance of these expenses is reflected in the consolidated balance sheets as deferred offering expenses, net. At March 31, 2013, IIG and its affiliates have incurred approximately $825,000 of unreimbursed offering expenses, which may be subject to reimbursement by the Company. No additional offering expenses have been incurred subsequent to March 31, 2013 (see Note 3).

Income Taxes

The Company intends to elect to be treated for federal income tax purposes as a RIC under Subchapter M of the Code. To qualify and maintain qualification as a RIC, the Company must, among other things, meet certain source of income and asset diversification requirements and distribute to shareholders, for each taxable year, at least 90% of the Company’s “investment company taxable income,” which is generally the Company’s net ordinary income plus the excess, if any, of realized net short-term capital gains over realized net long-term capital losses. If the Company qualifies as a RIC and satisfies the annual distribution requirement, the Company will not have to pay corporate level federal income taxes on any income that the Company distributes to its shareholders. The Company intends to make distributions in an amount sufficient to maintain RIC status each year and to avoid any federal income taxes on income. The Company will also be subject to nondeductible federal excise taxes if the Company does not distribute at least 98% of net ordinary income, 98.2% of any capital gain net income, if any, and any recognized and undistributed income from prior years for which it paid no federal income taxes.

 

8

 


 

CĪON INVESTMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

March 31, 2013 

(unaudited)

 

Book and tax basis differences relating to permanent differences are reclassified among the Company’s capital accounts, as appropriate. Additionally, the tax character of distributions is determined in accordance with income tax regulations that may differ from GAAP. During the three months ended March 31, 2013, the Company declared distributions of approximately $209,000.

 

Uncertainty in Income Taxes

The Company evaluates its tax positions to determine if the tax positions taken meet the minimum recognition threshold in connection with accounting for uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing tax liabilities in the consolidated financial statements. Recognition of a tax benefit or liability with respect to an uncertain tax position is required only when the position is “more likely than not” to be sustained assuming examination by the taxing authorities. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the consolidated statement of operations. As of and for the three months ended March 31, 2013, the Company did not have any uncertain tax positions.

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may materially differ from those estimates.

Valuation of Portfolio Investments

The fair value of the Company’s investments is determined quarterly in good faith by the Company’s board of directors pursuant to its consistently applied valuation procedures and valuation process. Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosure, or ASC Topic 820, defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 also establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, which includes inputs such as quoted prices for similar securities in active markets and quoted prices for identical securities where there is little or no activity in the market; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

For each investment, CIM will attempt to obtain the most recent closing public market price. If no sales of such investment occurred on the determination date, such investment will be valued at the midpoint of the “bid” and the “ask” price at the close of business on such day. Portfolio securities that carry certain restrictions on sale will typically be consistently valued at a discount from the public market value of the security. Loans or investments traded over the counter and not listed on an exchange are valued at a price obtained from third-party pricing services, including, where appropriate, multiple broker dealers, as determined by CIM.

Notwithstanding the foregoing, if in the reasonable judgment of CIM, the price for any securities held by the Company and determined in the manner described above does not accurately reflect the fair value of such security, CIM will value such security at a price that reflects such security’s fair value and report such change in the valuation to the board of directors or its designee as soon as practicable.

Any securities or other assets that are not publicly traded or for which a market price is not otherwise readily available will be valued at a price that reflects such security’s fair value. With respect to such investments, the investments will be reviewed and valued using one or more of the following types of analyses:

               i.      Market comparable statistics and public trading multiples discounted for illiquidity, minority ownership

and other factors for companies with similar characteristics.

 

9

 


 

CĪON INVESTMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

March 31, 2013 

(unaudited)

 

              ii.      Valuations implied by third-party investments in the applicable portfolio companies.

            iii.      Discounted cash flow analysis, including a terminal value or exit multiple.

 

Determination of fair value involves subjective judgments and estimates. Accordingly, these notes to the Company’s consolidated financial statements refer to the uncertainty with respect to the possible effect of such valuations, and any change in such valuations, on the Company’s consolidated financial statements. Below is a description of factors that the Company’s board of directors may consider when valuing the Company’s equity and debt investments where a market price is not readily available:

·         the size and scope of a portfolio company and its specific strengths and weaknesses;

·         prevailing interest rates for like securities;

·         expected volatility in future interest rates;

·         leverage; 

·         call features, put features and other relevant terms of the debt;

·         the borrower’s ability to adequately service its debt;

·         the fair market value of the portfolio company in relation to the face amount of its outstanding debt;

·         the quality of collateral securing the Company’s debt investments;

·         multiples of earnings before interest, taxes, depreciation and amortization, or EBITDA, cash flows, net income, revenues or, in some cases, book value or liquidation value; and

·         other factors deemed applicable.

All of these factors may be subject to adjustment based upon the particular circumstances of a portfolio company or the Company’s actual investment position. For example, adjustments to EBITDA may take into account compensation to previous owners, or acquisition, recapitalization, and restructuring expenses or other related or non-recurring items. The choice of analyses and the weight assigned to such factors may vary across investments and may change within an investment if events occur that warrant such a change.

Consistent with the Company’s valuation policy, the Company evaluates the source of inputs, including any markets in which the Company’s investments are trading, in determining fair value.

Given the expected types of investments, excluding short term investments that are classified as Level 1, the Company expects portfolio holdings to be classified as Level 2 or Level 3. Due to the uncertainty inherent in the valuation process, particularly for Level 2 and Level 3 investments, such fair value estimates may differ materially from the values that would have been used had an active market for the securities existed. In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses that the Company ultimately realizes on these investments to materially differ from the valuations currently assigned.

Revenue Recognition

Securities transactions are accounted for on the trade date. The Company records interest and dividend income on an accrual basis beginning on the settlement date to the extent that the Company expects to collect such amounts. The Company does not accrue as a receivable interest or dividends on loans and debt securities if it has reason to doubt the ability to collect such income. Loan origination fees, original issue discounts, and market discounts/premiums are capitalized and such amounts are amortized as adjustments to interest income over the respective term of the loan. Upon the prepayment of a loan or debt security, any unamortized loan origination fees are recorded as interest income. The Company records prepayment premiums on loans and debt securities as interest income when it receives such amounts.

 

10

 


 

CĪON INVESTMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

March 31, 2013 

(unaudited)

 

Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation

Gains or losses on the sale of investments are calculated by using the specific identification method. The Company measures realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized upfront fees and prepayment penalties. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.

Derivative Instrument

The Company’s only derivative instrument is a total return swap, or TRS. The Company marks its derivative to market through net changes in unrealized appreciation (depreciation) on the TRS in the consolidated statement of operations.

Capital Gains Incentive Fee

Pursuant to the terms of the investment advisory agreement the Company entered into with CIM, the incentive fee on capital gains earned on liquidated investments of the Company’s investment portfolio during operations is determined and payable in arrears as of the end of each calendar year. Such fee will equal 20% of the Company’s incentive fee capital gains (i.e., the Company’s realized capital gains on a cumulative basis from inception, calculated as of the end of each calendar year, net of all realized capital losses and unrealized capital depreciation on a cumulative basis), less the aggregate amount of any previously paid capital gains incentive fees. On a cumulative basis and to the extent that all realized capital losses and unrealized capital depreciation exceed realized capital gains as well as the aggregate realized net capital gains for which a fee has previously been paid, the Company would not be required to pay CIM a capital gains incentive fee. On a quarterly basis, the Company accrues for the capital gains incentive fee by calculating such fee as if it were due and payable as of the end of such period.

While the investment advisory agreement with CIM neither includes nor contemplates the inclusion of unrealized gains in the calculation of the capital gains incentive fee, pursuant to an interpretation of the American Institute for Certified Public Accountants, or AICPA, Technical Practice Aid for investment companies, the Company accrues capital gains incentive fees on unrealized gains. This accrual reflects the incentive fees that would be payable to CIM if the Company’s entire investment portfolio was liquidated at its fair value as of the balance sheet date even though CIM is not entitled to an incentive fee with respect to unrealized gains unless and until such gains are actually realized.

Earnings per share

Earnings per share is calculated based upon the daily weighted average number of shares of common stock outstanding during the reporting period.

Distributions

Distributions to shareholders are recorded as of the record date. The amount to be paid as a distribution is determined by the board of directors on a monthly basis. Net realized capital gains, if any, are distributed or deemed distributed at least annually.

 

Note 3. Transactions with Related Parties

 

The Company has entered into an investment advisory agreement with CIM. Pursuant to the investment advisory agreement, CIM will be paid an annual base management fee equal to 2.0% of the average value of the Company’s gross assets, less cash and cash equivalents, and an incentive fee based on the Company’s performance. The incentive fee consists of two parts. The first part, which is referred to as the subordinated incentive fee on income, will be calculated and payable quarterly in arrears based on “pre-incentive fee net investment income” for the immediately preceding quarter and will be subject to a hurdle rate, measured quarterly and expressed as a rate of

 

11

 


 

CĪON INVESTMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

March 31, 2013 

(unaudited)

 

return on adjusted capital, as defined in the investment advisory agreement, equal to 1.875% per quarter, or an annualized rate of 7.5%. The second part of the incentive fee, which is referred to as the incentive fee on capital gains, is an incentive fee on capital gains earned on liquidated investments from the portfolio and is determined and payable in arrears as of the end of each calendar year (or upon termination of the investment advisory agreement). This fee will equal 20% of realized capital gains on a cumulative basis from inception, calculated as of the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gains incentive fees. On a cumulative basis and to the extent that all realized capital losses and unrealized capital depreciation exceeds realized capital gains as well as the aggregate realized net capital gains for which a fee has previously been paid, the Company would not be required to pay CIM a capital gains incentive fee.

 

The Company began accruing fees under the investment advisory agreement on December 17, 2012, upon the commencement of the Company’s operations. For the three months ended March 31, 2013, CIM earned $44,742 in management fees. For the three months ended March 31, 2013, all management fees were reimbursed by IIG in accordance with the expense support and conditional reimbursement agreement entered into with IIG, or the expense support and conditional reimbursement agreement.

 

The Company accrues the capital gains incentive fee based on net realized and unrealized gains; however, under the terms of the investment advisory agreement, the fee payable to CIM is based on net realized gains and no such fee is payable with respect to unrealized gains unless and until such gains are actually realized. For the three months ended March 31, 2013, the Company recorded capital gains incentive fees of $117,023 based on the performance of its investment portfolio, of which $74,972 was based on net unrealized gains and $42,051 was based on realized gains. For the three months ended March 31, 2013, all incentive fees were reimbursed by IIG in accordance with the expense support and conditional reimbursement agreement.

 

On January 30, 2013, the Company entered into the expense support and conditional reimbursement agreement with IIG, whereby IIG agreed to reimburse the Company for expenses in an amount that is sufficient to: (1) ensure that no portion of the Company’s distributions to shareholders will be paid from its offering proceeds or borrowings, and/or (2) reduce the Company’s operating expenses until it has achieved economies of scale sufficient to ensure that it bears a reasonable level of expense in relation to its investment income. Pursuant to the expense support and conditional reimbursement agreement, the Company will have a conditional obligation to reimburse IIG for any amounts funded by IIG under such agreement if, during any fiscal quarter occurring within three years of the date on which IIG funded such amount, the sum of the Company’s net investment income for tax purposes, net capital gains and the amount of any dividends and other distributions paid to the Company on account of investments in portfolio companies exceeds the distributions paid by the Company to its shareholders. For the three months ended March 31, 2013, the total expense reimbursement from IIG was $819,373 relating to certain operating expenses.

 

The Company may fund its cash distributions to shareholders from any sources of funds available to the Company, including offering proceeds, borrowings, net investment income from operations, capital gains proceeds from the sale of assets, non-capital gains proceeds from the sale of assets, dividends or other distributions paid to it on account of preferred and common equity investments in portfolio companies and expense reimbursements from IIG, which are subject to recoupment. The Company has not established limits on the amount of funds it may use from available sources to make distributions. For a significant time after the commencement of its offering, a substantial portion of the Company’s distributions may result from expense reimbursements from IIG, which are subject to repayment by the Company within three years. The purpose of this arrangement is to avoid such distributions being characterized as returns of capital. Shareholders should understand that any such distributions are not based on the Company’s investment performance, and can only be sustained if the Company achieves positive investment performance in future periods and/or IIG continues to make such expense reimbursements. Shareholders should also understand that the Company’s future repayments will reduce the distributions that they would otherwise receive.  There can be no assurance that the Company will achieve such performance in order to sustain these distributions, or be able to pay distributions at all.  IIG has no obligation to provide expense reimbursements to the Company in future periods. For the three months ended March 31, 2013, if expense reimbursements from IIG of $819,373 were not supported, none of the distributions would be a return of capital.

 

12

 


 

CĪON INVESTMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

March 31, 2013 

(unaudited)

 

 

The table below presents a summary of all expenses supported by IIG and the associated dates through which such expenses are eligible for reimbursement by the Company for the three months ended December 31, 2012 and March 31, 2013.

 

Three Months Ended

 

Expense Support Received from IIG

 

Expense Support Reimbursed to IIG

 

Unreimbursed Expense Support

 

Eligible for Reimbursement through

December 31, 2012

 

$

116,706 

 

$

 - 

 

$

116,706 

 

December 31, 2015

March 31, 2013

 

 

819,373 

 

 

 - 

 

 

819,373 

 

March 31, 2016

Total

 

$

936,079 

 

$

 - 

 

$

936,079 

 

 

 

Reimbursement of such costs will be determined as appropriate to meet the objectives of the expense support and conditional reimbursement agreement. As a result, the Company may or may not be requested to reimburse any of these costs by IIG. As of March 31, 2013, the net reimbursement from IIG was $336,307.

 

The Company or IIG may terminate the expense support and conditional reimbursement agreement at any time. IIG has indicated that it expects to continue such reimbursements until it deems that the Company has achieved economies of scale sufficient to ensure that it bears a reasonable level of expenses in relation to its income. If the Company terminates the investment advisory agreement with CIM, the Company may be required to repay IIG all reimbursements funded by IIG within three years of the date of termination. The specific amount of expenses reimbursed by IIG, if any, will be determined at the end of each quarter. There can be no assurance that the expense support and conditional reimbursement agreement will remain in effect or that IIG will reimburse any portion of the Company’s expenses in future quarters.

 

The Company entered into an administration agreement with CIM’s affiliate, ICON Capital, LLC, formerly known as ICON Capital Corp., or ICON Capital, pursuant to which ICON Capital furnishes the Company with administrative services including accounting, investor relations and other administrative services necessary to conduct its day-to-day operations. ICON Capital is reimbursed for administrative expenses it incurs on the Company’s behalf in performing its obligations, provided that such reimbursement will be for the lower of ICON Capital’s actual costs or the amount that the Company would be required to pay for comparable administrative services in the same geographic location. Such costs will be reasonably allocated to the Company on the basis of assets, revenues, time records or other reasonable methods. The Company will not reimburse ICON Capital for any services for which it receives a separate fee or for rent, depreciation, utilities, capital equipment or other administrative items allocated to a person with a controlling interest in ICON Capital. For the three months ended March 31, 2013, the Company incurred administrative services expense from ICON Capital of $263,555. All of these charges were related to the cost of administrative personnel for services provided to the Company. For the three months ended March 31, 2013, all administrative expenses were reimbursed by IIG in accordance with the expense support and conditional reimbursement agreement.

 

The Company’s payment of organization costs and offering expenses (including reimbursement of costs incurred by IIG and its affiliates) is capped at 1.5% of the gross proceeds from the offering. If the Company sells the maximum number of shares at its latest public offering price of $10.24 per share, effective as of May 16, 2013, then the Company estimates that it may incur up to approximately $15,360,000 of expenses. Under the terms of the investment advisory agreement, CIM and certain of its affiliates, which includes IIG, will become entitled to receive reimbursement of up to 1.5% of the gross proceeds raised until all organization costs and offering expenses have been reimbursed. At March 31, 2013, IIG and its affiliates incurred organization costs and offering expenses of approximately $2,017,000, of which $1,000,000 have been reimbursed by the Company. No additional organization costs or offering expenses have been incurred subsequent to March 31, 2013. The decision to fund the Company’s organization costs and offering expenses and the decision to seek reimbursement for such costs is solely at the discretion of IIG and its affiliates. As a result, the Company may or may not be requested to reimburse any costs funded by IIG and its affiliates. To the extent that payments of organization costs and offering expenses exceed the 1.5% cap at the end of the offering period, any excess amounts may be recoverable from IIG and its affiliates.

 

13

 


 

CĪON INVESTMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

March 31, 2013 

(unaudited)

 

 

On December 17, 2012, the Company and IIG net cash settled IIG’s purchase of 111,111 shares of the Company’s common stock at $9.00 per share and the Company’s payment to IIG of $1,000,000 for offering expenses submitted for reimbursement.

 

The Company has entered into certain agreements with ICON Securities, LLC, formerly known as ICON Securities Corp., or ICON Securities, whereby the Company pays certain fees and reimbursements. ICON Securities is entitled to receive a 3% dealer manager fee from the gross offering proceeds from the sale of the Company’s shares. The selling dealers are entitled to receive a sales commission of up to 7% of the gross offering proceeds. Such costs are charged against capital in excess of par value when incurred. For the three months ended March 31, 2013, the Company paid or accrued commissions of $769,635 to the selling dealers and $358,269 to ICON Securities.

 

Fees and other expenses paid or accrued by the Company to CIM or its affiliates were as follows:

 

Entity

 

Capacity

 

Description

 

Three Months Ended

March 31, 2013

ICON Securities

 

Dealer-manager

 

Dealer-manager fees(1) 

 

$

 358,269 

CIM

 

Investment adviser

 

Management fees(2)(3) 

 

 

 44,742 

CIM

 

Investment adviser

 

Incentive fees(2)(3) 

 

 

 117,023 

ICON Capital

 

Administrative services provider

 

Administrative services expense(2)(3) 

 

 

 263,555 

 

 

 

 

 

 

$

 783,589 

(1) Amount charged directly to equity.

(2) Amount charged directly to operations.

(3) Amount has been supported in connection with the expense support and conditional reimbursement agreement.

 

Because CIM’s senior management team is comprised of substantially the same personnel as the senior management team of the Company’s affiliate, ICON Capital, which is the investment manager to certain equipment finance funds, or equipment funds, such members of senior management provide investment advisory and management services to both the Company and the equipment funds. In the event that CIM undertakes to provide investment advisory services to other clients in the future, it will strive to allocate investment opportunities in a fair and equitable manner consistent with the Company’s investment objective and strategies so that the Company will not be disadvantaged in relation to any other client of the investment adviser or its senior management team. However, it is currently possible that some investment opportunities will be provided to the equipment funds or other clients of CIM rather than to the Company.

 

Indemnifications

 

The investment advisory agreement, the investment sub-advisory agreement, the administration agreement and the dealer manager agreement each provide certain indemnifications from the Company to the other relevant parties to such agreements.  The Company’s maximum exposure under these agreements is unknown. However, the Company has not experienced claims or losses pursuant to these agreements and believes the risk of loss related to such indemnifications to be remote.

 

Note 4. Distributions

 

The Company’s board of directors declared distributions for six record dates in the three months ended March 31, 2013. Declared distributions are paid monthly. The following table presents the cash distributions per share that were declared during the three months ended March 31, 2013:

 

 

14

 


 

CĪON INVESTMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

March 31, 2013 

(unaudited)

 

 

  

Distributions

Three Months Ended

 

Per Share

 

Amount

    March 31, 2013

 

$

 0.1769 

  

$

 208,766 

             

On April 15, 2013, the Company’s board of directors declared two regular semi-monthly cash distributions of $0.029721 per share each, which were paid on May 1, 2013 to shareholders of record on April 15, 2013 and April 30, 2013, respectively. On May 15, 2013, the Company’s board of directors declared two regular semi-monthly cash distributions of $0.029721 per share and $0.029867 per share, payable on June 3, 2013 to shareholders of record as of May 15, 2013 and May 31, 2013, respectively. The timing and amount of any future distributions to shareholders are subject to applicable legal restrictions and the sole discretion of the Company’s board of directors.

 

The Company may fund cash distributions to shareholders in the future from any sources of funds available, including offering proceeds, borrowings, net investment income from operations, capital gains proceeds from the sale of assets, non-capital gains proceeds from the sale of assets, dividends or other distributions paid to the Company on account of preferred and common equity investments in portfolio companies and expense reimbursements from IIG, which are subject to recoupment. The Company has not established limits on the amount of funds it may use from available sources to make distributions.

 

The following table reflects the sources of the cash distributions that the Company has declared on its common stock during the three months ended March 31, 2013:

 

Source of Distribution

 

Distribution Amount

 

Percentage

Realized gain on investments and total return swap

 

$

 208,766 

 

100%

    Total

 

$

 208,766 

 

100%

 

The Company’s net investment loss on a tax basis for the three months ended March 31, 2013 was $46,684. As of March 31, 2013, the Company had no tax-basis net investment income earned to distribute.

 

There were no differences between the Company’s GAAP-basis net investment loss and the Company’s tax-basis net investment loss.

 

The determination of the tax attributes of the Company’s distributions is made annually as of the end of the Company’s fiscal year based upon the Company’s taxable income for the full year and distributions paid for the full year. Therefore, a determination made on a quarterly basis may not be representative of the actual tax attributes of the Company’s distributions for a full year. The actual tax characteristics of distributions to shareholders are reported to shareholders annually on Form 1099-DIV.

 

As of March 31, 2013 and December 31, 2012, the components of accumulated earnings on a tax basis were as follows:

 

 

 

March 31, 2013

(unaudited)

 

December 31, 2012

Undistributed net investment income

 

$

 - 

 

$

 2,692 

Undistributed net realized gain from investments

 

 

1,534 

 

 

44 

Net unrealized appreciation on investments and total return swap(1) 

 

 

477,998 

 

 

22,426 

 

 

 $

479,532 

  

 $

25,162 

 

 

 

 

 

 

 

 

(1)

As of March 31, 2013 and December 31, 2012, the gross unrealized appreciation on the Company’s investments and the underlying loans of the total return swap was $478,919 and $28,051, respectively. As of March 31, 2013 and December 31, 2012, the gross unrealized depreciation on the Company’s investments and the underlying loans of the total return swap was $921 and $5,625, respectively.

               

 

15

 


 

CĪON INVESTMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

March 31, 2013 

(unaudited)

 

 

The aggregate cost of the Company’s investments for federal income tax purposes totaled $12,731,185 and $3,787,873 as of March 31, 2013 and December 31, 2012, respectively. The aggregate net unrealized appreciation on a tax basis, including the Company’s TRS, was $477,998 and $22,426 as of March 31, 2013 and December 31, 2012, respectively.

 

Note 5. Investments

 

The composition of the Company’s investment portfolio as of March 31, 2013 and December 31, 2012 at amortized cost and fair value was as follows:

 

 

 

 

March 31, 2013

(unaudited)

 

December 31, 2012

 

 

Amortized Cost(1) 

 

Fair Value

 

Percentage of Investment Portfolio

 

Amortized Cost(1) 

 

Fair Value

 

Percentage of Investment Portfolio

Senior Secured Term Loans - First lien(2) 

 

$

 5,633,382 

 

$

 5,702,500 

 

44.3%

 

$

 1,970,111 

 

$

 1,980,044 

 

52.1%

Senior Secured Term Loans - Second lien(2) 

 

 

2,478,028 

 

 

2,543,125 

 

19.8%

 

 

 - 

 

 

 - 

 

 -% 

Short term investments(3) 

 

 

4,619,775 

 

 

4,619,775 

 

35.9%

 

 

1,817,762 

 

 

1,817,762 

 

47.9%

    Total investments

 

$

 12,731,185 

 

$

 12,865,400 

 

100.0%

 

$

 3,787,873 

 

$

 3,797,806 

 

100.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on the Company’s investments.

(2)

The Company does not control and is not an affiliate of any of the portfolio companies in its investment portfolio.

(3)

Short term investments represent highly liquid investments with original maturity dates of three months or less.

 

16

 


 

CĪON INVESTMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

March 31, 2013 

(unaudited)

 

 

The table below shows the composition of the Company’s investment portfolio by industry classification and the percentage, by fair value, of the total investment portfolio assets in such industries as of March 31, 2013 and December 31, 2012:

 

 

 

March 31, 2013

(unaudited)

 

December 31, 2012

 

Investments at Fair Value

 

Percentage of 

Investment Portfolio

 

Investments at Fair Value

 

Percentage of 

Investment Portfolio

Professional & Business Services

 

$

 1,509,585 

 

11.7%

 

$

 - 

 

 -% 

Building Materials

 

 

1,009,375 

 

7.8%

 

 

 - 

 

 -% 

Food & Beverage

 

 

1,009,375 

 

7.8%

 

 

 - 

 

 -% 

Chemicals

 

 

992,437 

 

7.7%

 

 

 1,000,000 

 

26.3%

Insurance

 

 

977,588 

 

7.6%

 

 

 980,044 

 

25.8%

Printing & Publishing

 

 

702,577 

 

5.5%

 

 

 - 

 

 -% 

Healthcare

 

 

516,250 

 

4.0%

 

 

 - 

 

 -% 

Media

 

 

512,500 

 

4.0%

 

 

 - 

 

 -% 

Gaming & Hotels

 

 

510,000 

 

4.0%

 

 

 - 

 

 -% 

Entertainment & Leisure

 

 

505,938 

 

4.0%

 

 

 - 

 

 -% 

U.S. Treasury Securities

 

 

4,619,775 

 

35.9%

 

 

1,817,762 

 

47.9%

  Total

 

$

 12,865,400 

 

100.0%

 

$

 3,797,806 

 

100.0%

 

Note 6. Total Return Swap

 

On December 17, 2012, the Company, through its wholly-owned subsidiary, Flatiron Funding, LLC, or Flatiron, entered into a TRS with Citibank, N.A., or Citibank.  The agreements between Flatiron and Citibank, which collectively establish the TRS, are referred to as the TRS Agreement.

 

A TRS is a contract in which one party agrees to make periodic payments to another party based on the change in the market value of the assets underlying the TRS and interest payments in return for periodic payments based on a fixed or variable interest rate. A TRS effectively adds leverage to a portfolio by providing investment exposure to a security or market without owning or taking physical custody of such security or investing directly in such market. Because of the unique structure of a TRS, a TRS typically offers lower financing costs than are offered through more traditional borrowing arrangements.

 

The TRS with Citibank enables the Company, through its ownership of Flatiron, to obtain the economic benefit of owning the loans subject to the TRS, without actually owning them, in return for an interest-type payment to Citibank. As such, the TRS is analogous to Flatiron borrowing funds to acquire loans and incurring interest expense to a lender.

 

The obligations of Flatiron under the TRS are non-recourse to the Company and the Company’s exposure under the TRS is limited to the value of the Company’s investment in Flatiron, which generally will equal the value of cash collateral provided by Flatiron under the TRS. Pursuant to the terms of the TRS, Flatiron may select loans with a maximum aggregate market value (determined at the time each such loan becomes subject to the TRS) of the lesser of (a) $150,000,000 and (b) 140% of the aggregate amount of cash contributed to the equity capital of the Company during the first nine months of the TRS and not withdrawn during that period, or the maximum portfolio amount. Flatiron is required to initially cash collateralize a specified percentage of each loan (generally 25% of the market value of such loan) included under the TRS in accordance with margin requirements described in the TRS Agreement. Under the terms of the TRS, Flatiron agreed not to draw upon, or post as collateral, such cash collateral in respect of other financings or operating requirements prior to the termination of the TRS. Neither the cash

 

17

 


 

CĪON INVESTMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

March 31, 2013 

(unaudited)

 

collateral required to be posted with Citibank nor any other assets of Flatiron are available to pay the debts of the Company.

 

Each individual loan must meet criteria described in the TRS Agreement, including a requirement that substantially all of the loans be rated by Moody’s and S&P and quoted by a nationally-recognized pricing service. Under the terms of the TRS, Citibank, as calculation agent, determines whether there has been a failure to satisfy the portfolio criteria in the TRS. If such failure continues for 30 days following the delivery of notice thereof, then Citibank has the right, but not the obligation, to terminate the TRS. Flatiron receives from Citibank all interest and fees payable in respect of the loans included in the TRS. Flatiron pays to Citibank interest at a rate equal to, in respect of each loan included in the TRS, the floating rate index specified for such loan + 1.25% per annum. In addition, upon the termination or repayment of any loan subject to the TRS, Flatiron will either receive from Citibank the appreciation in the value of such loan or pay to Citibank any depreciation in the value of such loan.

 

Under the terms of the TRS, Flatiron may be required to post additional cash collateral, on a dollar-for-dollar basis, in the event of depreciation in the value of the underlying loans after such value decreases below a specified amount. The limit on the additional collateral that Flatiron may be required to post pursuant to the TRS is equal to the difference between the full notional amount of the loans underlying the TRS and the amount of cash collateral already posted by Flatiron. The amount of collateral required to be posted by Flatiron is determined primarily on the basis of the aggregate value of the underlying loans.

 

The Company has no contractual obligation to post any such additional collateral or to make any interest payments to Citibank on behalf of Flatiron. The Company may, but is not obligated to, increase its investment in Flatiron for the purpose of funding any additional collateral or payment obligations for which Flatiron may become obligated during the term of the TRS. If the Company does not make any such additional investment in Flatiron and Flatiron fails to meet its obligations under the TRS, then Citibank will have the right to terminate the TRS and seize the cash collateral posted by Flatiron under the TRS. In the event of an early termination of the TRS, Flatiron would be required to pay an early termination fee.

 

Citibank may terminate the TRS on or after December 17, 2013, or the call date. Flatiron may terminate the TRS at any time upon providing no more than 30 days prior notice to Citibank. Any termination prior to the call date will result in payment of an early termination fee to Citibank based on the maximum portfolio amount of the TRS. Under the terms of the TRS, the early termination fee will equal the present value of a stream of monthly payments that would be owed by Flatiron to Citibank for the period from the termination date through and including the call date. Such monthly payments will equal the product of 60% of the maximum portfolio amount, multiplied by 1.25% per annum. The Company estimates the early termination fee would have been approximately $132,000 at March 31, 2013. Other than during the first nine months and last 180 days of the term of the TRS, Flatiron may be required to pay a minimum usage fee in connection with the TRS. At March 31, 2013, Flatiron was not subject to a minimum usage fee.

 

In connection with the TRS, Flatiron is required to comply with various covenants and reporting requirements as defined in the TRS Agreement. As of March 31, 2013, the Company was in compliance with all covenants and reporting requirements.

 

For purposes of computing the capital gains incentive fee, the Company treats the net realized gains or losses on the sale or maturity of the underlying TRS loans as realized gains or losses on the TRS.  For purposes of computing the subordinated incentive fee on income, the Company treats the interest spread, which represents the difference between i) the interest and fees received on the underlying TRS loans and ii) the interest paid to Citibank on the settled notional value of the TRS loans, as pre-incentive fee net investment income on the TRS. Accordingly, all net realized economic benefits associated with the underlying TRS loans, if any, are included in the computation of either the capital gains incentive fee or the subordinated incentive fee on income. Any unrealized appreciation on the TRS is reflected in total assets on the Company’s consolidated balance sheets and included in the computation of the base management fee.

 

 

18

 


 

CĪON INVESTMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

March 31, 2013 

(unaudited)

 

For purposes of the asset coverage ratio test applicable to the Company as a BDC, the Company will treat the outstanding notional amount of the TRS, less the initial amount of any cash collateral required to be posted by Flatiron under the TRS, as a senior security for the life of that instrument. The Company may, however, accord different treatment to the TRS in the future in accordance with any applicable new rules or interpretations adopted by the staff of the Securities and Exchange Commission, or SEC.

 

Further, for purposes of Section 55(a) under the 1940 Act, the Company will treat each loan underlying the TRS as a qualifying asset if the obligor on such loan is an eligible portfolio company and as a non-qualifying asset if the obligor is not an eligible portfolio company. The Company may, however, accord different treatment to the TRS in the future in accordance with any applicable new rules or interpretations adopted by the staff of the SEC.

 

As of March 31, 2013, the fair value of the TRS was $343,783. The fair value of the TRS is reflected as unrealized appreciation on total return swap on the Company’s consolidated balance sheets. The change in value of the TRS is reflected in the Company’s consolidated statement of operations as net change in unrealized appreciation on total return swap. As of March 31, 2013, Flatiron had selected 22 underlying loans with a total notional amount of $13,961,686 and posted $3,490,731 in cash collateral held by Citibank (of which only $3,490,422 was required to be posted), which is reflected in due from counterparty on the Company’s consolidated balance sheets.

 

19

 


 

CĪON INVESTMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

March 31, 2013 

(unaudited)

 

 

The following is a summary of the underlying loans subject to the TRS as of March 31, 2013:

 

Underlying Senior Secured Term Loans(a) 

 

Industry

 

Notional Amount

 

Market

Value(b) 

 

Unrealized Appreciation

ABB Concise Optical Group, LLC, L+425, 1.25% LIBOR Floor, 2/6/2019

 

Healthcare

 

$

 497,500 

 

$

 502,815 

 

$

 5,315 

American Petroleum Tankers Parent LLC, L+350, 1.25% LIBOR Floor, 10/2/2019

 

Shipping & Ship Building

 

 

497,500 

 

 

500,000 

 

 

2,500 

ATI Holdings, Inc, L+450, 1.25% LIBOR Floor, 12/21/2019

 

Healthcare

 

 

493,763 

 

 

504,361 

 

 

10,598 

Avaya Inc, L+675, 1.25% LIBOR Floor, 3/31/2018

 

Telecommunications

 

 

1,005,000 

 

 

1,005,630 

 

 

630 

Berlin Packaging LLC, L+350, 1.25% LIBOR Floor, 4/2/2020

 

Chemicals

 

 

497,500 

 

 

504,375 

 

 

6,875 

Centaur Gaming, L+400, 1.25% LIBOR Floor, 2/20/2019

 

Gaming & Hotels

 

 

497,500 

 

 

506,875 

 

 

9,375 

Cole Haan LLC, L+450, 1.25% LIBOR Floor, 2/1/2020

 

Textile & Apparel Mfg.

 

 

497,500 

 

 

505,625 

 

 

8,125 

EMG Utica LLC, L+375, 1.00% LIBOR Floor, 3/27/2020

 

Oil & Gas

 

 

497,500 

 

 

501,875 

 

 

4,375 

FairPoint Communications, L+625, 1.25% LIBOR Floor, 2/14/2019

 

Telecommunications

 

 

429,032 

 

 

439,320 

 

 

10,288 

Integra Telecom, Inc, L+475, 1.25% LIBOR Floor, 2/22/2019

 

Telecommunications

 

 

495,000 

 

 

506,330 

 

 

11,330 

Milacron, L+325, 1.00% LIBOR Floor, 3/28/2020(c)

 

Machinery

 

 

497,500 

 

 

503,125 

 

 

5,625 

Moneygram International Inc, L+325, 1.00% LIBOR Floor, 3/28/2020(c)

 

Professional & Business Services

 

 

1,000,000 

 

 

1,008,750 

 

 

8,750 

Peppermill Casinos, L+600, 1.25% LIBOR Floor, 11/9/2018

 

Gaming & Hotels

 

 

985,038 

 

 

1,017,450 

 

 

32,412 

Safe-Guard Products International, LLC, L+600, 1.25% LIBOR Floor, 12/21/2018

 

Financial Services

 

 

898,349 

 

 

945,630 

 

 

47,281 

SESAC Holdco II, LLC, L+475, 1.25% LIBOR Floor, 2/8/2019

 

Media

 

 

493,763 

 

 

502,491 

 

 

8,728 

SRA International, L+525, 1.25% LIBOR Floor, 7/20/2018

 

Computers & Electronics

 

 

952,500 

 

 

996,250 

 

 

43,750 

Sutherland Global Services, L+600, 1.25% LIBOR Floor, 3/6/2019 (c)

 

Professional & Business Services

 

 

978,503 

 

 

984,537 

 

 

6,034 

Tervita, L+500, 1.25% LIBOR Floor, 5/15/2018 (c)

 

Ecological

 

 

547,470 

 

 

559,570 

 

 

12,100 

TransFirst Holdings, Inc., L+500, 1.25% LIBOR Floor, 12/27/2017

 

Computers & Electronics

 

 

493,762 

 

 

505,453 

 

 

11,691 

Waupaca Foundry, Inc., L+450, 1.25% LIBOR Floor, 6/29/2017

 

Steel

 

 

493,750 

 

 

499,305 

 

 

5,555 

WideOpenWest Finance LLC, L+375, 1.00% LIBOR Floor, 4/1/2019

 

Telecommunications

 

 

717,000 

 

 

723,123 

 

 

6,123 

Washington Inventory Services, L+450, 1.25% LIBOR Floor, 12/20/2018

 

Professional & Business Services

 

 

496,256 

 

 

501,867 

 

 

5,611 

Total

 

 

 

$

 13,961,686 

 

$

 14,224,757 

 

 

263,071 

 

 

 

Total Interest Income, Net of Expenses on TRS

 

 

80,712 

 

 

Total Fair Value of TRS

 

$

 343,783 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

All of the Company's debt investments are issued by eligible U.S. portfolio companies, as defined in the 1940 Act, except for investments specifically identified as non-qualifying. The Company does not control and is not an affiliate of any of the  companies that are issuers of the underlying loans subject to the TRS.

(b)

Fair value determined by the Company’s board of directors (see Note 7).

(c)

The investment is not a qualifying asset under the Investment Company Act of 1940, as amended. A business development company may not acquire any asset other than qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the Company’s total assets as defined under Section 55 of the 1940 Act. As of March 31, 2013, 96.8% of the Company’s total assets represented qualifying assets. In addition, as described in Note 6, the Company calculates its compliance with the qualifying asset test on a “look through” basis by treating each loan underlying the total return swap as either a qualifying asset or non-qualifying asset based on whether the obligor is an eligible portfolio company. On this basis, 86.4% of the Company’s total assets represented qualifying assets as of March 31, 2013.

 

20

 


 

CĪON INVESTMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

March 31, 2013 

(unaudited)

 

 

The following is a summary of the underlying loans subject to the TRS as of December 31, 2012:

Underlying Senior Secured Term Loans(a) 

 

Industry

 

Notional Amount

 

Market

Value(b) 

 

Unrealized Appreciation / (Depreciation)

Peppermill Casinos Inc., L+600, 1.25% LIBOR Floor, 11/9/18

 

Gaming and Hotels

 

$

 492,500 

 

$

 486,875 

 

$

 (5,625) 

Safe-Guard Products International, LLC, L+600, 1.25% LIBOR Floor, 12/21/18

 

Financial Services

 

 

900,600 

 

 

905,340 

 

 

4,740 

Sequa Corporation, L+400, 1.25% LIBOR Floor, 6/19/17

 

Aerospace/Defense

 

 

497,500 

 

 

502,655 

 

 

5,155 

TransFirst Holdings, Inc., L+500, 1.25% LIBOR Floor, 12/27/17

 

Computers & Electronics

 

 

495,000 

 

 

500,000 

 

 

5,000 

Washington Inventory Service, L+450, 1.25% LIBOR Floor, 12/20/18

 

Professional & Business Services

 

 

497,500 

 

 

500,625 

 

 

3,125 

Total

 

 

 

$

 2,883,100 

 

$

 2,895,495 

 

 

12,395 

 

 

Total Interest Income, Net of Expenses on TRS

 

 

98 

 

 

Total Fair Value of TRS

 

$

 12,493 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

All of the Company's debt investments are issued by eligible U.S. portfolio companies, as defined in the 1940 Act. The Company does not control and is not an affiliate of any of the  companies that are issuers of the underlying loans subject to the TRS.

(b)

Fair value determined by the Company’s board of directors (see Note 7).

                         

Note 7. Fair Value of Financial Instruments

 

The Company determines the fair value of all portfolio investments in accordance with ASC Topic 820. ASC Topic 820 requires enhanced disclosures about assets and liabilities that are measured and reported at fair value. As defined in ASC Topic 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

 

ASC Topic 820 establishes a hierarchical disclosure framework that prioritizes and ranks the level of market price observability of inputs used in measuring investments at fair value. Market price observability is affected by a number of factors, including the type of investment and the characteristics specific to the investment. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.

 

Based on the observability of the inputs used in the valuation techniques, the Company is required to provide disclosures on fair value measurements according to the fair value hierarchy. Investments carried at fair value are classified and disclosed in one of the following three categories:

 

·                  Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. The Company’s short term investments are included in this category.

 

·      Level 2—Valuations based on inputs other than quoted prices in active markets, which are either directly or indirectly observable.

 

·      Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The inputs used in the determination of fair value may require significant management judgment or estimation. Such information may be the result of consensus pricing information or broker quotes that include a disclaimer that the broker would not be held to such a price in an actual transaction. The non-binding nature of consensus pricing and/or quotes accompanied by the disclaimer would result in classification as a Level 3 asset, assuming no additional corroborating evidence.

 

The following table presents fair value measurements of the Company’s portfolio investments and TRS as of March 31, 2013, according to the fair value hierarchy:

 

Valuation Inputs

 

First Lien Senior Secured Term Loans

 

Second Lien Senior Secured Term Loans

 

Short Term Investments

 

Total Return Swap

Level 1—Price quotations in active markets

  

$

 - 

 

$

 - 

 

$

4,619,775 

  

$

 - 

Level 2—Significant other observable inputs

  

 

 - 

 

 - 

 

 

 - 

  

 

 - 

Level 3—Significant unobservable inputs

  

 

5,702,500 

 

2,543,125 

 

 

 - 

  

 

343,783 

 

  

$

5,702,500 

 

$

2,543,125 

 

$

4,619,775 

  

$

343,783 

 

21

 


 

CĪON INVESTMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

March 31, 2013 

(unaudited)

 

 

The following table presents fair value measurements of the Company’s portfolio investments and TRS as of December 31, 2012, according to the fair value hierarchy:

 

Valuation Inputs

 

First Lien Senior Secured Term Loans

 

Second Lien Senior Secured Term Loans

 

Short Term Investments

 

Total Return Swap

Level 1—Price quotations in active markets

  

$

 - 

 

$

 - 

 

$

1,817,762 

  

$

 - 

Level 2—Significant other observable inputs

  

 

 - 

 

 - 

 

 

 - 

  

 

 - 

Level 3—Significant unobservable inputs

  

 

1,980,044 

 

 - 

 

 

 - 

  

 

12,493 

 

  

$

1,980,044 

 

$

 - 

 

$

1,817,762 

  

$

12,493 

 

The Company’s investments as of March 31, 2013, excluding short term investments, primarily consisted of debt securities that are traded on a private over-the-counter market for institutional investors. Except for investments specifically identified, the Company valued its portfolio investments by using market comparables, discounted cash flow models and independent third-party pricing services, which provided prevailing bid and ask prices that were screened for validity by the pricing service from dealers on the determination date of the relevant period end.

The Company’s investments as of December 31, 2012, excluding short term investments, primarily consisted of debt securities that are traded on a private over-the-counter market for institutional investors. Except for investments specifically identified, the Company valued its portfolio investments by using market comparables, discounted cash flow models and independent third-party pricing services, which provided prevailing bid and ask prices that were screened for validity by the pricing service from dealers on the determination date of the relevant period end. One senior secured loan that was purchased near December 31, 2012 was valued at cost, as the Company determined that the cost of the investment was the best indication of its fair value.

 

The discounted cash flow model deemed appropriate by CIM is prepared for the applicable investments and reviewed by the Company’s valuation committee. Such models are prepared quarterly or on an as needed basis. The model uses the estimated cash flow projections for the underlying investments and an appropriate discount rate is determined based on the latest financial information available for the borrower, prevailing market trends, comparable analysis and other inputs. The model, key assumptions, inputs, and results are reviewed by the Company’s valuation committee consisting of senior management with final approval from the board of directors.

 

The Company periodically benchmarks the bid and ask prices received from the third-party pricing services against the actual prices at which it purchases and sells its investments. Based on the results of the benchmark analysis and the Company’s experience in purchasing and selling these investments, the Company believes that these prices are reliable indicators of fair value. However, because of the private nature of this marketplace (meaning actual transactions are not publicly reported), the Company believes that these valuation inputs are classified as Level 3 within the fair value hierarchy. The Company may also use other methods to determine fair value for securities for which it cannot obtain prevailing bid and ask prices through third-party pricing services or independent dealers, including the use of an independent valuation firm. The Company intends to periodically benchmark the valuations provided by the independent valuation firm against the actual prices at which it purchases and sells its investments. The Company’s valuation committee and board of directors intend to review and approve the valuation determinations made with respect to these investments in a manner consistent with the Company’s valuation process.

 

The Company valued its TRS in accordance with the TRS Agreement. Pursuant to the TRS Agreement, the fair value of the TRS is based on the increase or decrease in the value of the loans underlying the TRS, together with accrued interest income, interest expense and certain other expenses incurred under the TRS. The loans underlying

 

22

 


 

CĪON INVESTMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

March 31, 2013 

(unaudited)

 

the TRS are valued by Citibank. Citibank bases its valuation primarily on the indicative bid prices provided by an independent third-party pricing service. Bid prices reflect a price that market participants may be willing to pay for an investment. These valuations are sent to the Company for review and testing. The Company reviews and approves the value of the TRS, as well as the value of the loans underlying the TRS, on a quarterly basis as part of the quarterly valuation process. To the extent the Company has any questions or concerns regarding the valuation of the loans underlying the TRS, such valuations will be discussed or challenged pursuant to the terms of the TRS. As a result of the private nature of this marketplace (meaning actual transactions are not publicly reported), the Company believes that the total fair value of the TRS should be classified as Level 3 within the fair value hierarchy. The Company did not have any transfers between Level 1, Level 2, and Level 3 of the fair value hierarchy for the three months ended March 31, 2013. The Company’s policy is to recognize transfers in and out as of the actual date of the event or change in circumstances that causes the transfer.

 

The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the three months ended March 31, 2013:

 

 

First Lien Senior Secured Term Loans

 

Second Lien Senior Secured Term Loans

 

Total Return Swap

 

Total

Balance, as of December 31, 2012

$

1,980,044 

 

$

 - 

 

$

12,493 

 

$

1,992,537 

Investments purchased

4,176,490 

 

2,477,500 

 

 - 

 

6,653,990 

Net realized gain

4,533 

 

 - 

 

 - 

 

4,533 

Net change in unrealized appreciation(1) 

59,185 

 

65,097 

 

331,290 

 

455,572 

Accretion of discount

1,623 

 

528 

 

 

2,151 

Sales and redemptions

 (519,375) 

 

 - 

 

 - 

 

 (519,375) 

Balance, as of March 31, 2013

$

 5,702,500 

 

$

 2,543,125 

 

$

 343,783 

 

$

 8,589,408 

 

 

 

 

 

(1)

Represents the amount of total gains/losses for the period included in the change in unrealized appreciation on investments and change in unrealized appreciation on total return swap still held at the reporting date.

                         

Significant Unobservable Inputs

 

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets as of March 31, 2013 were as follows:

 

 

Fair Value(1) 

 

Valuation Technique

 

Unobservable Inputs

 

Range

(Weighted Average)

Senior Secured First Lien Term Loans

$

5,702,500 

 

Discounted cash flow

 

Discount rates

 

4.75% - 7.75%

(5.98%)

Senior Secured Second Lien Term Loans

$

2,543,125 

 

Discounted cash flow

 

Discount rates

 

8.36% - 9.75%

(8.96%)

(1)   The TRS was valued in accordance with the TRS Agreement as discussed above.

 

 

 

The significant unobservable inputs used in the fair value measurement of the Company’s senior secured first lien and second lien term loans are the discount rates. A significant increase or decrease in the discount rates would result in a significantly lower or higher fair value measurement, respectively.

 

23

 


 

CĪON INVESTMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

March 31, 2013 

(unaudited)

 

Note 8. General and Administrative Expense

 

General and administrative expense consists of the following items for the three months ended March 31, 2013:

 

Professional fees expense

$

279,587 

Marketing expense

86,640 

Insurance expense

52,901 

Director fees and expenses

 

7,839 

Other expenses

81,896 

General and administrative expense

$

508,863 

 

Note 9. Borrowings

 

In 2012, the Company entered into an unsecured financing arrangement with Flatiron Capital, an unaffiliated third party, for directors and officers insurance in an amount of approximately $179,000. Payments under the financing arrangement were due in 10 equal installments, with final payment on April 19, 2013. As of March 31, 2013, approximately $18,000 was outstanding under the financing arrangement at a fixed interest rate of 3.99%, which is included in financing arrangement on the Company’s consolidated balance sheets. For purposes of the asset coverage ratio test applicable to the Company as a BDC, this amount is treated as a senior security.

 

Note 10. Commitments and Contingencies

 

The Company entered into certain contracts with other parties that contain a variety of indemnifications. The Company’s maximum exposure under these arrangements is unknown. However, the Company has not experienced claims or losses pursuant to these contracts and believes the risk of loss related to such indemnifications to be remote.

 

24

 


 

CĪON INVESTMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

March 31, 2013 

(unaudited)

 

Note 11. Financial Highlights

 

The following is a schedule of financial highlights as of and for the three months ended March 31, 2013 and as of December 31, 2012 and for the period from January 31, 2012 (Inception) through December 31, 2012:

 

 

Three Months Ended March 31, 2013

 

For the Period from January 31, 2012 (Inception) through December 31, 2012

Per share data:(1) 

 

 

 

 

 

Net asset value at beginning of period

$

 8.97 

 

$

 - 

Results of operations:

 

 

 

 

 

 

Net investment (loss) income(2) 

 

 (0.04) 

 

 

 0.01 

 

Net realized and net change in unrealized appreciation on investments

 

 0.11 

 

 

 0.02 

 

Net realized and net change in unrealized appreciation on total return swap

 

 0.46 

 

 

 0.02 

Net increase in net assets resulting from operations

 

 0.53 

 

 

 0.05 

Shareholder distributions:

 

 

 

 

 

 

Distributions from net investment income

 

 - 

 

 

 - 

 

Distributions from net realized gains

 

 (0.18) 

 

 

 - 

Net decrease in net assets from shareholder distributions

 

 (0.18) 

 

 

 - 

Capital share transactions:

 

 

 

 

 

 

Issuance of common stock above net asset value(3) 

 

 0.05 

 

 

 9.00 

 

Amortization of deferred offering expenses

 

 (0.21) 

 

 

 (0.08) 

Net (decrease) increase in net assets resulting from capital share transactions

 

 (0.16) 

 

 

 8.92 

Net asset value at end of period

$

 9.16 

 

$

 8.97 

Shares of common stock outstanding at end of period

 

 1,712,123 

 

 

 500,338 

Total investment return-net asset value(4) 

 

4.04%

 

 

(0.35%)

 

 

 

 

 

 

 

Net assets at beginning of period(5) 

$

 4,487,115 

 

$

 4,503,049 

Net assets at end of period

$

 15,689,645 

 

$

 4,487,115 

Average net assets

$

 10,088,380 

 

$

 4,495,082 

 

 

 

 

 

 

 

Ratio/Supplemental data:(5) 

 

 

 

 

 

Ratio of net investment (loss) income to average net assets(6) 

 

(0.46%)

 

 

0.06%

Ratio of operating expenses to average net assets(6) 

 

1.14%

 

 

0.00%

Ratio of operating expenses to gross assets(6) 

 

0.61%

 

 

0.00%

Ratio of expenses reimbursed from IIG to average net assets

 

8.12%

 

 

2.60%

Portfolio turnover rate(7) 

 

10.80%

 

 

0.13%

Asset coverage ratio(8) 

 

 2.50 

 

 

 3.02 

 

 

25

 


 

CĪON INVESTMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

March 31, 2013 

(unaudited)

 

(1)

The per share data for the period from January 31, 2012 (Inception) through December 31, 2012 was derived by using the weighted average shares of common stock outstanding from the commencement of operations on December 17, 2012, through December 31, 2012.

(2)

Net investment (loss) income per share includes the expense reimbursement from IIG of $0.70 and $0.23 per share for the three months ended March 31, 2013 and the period from January 31, 2012 (Inception) through December 31, 2012, respectively.

(3)

The continuous issuance of shares of common stock may cause an incremental increase in net asset value per share due to the sale of shares at the then prevailing public offering price and the receipt of net proceeds per share by the Company in excess of net asset value per share on each subscription closing date.

(4)

Total investment return-net asset value is a measure of the change in total value for shareholders who held the Company’s common stock at the beginning and end of the period, including distributions paid or payable during the period. Total investment return-net asset value is based on (i) the beginning period net asset value per share on the first day of the period, (ii) the net asset value per share on the last day of the period, of (A) one share plus (B) any fractional shares issued in connection with the reinvestment of monthly distributions, and (iii) the value of distributions payable, if any, on the last day of the period. The total investment return-net asset value calculation assumes that (i) monthly cash distributions are reinvested in accordance with the Company’s distribution reinvestment plan and (ii) the fractional shares issued pursuant to the distribution reinvestment plan are issued at 95% of the then public offering price on each monthly distribution payment date. The total investment return-net asset value for the period from January 31, 2012 (Inception) through December 31, 2012 was calculated by taking the difference between (i) the net asset value per share as of December 31, 2012 and (ii) the net asset value per share on the day the Company commenced operations (December 17, 2012), and dividing it by the net asset value per share on the day the Company commenced operations. The total investment return-net asset value does not consider the effect of the sales load from the sale of the Company’s common stock. The total investment return-net asset value includes the effect of the issuance of shares at a net offering price that is greater than net asset value per share, which causes an increase in net asset value per share. Total returns covering less than a full period are not annualized.

(5)

For the period from January 31, 2012 (Inception) through December 31, 2012, the net assets at the beginning of the period were derived from the net assets from the commencement of operations on December 17, 2012.

(6)

Excluding the expense reimbursement from IIG during the period, the ratios of net investment (loss) income and operating expenses to average net assets would have been (8.58%) and 9.26%, respectively, for the three months ended March 31, 2013, and (2.54%) and 2.60%, respectively, for the period from January 31, 2012 (Inception) through December 31, 2012. Excluding the expense reimbursement from IIG during the period, the ratio of operating expenses to gross assets would have been 4.99% for the three months ended March 31, 2013 and 2.07% for the period from January 31, 2012 (Inception) through December 31, 2012.

(7)

Portfolio turnover rate is calculated using the year-to-date sales over the average of the invested assets at fair value and is not annualized.

(8)

Asset coverage ratio is equal to (i) the sum of (a) net assets at the end of the period and (b) total senior securities outstanding at the end of the period, divided by (ii) total senior securities outstanding at the end of the period. For purposes of the asset coverage ratio test applicable to the Company as a BDC, the Company treats the outstanding TRS notional amount at the end of the period, less the total amount of cash collateral posted by Flatiron under the TRS, as a senior security for the life of the TRS.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

As used in this Quarterly Report on Form 10-Q, “we,” “us,” “our” or similar terms include CĪON Investment Corporation and its consolidated subsidiaries.

 

The following discussion should be read in conjunction with our unaudited consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the period from January 31, 2012 (Inception) through December 31, 2012. In addition to historical information, the following discussion and other parts of this Quarterly Report on Form 10-Q contain forward-looking information that involves risks and uncertainties.

 

Forward-Looking Statements

 

Some of the statements within this Quarterly Report on Form 10-Q may constitute forward-looking statements because they relate to future events or our future performance or financial condition. The forward-looking statements contained in this Quarterly Report on Form 10-Q may include statements as to:

·      our future operating results;

·      our business prospects and the prospects of the companies in which we may invest;

·      the impact of the investments that we expect to make;

·      the ability of our portfolio companies to achieve their objectives;

·      our expected financings and investments;

·      the adequacy of our cash resources, financing sources and working capital;

·      the use of borrowed money to finance a portion of our investments;

·      the timing of cash flows, if any, from the operations of our portfolio companies;

·      our contractual arrangements and relationships with third parties;

·      the actual and potential conflicts of interest with CIM and Apollo and their respective affiliates;

·      the ability of CIM and AIM to locate suitable investments for us and the ability of CIM to monitor and administer our investments;

·      the ability of CIM and AIM and their respective affiliates to attract and retain highly talented professionals;

·      the dependence of our future success on the general economy and its impact on the industries in which we invest;

·      our ability to source favorable private investments;

·      our tax status;

·      the effect of changes to tax legislation and our tax position;

·      the tax status of the companies in which we may invest; and

·      the timing and amount of distributions and dividends from the companies in which we may invest.

In addition, words such as “anticipate,” “believe,” “expect” and “intend” indicate a forward-looking statement, although not all forward-looking statements include these words. The forward-looking statements contained in this Quarterly Report on Form 10-Q involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth in “Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q. Other factors that could cause actual results to differ materially include:

 

27

 


 

  

·      changes in the economy;

·      risks associated with possible disruption in our operations or the economy generally due to terrorism or natural disasters; and

·      future changes in laws or regulations and conditions in our operating areas.

We have based the forward-looking statements on information available to us on the date of this Quarterly Report on Form 10-Q. Except as required by the federal securities laws, we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised to review any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The forward-looking statements contained in this Quarterly Report on Form 10-Q are excluded from the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

 

Overview

 

We were incorporated under the general corporation laws of the State of Maryland on August 9, 2011 and commenced operations on December 17, 2012 upon raising proceeds of $2,500,000 from persons not affiliated with us, CIM or Apollo. We are a newly organized, externally managed, non-diversified closed-end management investment company that has elected to be regulated as a BDC under the 1940 Act. We intend to elect to be treated for federal income tax purposes as a RIC, as defined under Subchapter M of the Code.

 

Our investment objective is to generate current income and, to a lesser extent, capital appreciation for investors. We anticipate that our portfolio will be comprised primarily of investments in senior secured loans and, to a lesser extent, second lien loans and long-term subordinated loans, referred to as mezzanine loans, of private and thinly traded U.S. middle-market companies. In connection with our debt investments, we may receive equity interests such as warrants or options as additional consideration. We may also purchase minority interests in the form of common or preferred equity in our target companies, either in conjunction with one of our debt investments or through a co-investment with a financial sponsor. In addition, a portion of our portfolio may be comprised of corporate bonds and other debt securities. However, such investments are not expected to comprise a significant portion of our portfolio.

 

We are managed by CIM, our affiliate and a registered investment adviser. CIM will oversee the management of our activities and will be responsible for making investment decisions for our portfolio. We and CIM have engaged AIM to act as our investment sub-adviser.

 

We will seek to meet our investment objective by utilizing the experienced management teams of both CIM and AIM, which includes their access to the relationships and human capital of Apollo, IIG and ICON Capital, in sourcing, evaluating and structuring transactions. We intend to focus primarily on the senior secured debt of private and thinly traded U.S. middle-market companies, which we define as companies that generally possess annual EBITDA of $50 million or less, with experienced management teams, significant free cash flow, strong competitive positions and potential for growth.

 

Portfolio Investment Activity for the Three Months Ended March 31, 2013 and the Period from January 31, 2012 (Inception) through December 31, 2012

For the three months ended March 31, 2013, we made investments in portfolio companies totaling $6,653,990. During the same period, we sold investments totaling $504,375 and received principal repayments of $15,000, and we recorded realized gains of $4,533 and unrealized appreciation on investments of $124,282.

As of March 31, 2013, our investment portfolio, excluding our short term investments and total return swap, consisted of interests in 11 portfolio companies (69% in first lien senior secured term loans and 31% in second lien senior secured term loans) with a total fair value of $8,245,625 and an average annual EBITDA of approximately $65.6 million. As of March 31, 2013, the investments in our portfolio were purchased at a weighted average price of

 

28

 


 

  

99.09% of par value. Our estimated gross annual yield on our investments was 7.23% based upon the purchase price of our investments.

As of December 31, 2012, our investment portfolio, excluding our short term investments and total return swap, consisted of interests in two portfolio companies (100% in first lien senior secured term loans) with a total fair value of $1,980,044 and an average annual EBITDA of approximately $26.6 million. As of December 31, 2012, the investments in our portfolio were purchased at a weighted average price of 98.63% of par value. Our estimated gross annual yield on our investments was 6.55% based upon the purchase price of our investments.

 

As of March 31, 2013 and December 31, 2012, our short term investments included an investment in a U.S. Treasury Obligations Fund of $4,619,775 and $1,817,762, respectively, which is included in investments, at fair value on the accompanying consolidated balance sheets and on the consolidated schedule of investments.

Further, through a TRS (more fully described in “Financial Condition, Liquidity and Capital Resources” below), we obtained the economic benefit of owning investments in senior secured, first lien, floating-rate term loans of 22 and 5 portfolio companies as of March 31, 2013 and December 31, 2012, respectively.

The following table summarizes the composition of our investment portfolio at cost and fair value as of March 31, 2013 and December 31, 2012: