Harvest Capital Credit Corp - FORM 10-Q

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 - Harvest Capital Credit Corp	exhibit3213312015.htm
EX-31.2 - EXHIBIT 31.2 - Harvest Capital Credit Corp	exhibit3123312015.htm
EX-32.2 - EXHIBIT 32.2 - Harvest Capital Credit Corp	exhibit3223312015.htm
EX-31.1 - EXHIBIT 31.1 - Harvest Capital Credit Corp	exhibit3113312015.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2015



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER: 1-35906

HARVEST CAPITAL CREDIT CORPORATION

(Exact name of registrant as specified in its charter)



Delaware (State or other Jurisdiction of Incorporation or Organization)	46-1396995 (I.R.S. Employer Identification Number)

767 Third Avenue, 25^th Floor New York, NY 10017 (Address of principal executive offices) (Zip Code)

(212) 906-3500
(Registrant's Telephone Number, Including Area Code)

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 definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	¨	Accelerated filer	þ
Non-accelerated filer	¨	Smaller reporting company	¨
(Do not check if a smaller reporting Company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑.

The number of shares of the registrant’s Common Stock, $0.001 par value, outstanding as of May 5, 2015 was 6,249,251.

HARVEST CAPITAL CREDIT CORPORATION

QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER

ENDED MARCH 31, 2015

TABLE OF CONTENTS



		Page
PART I. FINANCIAL INFORMATION		3
Item 1.	Financial Statements - (Unaudited)	3
	Statements of Assets and Liabilities as of March 31, 2015 and December 31, 2014	3
	Statements of Operations for the three months ended March 31, 2015 and March 31, 2014	4
	Statements of Changes in Net Assets for the three months ended March 31, 2015 and March 31, 2014	5
	Statements of Cash Flows for the three months ended March 31, 2015 and March 31, 2014	6
	Schedule of Investments as of March 31, 2015	7
	Schedule of Investments as of December 31, 2014	12
	Notes to Unaudited Financial Statements	17
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41
Item 4.	Controls and Procedures	42
PART II. OTHER INFORMATION		42
Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3.	Defaults Upon Senior Securities	42
Item 4.	Mine Safety Disclosures	42
Item 5.	Other Information	42
Item 6.	Exhibits	44
SIGNATURES		45

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Harvest Capital Credit Corporation

Statements of Assets and Liabilities (Unaudited)



	March 31, 2015			December 31, 2014
ASSETS:
Non-affiliated/non-control investments, at fair value (cost of $124,351,914 at 3/31/2015 and $113,035,774 at 12/31/14)	$	124,406,411		$	114,486,428
Affiliated investments, at fair value (cost of $2,085,843 at 3/31/2015 and $2,085,843 at 12/31/14)	1,000,000			1,348,000
Total investments, at fair value (cost of $126,437,757 at 3/31/2015 and $115,121,617 at 12/31/14)	125,406,411			115,834,428

Cash	2,431,659			2,171,771
Interest receivable	667,845			550,849
Accounts receivable – other	1,219,101			75,046
Deferred offering costs	1,128,959			119,640
Deferred financing costs	946,805			1,012,862
Other assets	50,911			105,408
Total assets	$	131,851,691		$	119,870,004

LIABILITIES:
Revolving line of credit	$	13,100,000		$	26,075,140
Unsecured notes	27,500,000			—
Accrued interest payable	391,943			77,363
Accounts payable and accrued expenses	1,509,937			1,806,545
Other liabilities	33,999			1,038,641
Total liabilities	42,535,879			28,997,689

Commitments and contingencies (Note 8)

NET ASSETS:
Common stock, $0.001 par value, 100,000,000 shares authorized, 6,244,309 issued and outstanding at 3/31/2015 and 6,222,673 issued and outstanding at 12/31/14	6,244			6,223
Capital in excess of common stock	89,686,442			89,424,499
Accumulated realized gains on investments	681,632			665,813
Net unrealized (depreciation) appreciation on investments	(1,031,346		)	712,811
Undistributed net investment income	(27,160		)	62,969
Total net assets	89,315,812			90,872,315
Total liabilities and net assets	$	131,851,691		$	119,870,004

Common stock issued and outstanding	6,244,309			6,222,673

Net asset value per common share	$	14.30		$	14.60

See accompanying notes to unaudited financial statements.

Harvest Capital Credit Corporation

Statements of Operations (Unaudited)



	Three Months Ended March 31,
	2015			2014
Investment Income:
Interest:
Cash - non-affiliated/non-control investments	$	3,430,036		$	2,381,505
Cash - affiliated investments	—			56,066
PIK - non-affiliated/non-control investments	306,126			370,317
PIK - affiliated investments	—			27,084
Amortization of fees, discounts and premiums, net	361,544			199,146
Total interest income	4,097,706			3,034,118
Other income	14,583			2,937
Total investment income	4,112,289			3,037,055

Expenses:
Interest expense – revolving line of credit	123,605			—
Interest expense - unused line of credit	84,585			103,125
Interest expense - deferred financing costs	66,057			61,229
Interest expense - unsecured notes	342,223			—
Interest expense - deferred offering costs	29,513			—
Total interest expense	645,983			164,354

Professional fees	181,582			163,751
General and administrative	188,759			153,814
Base management fees	609,332			384,857
Incentive management fees	324,765			356,315
Administrative services expense	150,000			68,751
Total expenses	2,100,421			1,291,842
Less waivers:
Incentive fees waived (1)	—			(320,827		)
Total net expenses	2,100,421			971,015
Net Investment Income	2,011,868			2,066,040

Net realized gains on investments	15,819			—
Net change in unrealized (depreciation) appreciation on investments	(1,744,157		)	177,442
Total net unrealized and realized gains (losses) on investments	(1,728,338		)	177,442

Net increase in net assets resulting from operations	$	283,530		$	2,243,482

Net investment income per share (basic and diluted)		$0.32			$0.34
Net increase in net assets resulting from operations per share (basic and diluted)		$0.05			$0.36
Weighted average shares outstanding (basic and diluted)	6,229,041			6,156,116
Dividends paid per common share (basic and diluted)		$0.34			$0.34



(1)	For the period from our initial public offering in May 2013 to March 31, 2014, our investment adviser agreed to waive its incentive fee to the extent required to support a minimum dividend yield of 9% per year based on our initial public offering price per share of $15.00.

See accompanying notes to unaudited financial statements.

Harvest Capital Credit Corporation

Statements of Changes in Net Assets (Unaudited)



	Three Months Ended March 31,
	2015			2014

Increase in net assets from operations:
Net investment income	$	2,011,868		$	2,066,040
Net realized gains (losses) on investments	15,819			—
Net change in unrealized (depreciation) appreciation on investments	(1,744,157		)	177,442
Net increase in net assets resulting from operations	283,530			2,243,482

Distributions to shareholders (1):
Distributions from net investment income	(2,101,996		)	(2,077,285		)
Distributions from capital gains
Return of capital
Decrease in net assets resulting from shareholder distributions	(2,101,996		)	(2,077,285		)

Capital share transactions:
Issuance of common shares	21			20
Reinvestment of dividends (2)	261,942			289,206
Net increase in net assets from capital share transactions	261,963			289,226

Total (decrease) increase in net assets	(1,556,503		)	455,423
Net assets at beginning of period	90,872,315			88,854,486

Net assets at end of period	$	89,315,812		$	89,309,909

Capital share activity (common shares):
Shares issued from reinvestment of dividends	21,636			20,180
Net increase in capital share activity (common shares)	21,636			20,180

See accompanying notes to unaudited financial statements.



(1	)	Distributions for the three months ended March 31, 2015 were in excess of net investment income in the amount of $91,128. Distributions for the three months ended March 31, 2014 were in excess of net investment income in the amount of $11,245. See Dividends and Distributions Policy in Note 2.
(2	)	Net of par value of shares issued of $21 and $20 and funds received for fractional shares of $7 and $20 for March 31, 2015 and 2014, respectively.

HARVEST CAPITAL CREDIT CORPORATION

Statements of Cash Flows (Unaudited)



	Three Months Ended March 31,
	2015			2014

Cash flows from operating activities:
Net increase in net assets resulting from operations	$	283,530		$	2,243,482
Adjustments to reconcile net increase in net assets resulting from operations to net cash used by operating activities:
Paid in kind income	(306,126		)	(397,401		)
Paid in kind income collected (1)	(18,733		)	10,606
Net realized gains on investments	(15,819		)	—
Net unrealized depreciation (appreciation) of investments	1,744,157			(177,442		)
Amortization of fees, discounts and premiums, net	(361,544		)	(199,146		)
Amortization of deferred financing costs	66,057			61,229
Amortization of deferred offering costs	29,513			—
Purchase of investments (net of loan origination and other fees)	(14,810,808		)	(11,059,099		)
Proceeds from principal payments	4,196,890			418,480
Changes to operating assets and liabilities
(Increase) in interest receivable	(116,996		)	(64,259		)
Decrease (increase) in accounts receivable - other and other assets	(1,089,558		)	47,990
Increase in accrued interest payable	314,580			—
(Decrease) increase in accounts payable and other liabilities	(1,301,250		)	689,661

Net cash used in operating activities	(11,386,107		)	(8,425,899		)

Cash flows from financing activities:
Borrowings on revolving credit facility	13,700,000			—
Repayment of borrowings on revolving credit facility	(26,675,140		)	—
Proceeds from the issuance of unsecured notes	27,500,000			—
Offering expenses from the issuance of unsecured notes	(1,038,832		)	—
Proceeds from the issuance of common stock and common units	7			18
Distributions to equity holders (net of stock issued under dividend reinvestment plan of $261,956 and $289,206, respectively)	(1,840,040		)	(1,788,079		)

Net cash provided (used) by financing activities	11,645,995			(1,788,061		)

Net increase (decrease) in cash during the period	259,888			(10,213,960		)

Cash at beginning of period	2,171,771			18,984,162

Cash at end of period	$	2,431,659		$	8,770,202

Non-cash operating activities:
Amendment fees	$	54,299		$	—

Non-cash financing activities:
Value of shares issued in connection with dividend reinvestment plan	$	261,956		$	289,206

Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	235,833		$	103,125

See accompanying notes to unaudited financial statements.



(1	)	Paid in kind income collected has been broken out for more complete disclosure of our paid in kind activity. These amounts were previously included in the proceeds from principal payments.

Harvest Capital Credit Corporation

Schedule of Investments (unaudited)

(as of March 31, 2015)



Portfolio Company				Investment (1) (2)	Origination Date	Outstanding Principal	Cost (4)	Fair Value
Investments in Non-controlled, Non-affiliated Portfolio Companies

Aviation

Bridgewater Engine Ownership III, LLC	1.5	%	*	Senior Secured Term Loan, due 07/05/2019	10/3/2014	1,353,833	1,332,009	1,332,009
				(15.00%; the greater of 14.00% and LIBOR +8.50%, plus additional 1.00% PIK)

				Residual Value			8,699	8,699

Regional Engine Leasing, LLC	4.9	%	*	Senior Secured Term Loan, due 3/31/2020	3/31/2015	4,390,000	4,243,679	4,243,679
				(11.00%; the greater of 11.00% or LIBOR +4.50% with no LIBOR floor)

				Residual Value		—	102,421	102,421

Capital Equipment Reseller

Lanco Acquisition, LLC	3.7	%	*	Senior Secured Term Loan A, due 06/12/2018	6/13/2014	719,500	701,324	719,034
				(11.50%; LIBOR +11.00% with 0.50% LIBOR floor)

				Senior Secured Term Loan B, due 03/12/2019		2,341,873	2,264,410	2,266,285
				(15.00%; 12.50% Cash/2.50% PIK)

				Revolving Line of Credit, 06/12/2017		350,000	350,000	348,759
				(8.50%; LIBOR +8.00% with 0.50% LIBOR floor)

				Common Equity Warrants		—	42,000	—
				(12% of fully diluted common equity)

Dietary Supplements

Atrium Innovations, Inc.	1.1	%	*	Senior Secured Term Loan, due 02/16/2021	1/29/2014	990,000	990,534	973,913
				(4.25%; LIBOR +3.25% with 1.00% LIBOR floor)

Distributor - Tobacco Products

North Atlantic Trading Company, Inc.	5.5	%	*	Junior Secured Term Loan, due 07/13/2020	1/13/2014	5,000,000	4,973,437	4,950,000
				(11.50% LIBOR +10.25% with 1.25% LIBOR floor)

Document and Information Solutions

Novitex Acquisition, LLC	7.4	%	*	Junior Secured Term Loan, due 07/7/2021	7/7/2014	7,000,000	6,934,939	6,577,093
				(11.75%; LIBOR + 10.50% with 1.25% LIBOR floor)



Portfolio Company				Investment (1) (2)	Origination Date	Outstanding Principal	Cost (4)	Fair Value

Heavy and Civil Engineering and Construction

LNB Construction, Inc.	4.3	%	*	Junior Secured Subordinated Debt, due 8/14/2015	8/21/2012	3,617,169	3,500,377	3,617,169
				(20.00%; 17.00% Cash/3.00% PIK)

				Options to Purchase Common Equity		—	193,751	200,000
				(21.93% of fully diluted common equity)

Industrial Fluid Filtration Services

CRS Reprocessing, LLC (3)	5.2	%	*	Junior Secured Subordinated Debt, due 09/30/2016	10/30/2013	6,884,661	6,104,843	4,635,516
				(15.00%; 12.00% Cash/3.00% PIK)

Industrial Machinery Manufacturing

Douglas Machines Corp.	5.4	%	*	Senior Secured Term Loan, due 04/6/2017	5/7/2014	4,390,133	4,295,212	4,390,133
				(13.50% Cash)

				Revolving Line of Credit		350,000	350,000	350,000
				(9.70%; LIBOR +9.50% with 0.20% LIBOR floor)

				Common Equity Warrants		—	12,500	139,698
				(2.0% of fully diluted common equity)

Metal Fabricating & Finishing

Northeast Metal Works, LLC	10.1	%	*	Senior Secured Term Loan, due 12/31/2017	9/29/2014	8,228,125	8,231,147	8,228,125
				(14.20%; LIBOR +14.00% with 0.20% LIBOR floor)

				Revolving Line of Credit		775,000	775,000	775,000
				(14.20%; LIBOR +14.00% with 0.20% LIBOR floor)

Novelty Manufacturer/Distributor

PD Products, LLC	5.2	%	*	Senior Secured Term Loan, due 10/04/2018	10/4/2013	4,685,517	4,576,933	4,685,517
				(14.50%; LIBOR +10.50% with 1.50% LIBOR floor/2.50% PIK)

Novelty Shops

Peekay Acquisition, LLC (Christals)	2.2	%	*	Senior Secured Term Loan, due 12/27/2015	12/31/2012	2,000,000	1,868,614	1,961,880
				(18.00%; 15.00% Cash/3.00% Accommodation Fee paid in Cash)

				Common Equity (Peekay Boutiques, Inc.)		—	105,000	—
				(5.99% of fully diluted common equity)



Portfolio Company				Investment (1) (2)	Origination Date	Outstanding Principal	Cost (4)	Fair Value

Other Nondepository Credit Intermediation

WBL SPE I, LLC	4.6	%	*	Senior Secured Term Loan, due 09/30/2016	9/30/2013	4,100,068	4,077,273	4,100,068
				(15.00% Cash)

WBL SPE II, LLC	5.8	%	*	Senior Secured Term Loan, due 12/23/2016	9/30/2014	5,198,274	5,145,660	5,145,660
				(14.50% Cash)

World Business Lenders, LLC	0.3	%	*	Common Equity	12/23/2013	—	200,000	249,820
				(0.4% of fully diluted common equity)

Pet Food Retail Stores

CP Holding Co., Inc. (Choice Pet)	5.9	%	*	Senior Secured Term Loan, due 02/28/2018	5/30/2013	5,301,762	5,205,529	5,301,762
				(16.25%; 12.00% Cash/4.25% PIK)

Radio Station Operator

Multicultural Radio Broadcasting, Inc.	5.5	%	*	Senior Secured Term Loan, due 06/27/2019	9/10/2014	4,950,050	4,950,050	4,950,050
				(11.50%; LIBOR +10.50% with 1.00% LIBOR floor)

Real Estate Brokerage Services

Americana Holdings LLC	5.5	%	*	Junior Secured Term Loan, due 09/15/2018	9/16/2013	3,870,741	3,257,497	3,870,741
				(13.00% Cash)

				Revenue Linked Security		—	906,311	1,041,045

Rental Car

Fox Rent A Car, Inc.	11.1	%	*	Junior Secured Term Loan, due 10/31/2019	10/31/2014	10,000,000	9,906,180	9,906,180
				(12.17%; LIBOR +12.00% with no LIBOR floor)

Safety Consulting Services

Safety Services Acquisition Corp.	6.7	%	*	Junior Secured Subordinated Debt, due 07/5/2017	4/5/2012	5,750,341	5,678,712	5,750,341
				(15.0%; 12.50% Cash/2.50% PIK)

				Preferred Equity			100,000	205,727
				(0.64% of fully diluted common equity)

Software Publishing

Optimal Blue, LLC	6.6	%	*	Junior Secured Subordinated Debt, due 03/18/2019	12/18/2013	5,388,021	5,346,614	5,388,021
				(14.50%; 12.50% Cash/2.00% PIK)

				Common Equity			100,000	513,293
				(0.391% of fully diluted common equity)



Portfolio Company				Investment (1) (2)	Origination Date	Outstanding Principal	Cost (4)	Fair Value
Specialty Advertising

Brite Media LLC	7.2	%	*	Senior Secured Term Loan, due 04/24/2019	4/24/2014	5,775,000	5,707,618	5,775,000
				(10.25%; LIBOR +9.50% with 0.75% LIBOR floor)

				Revolving Line of Credit, due 04/24/2018		500,000	500,000	500,000
				(10.25%; LIBOR +9.50% with 0.75% LIBOR floor)

				Common Equity		—	100,000	175,000
				(1.07% fully diluted common equity)

Structured Finance

Shinnecock CLO 2006-1, Ltd.	2.4	%	*	CLO Subordinated Notes, due 07/15/2018	3/6/2014		2,137,317	2,139,606

Sweetener Supplier
Flavors Holdings, Inc.	3.2	%	*	Junior Secured Term Loan, due 10/4/2021	10/7/2014	3,000,000	2,885,586	2,885,586
				(11.00%; LIBOR +10.00% with 1.00% LIBOR floor)

Technology - Software & Services

Applied Systems, Inc.	0.6	%	*	Junior Secured Term Loan, due 01/24/2022	1/15/2014	500,000	496,662	499,876
				(7.50%; LIBOR + 6.50% with 1.00% LIBOR floor)

GK Holdings, Inc. (Global Knowledge)	3.3	%	*	Junior Secured Term Loan, due 1/31/2022	1/30/2015	3,000,000	2,940,962	2,940,962
				(10.50%; LIBOR +9.50% with 1.00% LIBOR floor)

Transaction Processing
SourceHOV LLC	4.3	%	*	Junior Secured Subordinated Debt, due 4/30/2020	10/29/2014	4,000,000	3,848,665	3,850,000
				(11.50%; LIBOR + 10.50% with 1.00% LIBOR floor)

Urgent Care Facility Operator

Infinite Aegis Group, LLC	9.8	%	*	Revolving Line of Credit, 07/31/2017	3/10/2015	1,050,000	1,050,000	1,050,000
				(12.19%; LIBOR + 12.00% with 0.19% LIBOR floor)

				Senior Secured Term Loan (First Out), due 07/31/2017	3/10/2015	3,417,960	3,417,960	3,417,960
				(15.19%; LIBOR + 12.00% with 0.19% LIBOR floor/3.00% PIK)

				Senior Secured Term Loan (Last Out), due 07/31/2017	8/1/2013	4,456,260	4,358,969	4,244,785
				(18.19%; LIBOR + 14.65% with 0.19% LIBOR floor/3.00% PIK/0.35% Fee Letter)

				Common Equity Warrants			77,522	—
				(3% of fully diluted common equity)

Total Investments in Non-controlled, Non-affiliated Portfolio Companies						123,334,288	124,351,914	124,406,411



Portfolio Company				Investment (1) (2)	Origination Date	Outstanding Principal		Cost (4)		Fair Value

Investments in Affiliated Portfolio Companies

Seafood Product Preparation and Packaging

Solex Fine Foods, LLC (3)	1.1	%	*	Senior Secured Term Loan, due 12/28/2016	12/31/2012	1,783,258		1,644,045		1,000,000
				(18.82%; LIBOR +12.49% Cash/3.22% PIK/2.93% Supplemental PIK)

				Common Equity				290,284		—
				(6.57% of fully diluted common equity)

				Common Equity Warrants				151,514		—
				(6.4% of fully diluted common equity)

Total Investments in Affiliated Portfolio Companies						1,783,258		2,085,843		1,000,000

Total Investments as of 3.31.15	140.4	%	*			$	125,117,545	$	126,437,757	$	125,406,411

See accompanying notes to unaudited financial statements.



*	Value as a percentage of our net assets



(1)	Debt investments, the CLO subordinated notes and the revenue linked security are income producing investments. Common equity options, residual values and warrants are non-income producing investments. All investments other than Atrium Innovations, Inc., LNB Construction, Inc., Shinnecock CLO 2006-1, Ltd., WBL SPE I, LLC, WBL SPE II, LLC and World Business Lenders, LLC are qualifying assets for purposes of Section 55(a) of the Investment Company Act of 1940, as amended.
(2)	For each loan, the Company has provided the interest rate in effect on the date presented, as well as the contractual components of that interest rate. In the case of the Company's variable or floating rate loans, the interest rate in effect takes into account the applicable LIBOR rate in effect on the date presented or, if higher, the applicable LIBOR floor.
(3)	CRS Reprocessing, LLC and Solex Find Foods, LLC are on non-accrual status at March 31, 2015.
(4)	Gross unrealized appreciation, gross unrealized depreciation, and net unrealized depreciation for federal income tax purposes totaled $2.0 million, $3.3 million, and $1.3 million, respectively. The tax cost of investments is $126.7 million.

Harvest Capital Credit Corporation

Schedule of Investments

(as of December 31, 2014)



Portfolio Company				Investment (1) (2)	Origination Date	Outstanding Principal	Cost (4)	Fair Value
Investments in Non-controlled, Non-affiliated Portfolio Companies

Automotive

FCA US LLC (fka Chrysler Group LLC)	0.5	%	*	Senior Secured Term Loan, due 05/24/2017	12/22/2014	498,708	498,708	498,085
				(3.50%; LIBOR +2.75% with 0.75% LIBOR floor)

Aviation

Bridgewater Engine Ownership III, LLC	1.5	%	*	Senior Secured Term Loan, due 07/05/2019	10/3/2014	1,406,700	1,392,750	1,392,750
				(15.00%; the greater of 14.00% and LIBOR +8.50%, plus additional 1.00% PIK)

Capital Equipment Reseller

Lanco Acquisition, LLC	3.8	%	*	Senior Secured Term Loan A, due 06/12/2018	6/13/2014	762,000	741,617	761,550
				(11.50%; LIBOR +11.00% with 0.50% LIBOR floor)

				Senior Secured Term Loan B, due 03/12/2019		2,327,326	2,245,485	2,316,047
				(15.00%; 12.50% Cash/2.50% PIK)

				Revolving Line of Credit, 06/12/2017		350,000	350,000	348,796
				(8.50%; LIBOR +8.00% with 0.50% LIBOR floor)

				Common Equity Warrants		—	42,000	—
				(12% of fully diluted common equity)

Dietary Supplements

Atrium Innovations, Inc.	1.1	%	*	Senior Secured Term Loan, due 02/16/2021	1/29/2014	992,500	993,056	965,206
				(4.25%; LIBOR +3.25% with 1.00% LIBOR floor)

Distributor - Tobacco Products

North Atlantic Trading Company, Inc.	5.4	%	*	Junior Secured Term Loan, due 07/13/2020	1/13/2014	5,000,000	4,972,578	4,950,000
				(11.50% LIBOR +10.25% with 1.25% LIBOR floor)

Document and Information Solutions

Novitex Acquisition, LLC	7.6	%	*	Junior Secured Term Loan, due 07/7/2021	7/7/2014	7,000,000	6,933,243	6,933,243
				(11.75%; LIBOR + 10.50% with 1.25% LIBOR floor)



Portfolio Company				Investment (1) (2)	Origination Date	Outstanding Principal	Cost (4)	Fair Value

Global Information Technology Co.

Dell International LLC	0.6	%	*	Senior Secured Term Loan, due 04/29/2020	12/22/2014	500,000	500,000	500,006
				(4.50%; LIBOR +3.50% with 1.00% LIBOR floor)

Heavy and Civil Engineering and Construction

LNB Construction, Inc.	4.2	%	*	Junior Secured Subordinated Debt, due 8/14/2015	8/21/2012	3,655,053	3,434,038	3,655,053
				(20.00%; 17.00% Cash/3.00% PIK)

				Options to Purchase Common Equity		—	193,751	200,000
				(21.93% of fully diluted common equity)

Industrial Fluid Filtration Services

CRS Reprocessing, LLC (3)	5.9	%	*	Junior Secured Subordinated Debt, due 09/30/2015	10/30/2013	6,635,718	6,104,841	5,399,804
				(15.00%; 12.00% Cash/3.00% PIK)

Industrial Machinery Manufacturing

Douglas Machines Corp.	5	%	*	Senior Secured Term Loan, due 04/6/2017	5/7/2014	4,400,133	4,315,272	4,400,133
				(13.50% Cash)

				Revolving Line of Credit		—	—	—
				(9.70%; LIBOR +9.50% with 0.20% LIBOR floor)

				Common Equity Warrants		—	12,500	143,388
				(2.0% of fully diluted common equity)

Metal Fabricating & Finishing

Northeast Metal Works, LLC	9.9	%	*	Senior Secured Term Loan, due 12/31/2017	9/29/2014	8,333,750	8,304,889	8,304,889
				(14.20%; LIBOR +14.00% with 0.20% LIBOR floor)

				Revolving Line of Credit		700,000	700,000	700,000
				(14.20%; LIBOR +14.00% with 0.20% LIBOR floor)

Novelty Manufacturer/Distributor

PD Products, LLC	5.2	%	*	Senior Secured Term Loan, due 10/04/2018	10/4/2013	4,687,819	4,608,385	4,687,819
				(12.00%; LIBOR +10.50% with 1.50% LIBOR floor)



Portfolio Company				Investment (1) (2)	Origination Date	Outstanding Principal	Cost (4)	Fair Value
Novelty Shops

Peekay Acquisition, LLC (Christals)	2.2	%	*	Senior Secured Term Loan, due 12/27/2015	12/31/2012	2,000,000	1,829,065	1,977,630
				(18.00%; 15.00% Cash/3.00% Accommodation Fee paid in Cash)

				Common Equity (DICO)		—	105,000	—
				(5.99% of fully diluted common equity)

Other Nondepository Credit Intermediation

WBL SPE I, LLC	6.6	%	*	Senior Secured Term Loan, due 09/30/2016	9/30/2013	6,000,000	5,967,866	6,000,000
				(15.00% Cash)

WBL SPE II, LLC	3.4	%	*	Senior Secured Term Loan, due 12/23/2016	9/30/2014	3,086,205	3,066,461	3,066,461
				(15.00% Cash)

World Business Lenders, LLC	0.2	%	*	Common Equity	12/23/2013	—	200,000	210,920
				(0.4% of fully diluted common equity)

Pet Food Retail Stores

CP Holding Co., Inc. (Choice Pet)	5.8	%	*	Senior Secured Term Loan, due 02/28/2018	5/30/2013	5,246,023	5,142,642	5,246,023
				(16.25%; 12.00% Cash/4.25% PIK)

Radio Station Operator

Multicultural Radio Broadcasting, Inc.	5.4	%	*	Senior Secured Term Loan, due 06/27/2019	9/10/2014	4,950,050	4,950,050	4,950,050
				(11.50%; LIBOR +10.50% with 1.00% LIBOR floor)

Real Estate Brokerage Services

Americana Holdings LLC	5.5	%	*	Junior Secured Term Loan, due 09/15/2018	9/16/2013	3,933,550	3,271,370	3,895,678
				(13.00% Cash)

				Revenue Linked Security		—	876,923	1,111,001

Rental Car

Fox Rent A Car, Inc.	10.9	%	*	Junior Secured Term Loan, due 10/31/2019	10/31/2014	10,000,000	9,902,434	9,902,434
				(12.16%; LIBOR +12.00% with no LIBOR floor)
Safety Consulting Services

Safety Services Acquisition Corp.	6.5	%	*	Junior Secured Subordinated Debt, due 07/5/2017	4/5/2012	5,714,622	5,636,866	5,714,622
				(15.0%; 12.50% Cash/2.50% PIK)

				Preferred Equity		—	100,000	208,000
				(0.64% of fully diluted common equity)



Portfolio Company				Investment (1) (2)	Origination Date	Outstanding Principal	Cost (4)	Fair Value

Software Publishing

Optimal Blue, LLC	6.5	%	*	Junior Secured Subordinated Debt, due 03/18/2019	12/18/2013	5,361,216	5,317,620	5,361,216
				(14.50%; 12.50% Cash/2.00% PIK)

				Common Equity		—	100,000	511,362
				(0.391% of fully diluted common equity)

Specialty Advertising

Brite Media LLC	7.1	%	*	Senior Secured Term Loan, due 04/24/2019	4/24/2014	5,850,000	5,775,575	5,850,000
				(10.25%; LIBOR +9.50% with 0.75% LIBOR floor)

				Revolving Line of Credit, due 04/24/2018		500,000	500,000	500,000
				(10.25%; LIBOR +9.50% with 0.75% LIBOR floor)

				Common Equity		—	100,000	102,000
				(1.07% fully diluted common equity)

Structured Finance

Shinnecock CLO 2006-1, Ltd.	2.5	%	*	CLO Subordinated Notes, due 07/15/2018	3/6/2014		2,234,210	2,299,854
				(18.67% of sub-notes)

Sweetener Supplier
Flavors Holdings, Inc.	3.2	%	*	Junior Secured Term Loan, due 10/4/2021	10/7/2014	3,000,000	2,882,752	2,882,752
				(11.00%; LIBOR +10.00% with 1.00% LIBOR floor)

Technology - Software

Applied Systems, Inc.	0.5	%	*	Junior Secured Term Loan, due 01/24/2022	1/15/2014	500,000	496,570	495,834
				(7.50%; LIBOR + 6.50% with 1.00% LIBOR floor)

Transaction Processing
SourceHOV LLC	4.2	%	*	Junior Secured Subordinated Debt, due 4/30/2020	10/29/2014	4,000,000	3,841,733	3,840,000
				(11.50%; LIBOR + 10.50% with 1.00% LIBOR floor)

Urgent Care Facility Operator

Infinite Aegis Group, LLC	4.6	%	*	Senior Secured Term Loan, due 07/31/2017	8/1/2013	4,425,338	4,318,006	4,203,822
				(18.19%; LIBOR + 14.69% with 0.19% LIBOR floor/3.00% PIK/0.31% Fee Letter)

				Common Equity Warrants		—	77,522	—
				(3% of fully diluted common equity)

Total Investments in Non-controlled, Non-affiliated Portfolio Companies						111,816,711	113,035,774	114,486,428



Portfolio Company				Investment (1) (2)	Origination Date	Outstanding Principal		Cost (4)		Fair Value

Investments in Affiliated Portfolio Companies

Seafood Product Preparation and Packaging

Solex Fine Foods, LLC (3)	1.5	%	*	Senior Secured Term Loan, due 12/28/2016	12/31/2012	1,760,578		1,644,045		1,348,000
				(18.80%; LIBOR +12.49% Cash/3.22% PIK/2.93% Supplemental PIK)

				Common Equity				290,284		—
				(6.57% of fully diluted common equity)

				Common Equity Warrants				151,514		—
				(6.4% of fully diluted common equity)

Total Investments in Affiliated Portfolio Companies						1,760,578		2,085,843		1,348,000

Total Investments as of 12/31/2014	127.5	%	*			$	113,577,289	$	115,121,617	$	115,834,428



*	Value as a percentage of our net assets



(1)	Debt investments, the CLO subordinated notes and the revenue linked security are income producing. Common equity options, residual values and warrants are non-income producing. All investments other than Atrium Innovations, Inc., LNB Construction, Inc., Shinnecock CLO 2006-1, Ltd., WBL SPE I, LLC, WBL SPE II, LLC and World Business Lenders, LLC are qualifying assets for purposes of Section 55(a) of the Investment Company Act of 1940, as amended.
(2)	For each loan, the Company has provided the interest rate in effect on the date presented, as well as the contractual components of that interest rate. In the case of the Company's variable or floating rate loans, the interest rate in effect takes into account the applicable LIBOR rate in effect on the date presented or, if higher, the applicable LIBOR floor.
(3)	CRS Reprocessing, LLC and Solex Find Foods, LLC are on non-accrual status at December 31, 2014.
(4)	Gross unrealized appreciation, gross unrealized depreciation, and net unrealized appreciation for federal income tax purposes totaled $2.4 million, $1.8 million, and $0.6 million, respectively. The tax cost of investments is $115.2 million.

Harvest Capital Credit Corporation

Notes to Unaudited Financial Statements

Note 1. Organization

Harvest Capital Credit Corporation (“HCAP” or the "Company") was incorporated as a Delaware corporation on November 14, 2012, for the purpose of, among other things, acquiring Harvest Capital Credit LLC (“HCC LLC”). HCAP acquired HCC LLC on May 2, 2013, in connection with HCAP's initial public offering. HCAP is an externally managed, closed-end, non-diversified management investment company that has filed an election to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, for tax purposes, HCAP has elected to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). As an investment company, we follow accounting and reporting guidance as set forth in Accounting Standards Codification ("ASC") 946.

As used herein, the terms “we”, “us” and the “Company” refer to HCC LLC for the periods prior to the initial public offering and refer to HCAP for the periods after the initial public offering.

Note 2. Summary of Significant Accounting Policies

Basis of Financial Statement Presentation

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in accordance with the rules and regulations of the SEC.

In preparing the financial statements in accordance with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, as of the date of the statement of assets and liabilities and income and expenses for the period. Actual results could differ from those estimates.

Paid in kind income collected has been broken out on the Statement of Cash Flows for more complete disclosure of our paid in kind activity. These amounts were previously included in the proceeds from principal payments.

Basis for Consolidation

In accordance with Article 6 of Regulation S-X, the Company does not consolidate portfolio company investments.

Under the investment company rules and regulations pursuant to the American Institute of Certified Public Accountants Audit and Accounting Guide for Investment Companies, codified in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 946, Financial Services- Investment Companies, the Company is precluded from consolidating any entity other than another investment company, except that ASC 946 provides for the consolidation of a controlled operating company that provides substantially all of its services to the investment company or its consolidated subsidiaries.

Cash and Cash Equivalents

Cash and cash equivalents as presented in the statement of assets and liabilities and the statement of cash flows include bank checking accounts and short term securities with an original maturity of less than 90 days.

Investments and Related Investment Revenue and Expense

All investments and the related revenue and expenses attributable to these investments are reflected on the statement of operations commencing on the settlement date unless otherwise specified by the transaction documents.

The Company accrues interest income if it expects that ultimately it will be able to collect it. Generally, when an interest payment default occurs on a loan in the portfolio, in which interest has not been paid for greater than 90 days, or if management otherwise believes that the issuer of the loan will not be able to service the loan and other obligations, the Company will place the loan on non-accrual status and will cease recognizing interest income on that loan until all principal and interest is current through payment or until a restructuring occurs, such that the interest income is deemed collectible.

However, the Company remains contractually entitled to this interest. The Company may make exceptions to this policy if the loan has sufficient collateral value and is in the process of collection and the amount of collectible interest can be reasonably estimated.

For loans with contractual PIK (payment-in-kind) interest income, which represents contractual interest accrued and added to the loan balance that generally becomes due at maturity, we will not accrue PIK interest if we believe that the PIK interest is no longer collectible, including if the portfolio company valuation indicates that such PIK interest is not collectible. Loan origination fees - net of direct loan origination costs, original issue discounts that initially represent the value of detachable equity warrants obtained in conjunction with the acquisition of debt securities and market discounts or premiums - are accreted or amortized using the effective interest method as interest income over the contractual life of the loan. Upon the prepayment of a loan or debt security, any unamortized net loan origination fee will be recorded as interest income. Loan exit fees that are contractually required to be paid at the termination or maturity of the loan will be accreted to interest income over the contractual term of the loan. We suspend the accretion of interest income for any loans or debt securities placed on non-accrual status. We may also collect other prepayment premiums on loans. These prepayment premiums are recorded as other income as earned. Dividend income, if any, will be recognized on the ex-dividend date.

Certain expenses related to legal and tax consultation, due diligence, valuation expenses and independent collateral appraisals may arise when the Company makes certain investments. To the extent that such costs are not classified as direct loan origination costs, these expenses are recognized in the statement of operations as they are incurred.

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

Realized gains and losses on investments are calculated using the specific identification method. We measure realized gains or losses on equity investments as the difference between the net proceeds from the sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized. We measure realized gains or losses on debt investments as the difference between the net proceeds from the repayment or sale and the contractual amount owed to us on the investment, without regard to unrealized appreciation or depreciation previously recognized or unamortized deferred fees. The acceleration of unamortized deferred fees is recognized as interest income and the collection of prepayment and other fees is recognized as other income.

Classification of Investments

We classify our investments by level of control. As defined in the 1940 Act, control investments are those where there is the ability or power to exercise a controlling influence over the management or policies of a company. Control is generally deemed to exist when a company or individual owns beneficially more than 25% of the voting securities of an investee company. Affiliated investments and affiliated companies are defined by a lesser degree of influence and are deemed to exist through beneficial ownership of 5% or more, but 25% or less, of the outstanding voting securities of another person. Twenty-eight of the Company’s investments were classified as non-control/non-affiliated investments as of March 31, 2015 and December 31, 2014, respectively. One of the Company’s investments was classified as affiliated as of March 31, 2015 and December 31, 2014, respectively.

Valuation of Investments

Valuation analyses of the Company’s investments are performed on a quarterly basis pursuant to ASC 820, Fair Value Measurement. ASC 820 defines fair value, establishes a framework for measuring fair value in accordance with applicable accounting guidance and expands disclosure of fair value measurements.

Pursuant to ASC 820, the valuation standard used to measure the value of each investment is fair value defined as, “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.” Investments are recorded at their fair value at each quarter end (the measurement date).

Fair Value Investment Hierarchy

Accounting standards establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:



Level 1	Quoted prices (unadjusted) for identical assets or liabilities in active public markets that the entity has the ability to access as of the measurement date.
Level 2	Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3	Significant unobservable inputs that reflect a reporting entity’s own assumptions about what market participants would use in pricing an asset or liability.

Valuation Process

Investments are measured at fair value as determined in good faith by our board of directors, based on, among other factors, consistently applied valuation procedures on each measurement date. Debt investments which have closed within six months of the measurement date are valued at cost unless unique circumstances dictate otherwise.

During the quarter ended December 31, 2014, we made certain changes to our valuation process to increase the role of an independent external valuation firm in the review and valuation of our Level 3 assets. The fair value measurement of Level 3 assets involves the use of significant unobservable inputs that reflect a reporting entity’s own assumptions about what market participants would use in pricing an asset or liability. Before these changes to our valuation process, an independent external valuation firm reviewed all Level 3 assets at least annually. After implementation of the changes to our valuation process, an independent external valuation firm reviews all material Level 3 assets either quarterly or annually depending on the investment rating, or performance, of the investment.

The following is a description of our valuation process, as in effect after implementing these changes during the quarter ended December 31, 2014. Investments are measured at fair value as determined in good faith by our management team, reviewed by the audit committee of the board of directors (independent directors), and ultimately approved by our board of directors, based on, among other factors, consistently applied valuation procedures on each measurement date.

In the case of investments that are Level 3 assets and have an investment rating of 2 through 5 (with performance ranging from within expectations to substantially below expectations), we engage an independent external valuation firm to review all such material investments quarterly. In the case of investments that are Level 3 assets and have an investment rating of 3 through 5, our management or the investment professionals of our investment adviser prepare an internal valuation analysis (in the form of a portfolio monitoring report or “PMR”), which is considered in addition to the review of the independent external valuation firm. In the case investments that are Level 3 assets and have an investment rating of 1, we engage an independent external valuation firm to review all material investments, at least annually. In quarters where an external valuation is not prepared for such investments, our management or the investment professionals of our investment adviser prepare a PMR for such investments. In the case of investments that are Level 1 or 2 assets, no independent external valuation firm is engaged due to the availability of quotes in markets (which may or may not be active) for such investments or similar assets.

The board of directors undertakes a multi-step valuation process at each measurement date.


•	Our valuation process begins with (i) an internally prepared PMR, (ii) an external valuation report prepared by an independent valuation firm, or both (i) and (ii), depending on the investment’s rating and whether it is categorized as a Level 1, 2 or 3 asset.


•	Preliminary valuation conclusions are documented and discussed with our senior management.


•	The audit committee of our board of directors reviews and discusses the preliminary valuations.


•	The board of directors discusses valuations and determines the fair value of each investment in our portfolio in good faith, based upon the input of our senior management, the independent valuation firm (if reviewed in such quarter), and the audit committee.

Valuation Methodology

The following section describes the valuation methods and techniques used to measure the fair value of the investments.

Fair value for each investment will be derived using a combination of valuation methodologies that, in the judgment of our management, are most relevant to such investment, including, without limitation, being based on one or more of the following: (i) market prices obtained from market makers for which our management has deemed there to be enough breadth (number of quotes) and depth to be indicative of fair value, (ii) the price paid or realized in a completed transaction or binding offer received in an arms-length transaction, (iii) market approach (enterprise value), (iv) income approach (discounted cash flow analysis) or the (v) bond yield approach.

The valuation methods selected for a particular investment are based on the circumstances and on the level of sufficient data available to measure fair value. If more than one valuation method is used to measure fair value, the results are evaluated and weighted, as appropriate, considering the reasonableness of the range indicated by those results. A fair value measurement is the point within that range that is most representative of fair value in the circumstances.

The determination of fair value using the selected methodologies takes into consideration a range of factors including, but not limited to, the price at which the investment was acquired, the nature of the investment, local market conditions, trading values on public and private exchanges for comparable securities, current and projected operating performance and financing transactions subsequent to the acquisition of the investment, compliance with agreed upon terms and covenants, and assessment of credit ratings of an underlying borrower.

In most cases we use the bond yield approach for valuing our Level 3 debt investments, as long as we deem this method appropriate. This approach entails analyzing the interest rate spreads for recently completed financing transactions which are similar in nature to ours, in order to assess what the range of effective market interest rates would be for our investment if it were being made on or near the valuation date. Then all of the remaining expected cash flows of the investment are discounted using this range of interest rates to determine a range of fair values for the debt investment.

The fair value of equity securities, including warrants, in portfolio companies oftentimes considers the market approach, which applies market valuation multiples of publicly-traded firms or recently acquired private firms engaged in businesses similar to those of the portfolio companies. This approach to determining the fair value of a portfolio company’s equity security will typically involve: (1) applying to the portfolio company’s trailing twelve month EBITDA (earnings before interest, taxes, depreciation and amortization) a range of enterprise value to EBITDA multiples that are derived from an analysis of comparable companies, in order to arrive at a range of enterprise values for the portfolio company; then (2) subtracting from the range of enterprise values balances of any debt or equity securities that rank senior to our equity securities; and (3) multiplying the range of equity values by the Company’s ownership share of such equity to determine a range of fair values for the Company’s equity investment.

We also use the income approach, which discounts a portfolio company’s expected future cash flows to determine its net present enterprise value. The discount rate used is based upon the company’s weighted average cost of capital, which is determined by blending the cost of the company’s various debt instruments and its estimated cost of equity capital. The cost of equity capital is estimated based upon our market knowledge and discussions with private equity sponsors.

These valuation methodologies involve a significant degree of judgment. As it relates to investments that do not have an active public market, there is no single standard for determining the estimated fair value. Valuations of privately held investments are inherently uncertain, and they may fluctuate over short periods of time and may be based on estimates. The determination of fair value may differ materially from the values that would have been used if a ready market for these investments existed. In some cases, fair value of such investments is best expressed as a range of values derived utilizing different methodologies from which a single estimate may then be determined.

Consequently, fair value for each investment may be derived using a combination of valuation methodologies that, in the judgment of our management, are most relevant to such investment. The selected valuation methodologies for a particular investment are consistently applied on each measurement date. However, a change in a valuation methodology or its application from one measurement date to another is possible if the change results in a measurement that is equally or more representative of fair value in the circumstances.

Capital Gains Incentive Fee

Under GAAP, the Company calculates the capital gains incentive fee as if the Company had realized all investments at their fair values as of the reporting date. Accordingly, the Company accrues a provisional capital gains incentive fee taking into account any unrealized gains or losses. As the provisional incentive fee is subject to the performance of investments until there is a realization

event, the amount of provisional capital gains incentive fee accrued at a reporting date may vary from the capital gains incentive fee that is ultimately realized and the differences could be material.

Deferred Offering Costs

Deferred offering costs are made up of deferred offering costs related to the preparation and filing of the Company's shelf registration statement on Form N-2 in November 2014 and the expenses related to the Company's unsecured notes issued in January 2015. The deferred offering costs consist of underwriting fees, legal fees and other direct costs incurred by the Company in conjunction with preparation and filing of the Company's shelf registration statement on Form N-2 and are recognized as assets and are amortized as deferred offering expense over the term of the applicable offering. The balance of deferred offering costs as of March 31, 2015 and December 31, 2014 was $1,128,959 and $119,640, respectively. The amortization expense relating to deferred debt offering costs during the three months ended March 31, 2015 and March 31, 2014 was $29,513 and $0, respectively.

Deferred Financing Costs

Deferred financing costs are made up of deferred debt issuance costs. The deferred debt issuance costs consist of fees and other direct costs incurred by the Company in obtaining debt financing from its lender and are recognized as assets and are amortized as interest expense over the term of the applicable credit facility. The balance of deferred financing costs as of March 31, 2015 and December 31, 2014 was $946,805 and $1,012,862, respectively and relates to deferred debt issuance costs. The amortization expense relating to deferred debt financing costs during the three months ended March 31, 2015 and March 31, 2014 was $66,057 and $61,229, respectively.

Other Liabilities

Other liabilities as of March 31, 2015 consisted of other miscellaneous accrued expenses. Other liabilities as of December 31, 2014 consisted of two debt investments totaling $1.0 million that had not closed as of December 31, 2014 and other miscellaneous accrued expenses.

Dividends and Distributions

Dividends and distributions to common stockholders are recorded on the ex-dividend date. Distributions to shareholders which exceed tax distributable income (tax net investment income and realized gains, if any) are reported as distributions of paid-in capital (i.e. return of capital). The tax character of distributions is made on an annual (full calendar-year) basis. The determination of the tax attributes of our distributions is made at the end of the year based upon our taxable income for the full year and the distributions paid during the full year. Therefore, a determination of tax attributes made on a quarterly basis may not be representative of the actual tax attributes of distributions for a full year. Net realized capital gains, if any, are distributed at least annually, although the Company may decide to retain such capital gains for investment. The Company adopted a dividend reinvestment plan that provides for reinvestment of our dividends and other distributions on behalf of our stockholders, unless a stockholder elects to receive cash. As a result, if the board of directors authorizes, and we declare, a cash dividend or other distribution, then our stockholders who have not “opted out” of our dividend reinvestment plan will have their cash distribution automatically reinvested in additional shares of our common stock, rather than receiving the cash distribution. No action is required on the part of a registered stockholder to have their cash dividend or other distribution reinvested in shares of our common stock.

During the three months ended March 31, 2015, the Company declared dividends totaling $0.34 per share.

Income Taxes

Beginning with its first taxable year ending December 31, 2014, the Company elected to be treated, and intends to qualify annually thereafter, as a RIC under Subchapter M of the Code. To qualify as a RIC, the Company is required to meet certain income and asset diversification tests in addition to distributing at least 90% of ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, out of the assets legally available for distribution. As a RIC, the Company will be subject to a 4% nondeductible federal excise tax on certain undistributed income unless the Company distributes in a timely manner an amount at least equal to the sum of (1) 98% of its ordinary income for each calendar year, (2) 98.2% of its capital gain net income for the 1-year period ending October 31 in that calendar year and (3) any ordinary income and net capital gains for preceding years that were not distributed during such years and on which the Company paid no U.S. federal income tax.

The Company’s tax returns are subject to examination by federal, state and local taxing authorities. Because many types of transactions are susceptible to varying interpretations under federal and state income tax laws and regulations, the amounts reported in the accompanying financial statements may be subject to change at a later date by the respective taxing authorities. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. Penalties or interest that may be assessed related to any income taxes would be classified as other operating expenses in the financial statements. Based on an analysis of our tax position, there are no uncertain tax positions that met the recognition or measurement criteria. The Company has no amounts accrued for interest or penalties as of March 31, 2015. Neither HCC LLC nor the Company is currently undergoing any tax examinations. The Company does not anticipate any significant increase or decrease in unrecognized tax benefits for the next twelve months.

Recent Accounting Pronouncements

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Cost, which simplifies the presentation of debt issuance costs. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2015, and requires a retrospective approach to adoption. Early adoption is permitted. The Company is currently evaluating the impact to our financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2016, and requires either a retrospective or a modified retrospective approach to adoption. Early adoption is not permitted. The Company is currently evaluating the potential impact on our financial statements, as well as the available transition methods.

In August 2014, the Financial Accounting Standard Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40)—Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. The amendments in this ASU provide guidance in GAAP about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The amendments in this ASU apply to all entities and will be effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The adoption of this ASU is not expected to have a material impact on the Company’s statement of assets and liabilities, results of operations or cash flows.

Note 3. Borrowings

On October 29, 2013, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with CapitalSource Bank, as agent and a lender, and each of the lenders from time to time party thereto, including City National Bank, to provide the Company with a $55 million senior secured revolving credit facility (the “Credit Facility”). The Credit Facility is secured by all of the Company’s assets. The Loan Agreement, among other things, has a revolving period that expires on October 29, 2015 and matures on October 29, 2018. Advances under the Credit Facility bear interest at a rate per annum equal to the lesser of (i) LIBOR plus 4.50% and (ii) the maximum rate permitted under applicable law. In addition, the Loan Agreement requires payment of a fee for unused amounts during the revolving period, which fee varies depending on the obligations outstanding as follows: (i) 0.75% per annum, if the average daily principal balance of the obligations outstanding for the prior month is less than fifty percent of the maximum loan amount; and (ii) 0.50% per annum, if such obligations outstanding are equal to or greater than fifty percent of the maximum loan amount. In each case, the fee is calculated based on the difference between (i) the maximum loan amount under the Credit Facility and (ii) the average daily principal balance of the obligations outstanding during the prior calendar month.

The Loan Agreement also contains customary terms and conditions, including, without limitation, affirmative and negative covenants, including, without limitation, information reporting requirements, a minimum tangible net worth, a minimum debt service coverage ratio, a minimum liquidity of 4% of the maximum loan amount, a maximum leverage ratio of 1.00 to 1.00, and maintenance of RIC and business development company status. In addition, the Loan Agreement contains a covenant that limits the amount of our unsecured longer-term indebtedness (as defined in the Loan Agreement), which includes HCAP's Notes, to 50% of the maximum borrowing amount under the Credit Facility. The Loan Agreement also contains customary events of default, including, without limitation, nonpayment, misrepresentation of representations and warranties in a material respect, breach of covenant, cross-default to other indebtedness, bankruptcy, change of control, and the occurrence of a material adverse effect. In

addition, the Loan Agreement provides that, upon the occurrence and during the continuation of such an event of default, the Company’s administration agreement could be terminated and a backup administrator could be substituted by the agent.

As of March 31, 2015, the outstanding balance on the Credit Facility was $13.1 million. As of December 31, 2014, the outstanding balance on the Credit Facility was $26.1 million. As of March 31, 2015 and December 31, 2014, the Company was in compliance with its debt covenants, respectively.

On January 27, 2015, the Company closed the public offering of $25.0 million in aggregate principal amount of its 7.00% Notes due 2020 (the "Notes"). On February 4, 2015, the Company closed on an additional $2.5 million in aggregate principal amount of Notes to cover the over-allotment option exercised by the underwriters. The total net proceeds to the Company from the Notes, after deducting underwriting discounts of $750,000 and estimated offering expenses of $318,345, were $26.4 million.

The Notes will mature on January 16, 2020 and bear interest at a rate of 7.00%. The Notes are unsecured obligations of the Company and rank pari passu with the Company’s future unsecured indebtedness; senior to any of the Company’s future indebtedness that expressly provides it is subordinated to the Notes; effectively subordinated to all of the existing and future secured indebtedness of the Company, to the extent of the value of the assets securing such indebtedness, including borrowings under the Credit Facility; and structurally subordinated to all existing and future indebtedness and other obligations of any subsidiaries, financing vehicles, or similar facilities the Company may form in the future, with respect to claims on the assets of any such subsidiaries, financing vehicles, or similar facilities. The Notes may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after January 16, 2017. Interest on the Notes is payable quarterly on January 16, April 16, July 16, and October 16 of each year, beginning April 16, 2015. The Notes are listed on the NASDAQ Global Market under the trading symbol “HCAPL.” The Company may from time to time repurchase Notes in accordance with the 1940 Act and the rules promulgated thereunder. As of March 31, 2015, the outstanding balance of the Notes was $27.5 million.

The indenture governing the Notes (“the Notes Indenture”) contains certain covenants, including covenants (i) requiring the Company’s compliance with the asset coverage requirements set forth in Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act, whether or not the Company continues to be subject to such provisions of the 1940 Act; (ii) requiring the Company’s compliance, under certain circumstances, with a modified version of the requirements set forth in Section 18(a)(1)(B) as modified by Section 61(a)(1) of the 1940 Act, whether or not the Company continues to be subject to such provisions of the 1940 Act, prohibiting the declaration of any cash dividend or distribution upon any class of the Company’s capital stock (except to the extent necessary for the Company to maintain its status as a RIC under Subchapter M of the Code), or purchasing any such capital stock, if the Company’s asset coverage, as defined in the 1940 Act, were below 200% at the time of the declaration of the dividend or distribution or the purchase and after deducting the amount of such dividend, distribution, or purchase; and (iii) requiring the Company to provide financial information to the holders of the Notes and the Trustee if the Company ceases to be subject to the reporting requirements of the Securities Exchange Act of 1934. These covenants are subject to limitations and exceptions that are described in the Notes Indenture.

Note 4. Concentrations of Credit Risk

The Company’s investment portfolio consists primarily of loans to privately-held small to mid-size companies. Many of these companies may experience variation in operating results. Many of these companies do business in regulated industries and could be affected by changes in government regulations.

The largest debt investments may vary from year to year as new debt investments are recorded and repaid. The Company’s five largest debt investments represented approximately 33.4% and 34.4% of total debt investments outstanding as of March 31, 2015 and December 31, 2014, respectively. Investment income, consisting of interest and fees, can fluctuate significantly upon repayment of large loans. Interest income from the five largest debt investments accounted for approximately 28.2% and 34.1% of total loan interest and fee income for the three months ended March 31, 2015 and March 31, 2014, respectively.

Note 5. Shareholders’ Equity

The following tables summarize the total shares issued and proceeds received for shares of the Company’s common stock net of any underwriting discounts and offering costs for the quarters ended March 31, 2015 and March 31, 2014.



	March 31, 2015
	Shares Issued	Proceeds
Dividend reinvestment plan	21,636	$261,956
Total for the three months ended March 31, 2015	21,636	$261,956



	March 31, 2014
	Shares Issued	Proceeds
Dividend reinvestment plan	20,180	$289,206
Total for the three months ended March 31, 2014	20,180	$289,206

As of March 31, 2015, the Company had warrants outstanding to purchase an aggregate of 39,827 shares of its common stock. Each warrant is exercisable at any time, but no later than its expiration date, which, depending on the warrant, ranges from April 9, 2015 to June 22, 2015. Each warrant has an exercise price per share of $15.00, subject to standard adjustments for stock splits, stock dividends, combinations of common stock, reclassifications, recapitalizations, or other similar events affecting the number of outstanding shares of common stock.

Note 6. Fair Value Measurements

As described in Note 2, the Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. A description of the valuation methodologies used for assets and liabilities recorded at fair value, and for estimating fair value for financial and non-financial instruments not recorded at fair value, is set forth below.

Cash and cash equivalents: Cash and cash equivalents are Level 1 assets with readily observable market inputs. The Company determined that the historical cost carrying value is a reasonable estimate of fair value.

Revolving credit facility: The Credit Facility is a Level 2 financial instrument with readily observable market inputs from other comparable credit facilities in the marketplace. The Company believes the interest rate on the Credit Facility is comparable to what the Company would be offered by third party lenders and determined the fair value to approximate the amortized cost carrying value.

Unsecured notes: The Notes are a Level 2 financial instrument with readily observable market inputs from other comparable unsecured notes in the marketplace. The Company believes the interest rate on the Notes is comparable to what the Company would be offered by third party lenders and determined the fair value to approximate the amortized cost carrying value.

Off-balance sheet financial instruments: The fair value of unfunded commitments is estimated based on the fair value of the funded portion of the corresponding debt investment.

As of March 31, 2015 and December 31, 2014, unfunded commitments totaled $5.6 million and $3.6 million, respectively, and their estimated fair values on such dates were $5.6 million and $3.6 million, respectively.

There are no assets or liabilities measured at fair value on a nonrecurring basis as of March 31, 2015 or December 31, 2014.

There were no transfers from levels of the fair value hierarchy during the three months ended March 31, 2015 and one transfer of a debt investment from Level 3 to Level 2 of the fair value hierarchy during the year ended December 31, 2014 due to increased quoted market prices available from market makers for the financial instrument.

The following table details the financial instruments that are carried at fair value and measured at fair value on a recurring basis as of March 31, 2015 and December 31, 2014, respectively:



	Fair Values as of March 31, 2015

	Level 1	Level 2	Level 3	Total

Financial assets:
Senior Secured	—	973,913	64,785,704	65,759,617
Junior Secured	—	9,299,877	45,571,608	54,871,485
CLO Equity	—	—	2,139,606	2,139,606
Equity	—	—	1,594,658	1,594,658
Royalty Security	—	—	1,041,045	1,041,045
	—	10,273,790	115,132,621	125,406,411



	Fair Values as of December 31, 2014

	Level 1	Level 2	Level 3	Total

Financial assets:
Senior Secured	—	1,963,297	56,053,970	58,017,267
Junior Secured	—	9,285,834	43,744,802	53,030,636
CLO Equity		—	2,299,854	2,299,854
Equity		—	1,375,670	1,375,670
Royalty Security	—	—	1,111,001	1,111,001
	—	11,249,131	104,585,297	115,834,428

The following table provides quantitative information related to the significant unobservable inputs used to fair value the Company's Level 3 investments as of March 31, 2015 and December 31, 2014, respectively, and indicates the valuation techniques utilized by the Company to determine the fair value:

Type of Investment

Fair Value at
March 31, 2015

Valuation Technique

Significant Unobservable
Input

Range

Weighted Average

Senior Secured

64,785,704

Bond Yield

Risk adjusted discount factor

3.9 - 25.4%

12.7%

Market

EBITDA multiple

3.7x - 8.8x

5.8x

Income

Weighted average cost of capital

8.5% - 21.0%

14.0%

Junior Secured

45,571,608

Bond Yield

Risk adjusted discount factor

5.7% - 28.0%

12.3%

Market

EBITDA multiple

4.9x - 24.8x

9.6x

Income

Weighted average cost of capital

11.3% - 25.0%

16.8%

Equity investments

1,594,658

Market

EBITDA multiple

2.9x - 24.8x

12.9x

Income

Weighted average cost of capital

9.5% - 21.0%

16.1%

CLO equity

2,139,606

Bond Yield

Risk adjusted discount factor

15.3%

Royalty security

1,041,045

Bond Yield

Risk adjusted discount factor

17.7% - 19.0%

18.4%

Type of Investment

Fair Value at
December 31, 2014

Valuation Technique

Significant Unobservable
Input

Range

Weighted Average

Senior Secured

56,053,970

Bond Yield

Risk adjusted discount factor

3.9% - 22.0%

12.3%

Market

EBITDA multiple

3.0x - 8.1x

5.5x

Income

Weighted average cost of capital

7.0% - 19.0%

14.2%

Junior Secured

43,744,802

Bond Yield

Risk adjusted discount factor

3.3% - 28.0%

11.3%

Market

EBITDA multiple

3.7x - 26.7x

7.8x

Income

Weighted average cost of capital

11.0% - 25.0%

15.6%

Equity investments

1,375,670

Market

EBITDA multiple

2.9x - 26.7x

9.2x

Income

Weighted average cost of capital

3.9% - 20.9%

12.3%

CLO equity

2,299,854

Bond Yield

Risk adjusted discount factor

15.3%

Royalty security

1,111,001

Bond Yield

Risk adjusted discount factor

16.4%

When estimating the fair value of its debt investments, the Company typically utilizes the bond yield technique. The significant unobservable inputs used in the fair value measurement under this technique are risk adjusted discount factors. However, the Company also takes into consideration the market technique and income technique in order to determine whether the fair value of the debt investment is within the estimated enterprise value of the portfolio company. The significant unobservable inputs used under these techniques are EBITDA multiples, weighted average cost of capital and expected principal recovery. Under the bond yield technique, significant increases (decreases) in the risk adjusted discount factors would result in a significantly lower (higher) fair value measurement.

When estimating the fair value of its equity investments, the Company utilizes the (i) market technique and (ii) income technique. The significant unobservable inputs used in the fair value measurement of the Company’s equity investments are EBITDA multiples and weighted average cost of capital (“WACC”). Significant increases (decreases) in EBITDA multiple inputs in isolation would result in a significantly higher (lower) fair value measurement. Significant increases (decreases) in WACC inputs in isolation would result in a significantly lower (higher) fair value measurement.

When estimating the value of its CLO equity investment, the Company typically utilizes the bond yield technique. The significant unobservable inputs used in the fair value measurement under this technique are risk adjusted discount factors. The Company also utilizes the performance and covenant compliance information as provided by the independent trustee along with other risk factors including default risk, prepayment rates, interest rate risk and credit spread risk when valuing this investment.

When estimating the fair value of its royalty security, the Company utilizes the bond yield technique and the specific provisions contained in the royalty security agreement. The determination of the fair value utilizing the specific provisions contained in the royalty security agreement is not a significant component of the Company’s valuation process.

The following table shows a reconciliation of the beginning and ending balances for Level 3 assets:



	Three Months ended March 31, 2015
	Senior Secured			Junior Secured			CLO Equity			Equity		Royalty Security			Total Level 3 Assets

Fair value of portfolio, beginning of period	$	56,053,970		$	43,744,802		$	2,299,854		$	1,375,670	$	1,111,001		$	104,585,297
New investments	12,063,006			2,939,999			—			111,120		—			15,114,125
Principal payments received	(2,934,756		)	(125,272		)	(96,893		)	—		(18,574		)	(3,175,495		)
Loan origination fees received	(288,954		)	(14,362		)	—			—		—			(303,316		)
Payment in kind interest earned	171,061			87,102			—			—		47,962			306,125
Accretion of deferred loan origination fees/discounts	182,966			170,713			—			—		—			353,679
Net realized gains on investments	—			14,362			—			—		—			14,362
Change in unrealized appreciation (depreciation) on investments (1)	(461,588		)	(1,245,736		)	(63,355		)	107,868		(99,344		)	(1,762,155		)
Fair value of portfolio, end of period	$	64,785,705		$	45,571,608		$	2,139,606		$	1,594,658	$	1,041,045		$	115,132,622



(1	)	The net change in unrealized appreciation/depreciation of Level 3 investments held at March 31, 2015, was $(1,762,155). Net realized gain and net change in unrealized appreciation/depreciation are reflected on the Statement of Operations.



	Year ended December 31, 2014
	Senior Secured			Junior Secured			CLO Equity			Equity			Royalty Security			Total Level 3 Assets

Fair value of portfolio, beginning of period	$	29,274,987		$	38,620,670		$	—		$	1,143,733		$	758,061		$	69,797,451
New investments	34,288,065			23,350,000			2,608,830			142,000			—			60,388,895
Principal payments received	(11,615,770		)	(11,500,761		)	(374,620		)	(854,473		)	(91,814		)	(24,437,438		)
Loan origination fees received	(562,675		)	(804,760		)	—			—			—			(1,367,435		)
Payment in kind interest earned	541,901			657,454			—			—			210,676			1,410,031
Accretion of deferred loan origination fees/discounts	884,335			648,380			—			—			—			1,532,715
Transfer (to) from level 2 (1)	(1,004,203		)	(3,030,000		)	—			—			—			(4,034,203		)
Transfer (to) from investment type	4,220,717			(4,220,717		)				—						—
Net realized gains on investments	—			—			—			662,709			—			662,709
Change in unrealized appreciation (depreciation) on investments (2)	26,613			24,536			65,644			281,701			234,078			632,572
Fair value of portfolio, end of period	$	56,053,970		$	43,744,802		$	2,299,854		$	1,375,670		$	1,111,001		$	104,585,297



(1	)	The Company uses the fair value of investments at the end of the period when transferring investments between levels of the fair value hierarchy.
(2	)	The net change in unrealized appreciation/depreciation of Level 3 investments held at December 31, 2014, was $580,649. Net realized gain and net change in unrealized appreciation/depreciation are reflected on the Statement of Operations.

The information presented should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only required for a portion of the Company’s assets and liabilities.

Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.

Note 7: Related Party Transactions

We were founded in September 2011 by certain members of our investment adviser and JMP Group Inc. (now JMP Group LLC) ("JMP Group"), a full-service investment banking and asset management firm. JMP Group currently holds an equity interest in us and our investment adviser. JMP Group conducts its primary business activities through three wholly-owned subsidiaries: (i) Harvest Capital Strategies, LLC ("HCS"), an SEC registered investment adviser that focuses on long-short equity hedge funds, middle-market lending and private equity, (ii) JMP Securities LLC, a full-service investment bank that provides equity research, institutional brokerage and investment banking services to growth companies and their investors, and (iii) JMP Credit Advisors LLC ("JMP Credit Advisors"), which manages approximately $1.1 billion in credit assets of collateralized loan obligation funds.

In conjunction with our initial public offering in May 2013, HCAP entered into an investment advisory and management agreement with HCAP Advisors LLC ("HCAP Advisors"), which is a majority owned subsidiary of JMP Group. Under the investment advisory and management agreement, the base management fee is calculated based on our gross assets (which includes assets acquired with the use of leverage and excludes cash and cash equivalents) at an annual rate of 2.0% on gross assets up to and including $350 million, 1.75% on gross assets above $350 million and up to and including $1 billion, and 1.5% on gross assets above $1 billion. The incentive fee consists of two parts. The first part is calculated and payable quarterly in arrears and equals 20% of our pre-incentive fee net investment income that exceeds a 2% quarterly (8% annualized) hurdle rate, subject to a catch-up provision measured at the end of each fiscal quarter. The second part is calculated and payable in arrears as of the end of each calendar year (or upon termination of the investment advisory and management agreement, as of the termination date) and equals 20% of our realized capital gains on a cumulative basis from inception through 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 gain incentive fees.

The incentive fee is subject to a total return requirement, which provides that no incentive fee in respect of our pre-incentive fee net investment income is payable except to the extent 20% of the cumulative net increase in net assets resulting from operations over the then current and 11 preceding calendar quarters exceeds the cumulative income and capital gains incentive fees accrued and/or paid for the 11 preceding quarters. As a result, the total return requirement acts to defer our obligation to pay our investment adviser an incentive fee to the extent that we have generated cumulative net decreases in assets resulting from operations over the trailing 12 quarters due to unrealized or realized net losses on our investments and even in the event that our pre-incentive fee net investment income exceeds the hurdle rate. Additionally, our investment adviser agreed to waive its incentive fees from the period beginning with our initial public offering through March 31, 2014 to the extent required to support a minimum annual dividend yield of 9% (paid on a monthly basis) based on our initial public offering price per share of $15.00 per share. The number of shares of common stock taken into account in connection with this determination only included shares outstanding immediately after the initial public offering plus the number of shares of common stock issued pursuant to our dividend reinvestment plan relating to those shares during the waiver period. Incentive fee expense, net of fees waived under the waiver agreement, for the three months ended March 31, 2015 totaled $324,765. The capital gains incentive fee is determined and paid annually with respect to realized capital gains (but not unrealized capital gains) to the extent such realized capital gains exceed realized and unrealized capital losses for such year. The Company also records an expense accrual relating to the capital gains incentive fee payable by the Company to its investment adviser when the unrealized gains on its investments exceed all realized and unrealized capital losses on its investments given the fact that a capital gains incentive fee would be owed to the investment adviser if the Company were to liquidate its investment portfolio at such time. The actual incentive fee payable to the Company’s investment adviser related to capital gains is determined and payable in arrears at the end of each fiscal year and includes only realized capital gains for the period. The Company recorded net unrealized depreciation of $(1,744,157) for the three months ended March 31, 2015 and net unrealized depreciation of $(3,504,262) since our initial public offering.

The incentive fee expense also included the waiver of $0 and $320,827 in income incentive fees that would otherwise have been payable to the Company’s investment adviser for the three months ended March 31, 2015 and March 31, 2014, but for the 9% minimum dividend yield waiver provision described above.

Total base management fees and incentive management fees expense was $934,097 and $741,172 for the three months ended March 31, 2015 and March 31, 2014, respectively. Total base management fees and incentive management fees expense, net of fees waived under the waiver agreement, was $934,097 and $420,345 for the three months ended March 31, 2015 and

March 31, 2014, respectively. Accrued base management fees and incentive management fees were $1,076,660 and $1,385,389 as of March 31, 2015 and December 31, 2014, respectively.

In conjunction with our initial public offering in May 2013, HCAP entered into an administration agreement with JMP Credit Advisors pursuant to which JMP Credit Advisors provides administrative services to HCAP and furnishes us with office facilities, equipment, and clerical, bookkeeping, and record keeping services. Payments under the administration agreement are equal to an amount based upon our allocable portion of the administrator's overhead in performing its obligations under the administration agreement, including rent and our allocable portion of the cost of our chief financial officer and chief compliance officer and their respective staffs, except that payments required to be made by HCAP to JMP Credit Advisors under the agreement were capped such that amounts payable to JMP Credit Advisors would not exceed $275,000 during the first year of the term of the administration agreement. Since the $275,000 cap expired on April 29, 2014, the Company negotiated a new cap with JMP Credit Advisors of $150,000 for each of the quarters ending June 30, September 30, and December 31, 2014. On March 5, 2015, the Company negotiated a new cap with JMP Credit Advisors on amounts payable by the Company under the administration agreement during the 2015 fiscal and calendar year. The new cap sets the maximum amount that will be payable by the Company on both a quarterly and annual basis. The cap for each quarter is as follows: (i) for the quarter ended March 31, 2015, the cap is $150,000; (ii) for the quarter ended June 30, 2015, the cap will be equal to the sum of (a) $150,000 plus (b) 0.25% of the increase in the Company’s portfolio assets from December 31, 2014, to March 31, 2015; (iii) for the quarter ended September 30, 2015, the cap will be equal to the sum of (a) $150,000 plus (b) 0.25% of the increase in the Company’s portfolio assets from December 31, 2014, to June 30, 2015; and (iv) for the quarter ended December 31, 2015, the cap will be equal to the sum of (a) $150,000 plus (b) 0.25% of the increase in the Company’s portfolio assets from December 31, 2014, to September 30, 2015. The overall cap for the year is $800,000, so notwithstanding any given quarterly cap, the amounts payable for all four quarters will not exceed $800,000. Total administrative services expense was $150,000 and $68,751 for the quarter ended March 31, 2015 and the quarter ended March 31, 2014, respectively. Accrued administrative services fees were $150,000 and $150,001 as of March 31, 2015 and December 31, 2014, respectively.

In connection with HCAP's acquisition of HCC LLC in conjunction with our initial public offering, the Company succeeded to all of the assets and liabilities of HCC LLC, including a potential obligation to pay HCS, the investment adviser to HCC LLC, a capital gains incentive fee based on the net unrealized appreciation in HCC LLC’s investment portfolio. An expense for the incentive fee in the amount of $0.5 million was accrued in HCC LLC's financial statements at the time of the merger and, accordingly, reduced the value of HCC LCC in the merger. The Company will only be obligated to pay a capital gains incentive fee on the acquired investment assets when and if such fee would have become payable under the terms of the investment advisory agreement that HCC LLC had entered into with HCS and irrespective of the 9% minimum dividend hurdle waiver discussed above. The right to receive such incentive fee, if any, was assigned by HCS to HCAP Advisors after the merger.

In connection with the Company’s offering of its Notes in January 2015, JMP Securities LLC was one of the co-managing underwriters and received an estimated $61,900 of compensation for its services. In the future, JMP Securities LLC or its affiliates may provide the Company with various financial advisory and investment banking services, for which they would receive customary compensation.

Note 8: Commitments and Contingencies

At March 31, 2015, the Company had a total of $5.6 million in unfunded commitments comprised of $3.9 million of an unfunded delayed draw term loan that had not been fully drawn and expires on September 30, 2016 and $1.7 million of unfunded revolving line of credit commitments on four of the Company’s debt investments.

We are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us. From time to time, we may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations.

Note 9: Net Increase in Net Assets Resulting from Operations per Common Share

In accordance with the provision of ASC 260, “Earnings per Share,” basic earnings per share is computed by dividing earnings available to common shareholders by the weighted average number of shares outstanding during the period. Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis. There were no potentially dilutive common shares issued as of March 31, 2015 and December 31, 2014, respectively,

because the strike price of the Company's outstanding warrants exceeded the closing price of the Company's common stock for the respective period.

The following information sets forth the computation of the weighted average basic and diluted net increase in net assets per share from operations for each period:



	Three Months Ended March 31, 2015	Three Months Ended March 31, 2014

Net increase (decrease) in net assets resulting from operations	$283,530	$2,243,482
Weighted average shares outstanding (basic and diluted)	6,229,041	6,156,116
Net increase (decrease) in net assets resulting from operations per share (basic and diluted)	$0.05	$0.36

Note 10. Taxable/Distributable Income and Dividend Distributions

To qualify for RIC tax treatment, we must, among other things, distribute annually at least 90% of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. Depending on the level of taxable income earned in a tax year, we may choose to carry forward taxable income in excess of current year distributions into the next tax year and pay a 4% excise tax on such income. Any such carryover taxable income must be distributed through a dividend declared prior to filing the final tax return related to the year which generated such taxable income. We may, in the future, make actual distributions to our stockholders of our net capital gains. We can offer no assurance that we will achieve results that will permit the payment of any cash distributions and, if we issue senior securities, we may be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the

terms of any of our borrowings. The Company incurred a U.S. federal excise tax of $43,727 for calendar year 2014.

We have adopted an “opt out” dividend reinvestment plan, or “DRIP,” for our common stockholders. As a result, if we make cash distributions, then stockholders’ cash distributions will be automatically reinvested in additional shares of our common stock, unless they specifically “opt out” of the dividend reinvestment plan so as to receive cash distributions.

Note 11: Financial Highlights

The following is a schedule of financial highlights for the three months ended March 31, 2015, and March 31, 2014, respectively:



	Three Months Ended March 31,
	2015				2014

Per share data:
Net asset value at beginning of period		$14.60				$14.45
Net investment income (1)	0.32				0.34
Realized gains on investments (1)	—			(2)	—
Net unrealized (depreciation) appreciation on investments (1)	(0.28		)		0.03
Net increase in net assets from operations	0.04				0.37
Distributions from net investment income (3)	(0.34		)		(0.34		)
Distributions from capital gains (3)
Return of capital (3)
Total Distributions	(0.34		)		(0.34		)
Effect of shares issued, net of offering expenses	—				—
Net asset value at end of period		$14.30				$14.48
Net assets at end of period	89,315,812				89,309,909
Shares outstanding at end of period	6,244,309				6,168,407
Weighted average shares outstanding (basic and diluted)	6,229,041				6,156,116
Per share closing price at end of period	$12.98				$14.88

Ratios and Supplemental data:
Total Return (4)	0.72		%		2.47		%
Market Price Total Return (5)	15.67		%		1.42		%
Average Net Assets	$90,495,056				$89,026,177
Ratio of expenses to average Net assets (annualized)	9.28		%		4.36		%	(6)
Ratio of net investment income to average Net assets (annualized)	8.89		%		9.28		%



(1)	Based on weighted average number of common shares outstanding for the period.
(2)	Amount calculates to less than $0.01.
(3)	Distributions for the three months ended March 31, 2015 were in excess of net investment income in the amount of $91,128. Distributions for the three months ended March 31, 2014 were in excess of net investment income in the amount of $11,245. See Dividends and Distributions Policy in Note 2.
(4)	Total return measures the changes in net asset value over the period indicated, taking into account dividends as reinvested. Dividends and distributions are assumed for purposes of these calculations to be reinvested at prices obtained under the Company's dividend reinvestment plan.
(5)	Total return measures the changes in market value over the period indicated, taking into account dividends as reinvested. Dividends and distributions are assumed for purposes of these calculations to be reinvested at prices obtained under the Company's dividend reinvestment plan.
(6)	Had our investment adviser not agreed to waive its incentive fee for the period from our initial public offering through March 31, 2014, to the extent required to support a minimum dividend yield of 9%, our ratio of expenses to average net assets would have increased by 144 basis points, respectively on an annualized basis.

Note 12: Subsequent Events

On May 1, 2015, the Company declared monthly distributions of $0.1125 per share payable on each of May 28, 2015, June 25, 2015, and July 30, 2015


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

Forward-Looking Statements

Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements, which relate to future events or our future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties, including statements as to:


•	our future operating results, including the performance of our existing investments;


•	the introduction, withdrawal, success and timing of business initiatives and strategies;


•	changes in political, economic or industry conditions, the interest rate environment or financial and capital markets, which could result in changes in the value of our assets;


•	the relative and absolute investment performance and operations of our investment adviser;


•	the impact of increased competition;


•	the impact of investments we intend to make and future acquisitions and divestitures;


•	our ability to turn potential investment opportunities into transactions and thereafter into completed and successful investments;


•	the unfavorable resolution of any future legal proceedings;


•	our business prospects and the prospects of our portfolio companies;


•	our regulatory structure and tax status;


•	the adequacy of our cash resources and working capital;


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


•	the impact of interest rate volatility on our results, particularly because we use leverage as part of our investment strategy;


•	the ability of our portfolio companies to achieve their objective;


•	the impact of legislative and regulatory actions and reforms and regulatory, supervisory or enforcement actions of government agencies relating to us or our investment adviser;


•	our contractual arrangements and relationships with third parties;


•	our ability to access capital and any future financings by us;


•	the ability of our investment adviser to attract and retain highly talented professionals; and


•	the impact of changes to tax legislation and, generally, our tax position.

Such forward-looking statements may include statements preceded by, followed by or that otherwise include the words “may,” “might,” “will,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “estimate,” “anticipate,” “predict,” “potential,” “plan” or similar words.

We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q, and we assume no obligation to update any such forward-looking statements. Actual results could differ materially from those anticipated in our forward-looking statements, and future results could differ materially from historical performance. We undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law or SEC rule or regulation. You are advised to consult 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 following analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto contained elsewhere in this quarterly report on Form 10-Q.

Overview

We were formed as a Delaware corporation on November 14, 2012. We completed our initial public offering on May 7, 2013, raising $51.0 million in gross proceeds. On May 17, 2013, we raised another $6.5 million in gross proceeds from the closing of the initial public offering underwriters’ overallotment option. Immediately prior to the initial public offering, we acquired Harvest Capital Credit LLC in a merger whereby the outstanding limited liability company membership interests of Harvest Capital Credit LLC were converted into shares of our common stock and we assumed and succeeded to all of Harvest Capital Credit LLC’s assets and liabilities, including its entire portfolio of investments. We issued 2,246,699 shares of our common stock for all of Harvest Capital Credit LLC’s 2,266,974 outstanding membership interests in connection with the merger. Harvest Capital Credit LLC is considered to be our predecessor for accounting purposes and, as such, its financial statements are our historical financial statements. Accordingly, the financial statements for periods prior to the initial public offering presented in this Form 10-Q and this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are in reference to the historical financial statements of Harvest Capital Credit LLC, which are our historical financial statements as a result of the merger.

As used herein, the terms “we”, “us” and the “Company” refer to Harvest Capital Credit LLC for the periods prior to the initial public offering and refer to Harvest Capital Credit Corporation for the periods after the initial public offering.

Our investment objective is to generate both current income and capital appreciation primarily by making direct investments in the form of subordinated debt, senior debt, and to a lesser extent, minority equity investments. We plan to accomplish our investment objective by targeting investments in small and mid-sized U.S. private companies with annual revenues of less than $100 million and EBITDA (earnings before interest, taxes, depreciation and amortization) of less than $15 million. We believe that transactions involving companies of this size offer higher yielding investment opportunities, lower leverage levels and other terms more favorable than transactions involving larger companies.

We are an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a BDC under the Investment Company 1940 Act, as amended (the "1940 Act"). As a BDC, we are required to comply with certain regulatory requirements. For instance, as a BDC, we must not acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). Qualifying assets include investments in “eligible portfolio companies.” Under the relevant SEC rules, the term “eligible portfolio company” includes all private companies, companies whose securities are not listed on a national securities exchange, and certain public companies that have listed their securities on a national securities exchange and have a market capitalization of less than $250 million, in each case organized in the United States.

We have elected to be treated for tax purposes as a regulated investment company, or RIC, under Subchapter M of the Internal Revenue Code (the "Code"). To maintain our qualification as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements. As a RIC, we generally will not have to pay corporate-level U.S. federal income taxes on any income we distribute to our stockholders.

Portfolio

Portfolio Composition

As of March 31, 2015, we had $125.4 million (at fair value) invested in 29 companies. As of March 31, 2015, our portfolio was comprised of approximately 52.4% senior secured term loans, 43.8% junior secured term loans, 1.3% equity investments, 1.7% CLO equity investments and 0.8% in a royalty security.

As of December 31, 2014, we had $115.8 million (at fair value) invested in 29 companies. As of December 31, 2014, our portfolio was comprised of approximately 50% senior secured term loans, 45.8% junior secured term loans, 1.2% equity investments and 1% in a royalty security.

We originate and invest primarily in privately-held middle-market companies (typically those with less than $15.0 million of EBITDA) through first lien and second lien debt, oftentimes with a corresponding equity investment component and less frequently with a corresponding royalty security. The composition of our investments as of March 31, 2015 and December 31, 2014 was as follows:



	As of March 31, 2015				As of December 31, 2014
	Cost		Fair Value		Cost		Fair Value

Senior Secured	$	66,035,964	$	65,759,617	$	57,843,872	$	58,017,267
Junior Secured	55,874,474		54,871,485		52,794,041		53,030,636
Equity	1,483,691		1,594,658		1,372,571		1,375,670
CLO Equity	2,137,317		2,139,606		2,234,210		2,299,854
Royalty Securities	906,311		1,041,045		876,923		1,111,001
Total Investments	$	126,437,757	$	125,406,411	$	115,121,617	$	115,834,428

At March 31, 2015, our average portfolio company investment at amortized cost and fair value was approximately $4.5 million and $4.5 million, respectively, and our largest portfolio company investment by amortized cost and fair value was approximately $9.9 million and $9.9 million, respectively. At December 31, 2014, our average portfolio company investment at amortized cost and fair value was approximately $4.1 million and $4.1 million, respectively, and our largest portfolio company investment by amortized cost and fair value was approximately $9.9 million and $9.9 million, respectively.

At March 31, 2015, 63.1% of our debt investments bore interest based on floating rates (some of which were subject to interest rate floors), such as LIBOR, and 36.9% bore interest at fixed rates. At December 31, 2014, 59.7% of our debt investments bore interest based on floating rates (some of which were subject to interest rate floors), such as LIBOR, and 40.3% bore interest at fixed rates.

The weighted average yield on all of our debt and other income producing investments, excluding Shinnecock CLO 2006-1, Ltd. and equity components of the investment portfolio, as of March 31, 2015 and December 31, 2014 was approximately 14.8% and 15.1%, respectively. The weighted average yield was computed using the effective interest rates for all of our income producing investments, including cash and PIK interest as well as the accretion of deferred fees.

For investments that have a PIK interest component, PIK interest is accrued each period but generally not collected until the debt investment is sold or paid off. A roll forward of PIK interest accruals and collections for the three months ended March 31, 2015 and March 31, 2014 is summarized in the table below.



	Three months ended March 31,
	2015			2014

PIK, beginning of period	$	1,524,126		$	1,256,939
Accrual	306,126			397,401
Payments	(18,733		)	(10,606		)
PIK, end of period	$	1,811,519		$	1,643,734

Investment Activity

During the three months ended March 31, 2015, we closed $13.9 million of investment commitments in two new portfolio companies and two of our existing portfolio companies. During the three months ended March 31, 2014, we closed $11.4 million of investment commitments in five new portfolio companies and one of our existing portfolio companies.

During the three months ended March 31, 2015, we sold two investments at $1.0 million. Additionally, we received $2.8 million in principal repayments due to scheduled amortization and prepayments. During the three months ended March 31, 2014, we did not have any investment payoffs or sales.

Our level of investment activity can vary substantially from period to period depending on many factors, including the level of merger and acquisition activity in our target market, the general economic environment and the competitive environment for the types of investments we make.

Asset Quality

In addition to various risk management and monitoring tools, we use an investment rating system to characterize and monitor the credit profile and expected level of returns on each investment in our portfolio. This investment rating system uses a five-level numeric scale. The following is a description of the conditions associated with each investment rating:


•	Investment Rating 1 is used for investments that are performing above expectations, and whose risks remain favorable compared to the expected risk at the time of the original investment.


•	Investment Rating 2 is used for investments that are performing within expectations and whose risks remain neutral compared to the expected risk at the time of the original investment. All new loans are initially rated 2.


•	Investment Rating 3 is used for investments that are performing below expectations and that require closer monitoring, but where no loss of return or principal is expected. Portfolio companies with a rating of 3 may be out of compliance with financial covenants.


•	Investment Rating 4 is used for investments that are performing substantially below expectations and whose risks have increased substantially since the original investment. These investments are often in work out. Investments with a rating of 4 are those for which some loss of return but no loss of principal is expected.


•	Investment Rating 5 is used for investments that are performing substantially below expectations and whose risks have increased substantially since the original investment. These investments are almost always in work out. Investments with a rating of 5 are those for which some loss of return and principal is expected.

The following table shows the investment rankings of our debt investments at fair value (in millions):



	As of March 31, 2015					As of December 31, 2014
Investment Rating	Fair Value		% of Total Portfolio		Number of Portfolio Companies	Fair Value		% of Total Portfolio		Number of Portfolio Companies

1	$	38.9	32.2	%	8	$	24.50	22.1	%	5
2	65.4		54.4	%	15	73.6		66.3	%	18
3	10.7		8.8	%	2	6.2		5.6	%	2
4	4.6		3.8	%	1	5.4		4.9	%	1
5	1.0		0.8	%	1	1.3		1.1	%	1
	$	120.6	100.0	%	27	$	111.0	100.0	%	27

Loans and Debt Securities on Non-Accrual Status

We will not accrue interest on loans and debt securities if we doubt our ability to collect such interest or for such investments in which interest has not been paid for greater than 90 days. As of March 31, 2015 and December 31, 2014, we had two loans on non-accrual status which comprised approximately 6.5% and 6.7% of our portfolio at cost, respectively. This may be a higher percentage of the portfolio at cost than the BDC industry average. The continued failure by borrowers under these loans to pay interest and repay principal, and the failure by other borrowers to make such payments, could have a material adverse effect on our financial condition and results of operation.

Results of Operations

An important measure of our financial performance is net increase (decrease) in net assets resulting from operations, which includes net investment income (loss), net realized gain (loss) and net unrealized appreciation (depreciation). Net investment income (loss) is the difference between our income from interest, dividends, fees and other investment income and our operating expenses, including interest on borrowed funds. Net realized gain (loss) on investments is the difference between the proceeds received from dispositions of portfolio investments and their amortized cost. Net unrealized appreciation (depreciation) on investments is the net unrealized change in the fair value of our investment portfolio.

Comparison of the Three Months Ended March 31, 2015 and March 31, 2014

Revenues

We generate revenue in the form of interest income on debt investments and capital gains and distributions, if any, on investment securities that we may acquire in portfolio companies. Our debt investments typically have a term of five to seven years and bear interest at a fixed or floating rate. Interest on our debt securities is generally payable quarterly. Payments of principal on our debt investments may be amortized over the stated term of the investment, deferred for several years or due entirely at maturity. In some cases, our debt investments may pay interest in-kind, or PIK. Any outstanding principal amount of our debt securities and any accrued but unpaid interest will generally become due at the maturity date. The level of interest income we receive is directly related to the balance of interest-bearing investments multiplied by the weighted average yield of our investments. We expect that the dollar amount of interest and any dividend income that we earn to increase as the size of our investment portfolio increases. In addition, we may generate revenue in the form of prepayment, commitment, loan origination, structuring or due diligence fees and consulting fees.

Investment income for the three months ended March 31, 2015 totaled $4.1 million, compared to investment income of $3.0 million for the three months ended March 31, 2014. Investment income for the three months ended March 31, 2015 was comprised of $3.4 million in cash interest, $0.3 million in PIK interest and $0.4 million in fees earned on the investment portfolio. Investment income for the three months ended March 31, 2014 was comprised of $2.4 million in cash interest, $0.4 million in PIK interest and $0.2 million in fees earned on the investment portfolio. The increase in investment income in the three months ended March 31, 2015 is attributable to a larger investment portfolio during the period, as compared to the three months ended March 31, 2014.

Expenses

Our primary operating expenses include the payment of fees to HCAP Advisors LLC ("HCAP Advisors") under the investment advisory and management agreement, our allocable portion of overhead expenses under the administration agreement with JMP Credit Advisors, and other operating costs described below. We bear all other out-of-pocket costs and expenses of our operations and transactions, which include:


•	Interest expense and unused line fees;


•	the cost of calculating our net asset value, including the cost of any third-party valuation services;


•	the cost of effecting sales and repurchases of shares of our common stock and other securities;


•	fees payable to third parties relating to making investments, including out-of-pocket fees and expenses associated with performing due diligence and reviews of prospective investments;


•	transfer agent and custodial fees;


•	out-of-pocket fees and expenses associated with marketing efforts;


•	federal and state registration fees and any stock exchange listing fees;


•	U.S. federal, state and local taxes;


•	independent directors’ fees and expenses;


•	brokerage commissions;


•	fidelity bond, directors’ and officers’ liability insurance and other insurance premiums;

•direct costs, such as printing, mailing, long distance telephone and staff;


•	fees and expenses associated with independent audits and outside legal costs;


•	costs associated with our reporting and compliance obligations under the 1940 Act and other applicable U.S. federal and state securities laws; and


•	other expenses incurred by JMP Credit Advisors or us in connection with administering our business, including payments under the administration agreement that are based upon our allocable portion of overhead (subject to the review of our board of directors).

Operating expenses (net of fees waived by HCAP Advisors through March 31, 2014, pursuant to the waiver agreement) totaled $2.1 million for the three months ended March 31, 2015 compared to $1.0 million for the three months ended March 31, 2014. Operating expenses in both periods consisted of interest expense, base and incentive management fees, administrator expenses, interest and related fees, professional fees, valuation fees, insurance expenses, directors’ fees, and other general and administrative expenses. The increase in operating expenses was due to a $0.5 million increase in base management fees and incentive management fees discussed below and $0.1 million increase in administrative expenses for the three months ended March 31, 2015 compared to the three months ended March 31, 2014. Interest expense increased $0.5 million in the three months ended March 31, 2015, compared to March 31, 2014 due to higher outstanding indebtedness in the three months ended March 31, 2015.

We recorded an administrative services expense of $0.2 million for the three months ended March 31, 2015, compared to $0.1 million for the three months ended March 31, 2014. On March 5, 2015, the Company negotiated a new cap with JMP Credit Advisors on amounts payable by the Company under the administration agreement during the 2015 fiscal and calendar year. The new cap sets the maximum amount that will be payable by the Company on both a quarterly and annual basis. The cap for each quarter is as follows: (i) for the quarter ended March 31, 2015, the cap is $150,000; (ii) for the quarter ended June 30, 2015, the cap will be equal to the sum of (a) $150,000 plus (b) 0.25% of the increase in the Company’s portfolio assets from December 31, 2014, to March 31, 2015; (iii) for the quarter ended September 30, 2015, the cap will be equal to the sum of (a) $150,000 plus (b) 0.25% of the increase in the Company’s portfolio assets from December 31, 2014, to June 30, 2015; and (iv) for the quarter ended December 31, 2015, the cap will be equal to the sum of (a) $150,000 plus (b) 0.25% of the increase in the Company’s portfolio assets from December 31, 2014, to September 30, 2015. The overall cap for the year is $800,000, so notwithstanding any given quarterly cap, the amounts payable for all four quarters will not exceed $800,000. The $0.2 million expensed in the quarter ended March 31, 2015 was an increase over the $0.1 million expensed in the quarter ended March 31, 2014 due to an annual cap of $275,000 being in place from April 29, 2013 through April 29, 2014.

The base management fee for the three months ended March 31, 2015 was $0.6 million, compared to $0.4 million for the three months ended March 31, 2014. The increase in the base management fee is attributable to increased gross investments during the three months ended March 31, 2015, as compared to the three months ended March 31, 2014. Incentive management fees, net of the fee waiver, for the three months ended March 31, 2015 were $0.3 million, compared to $0.0 million for the three months ended March 31, 2014. The decrease in incentive management fees is attributable to the $(1.7) million realized gains and unrealized depreciation for the three months ended March 31, 2015, compared to $0.2 million in unrealized appreciation during the three months ended March 31, 2014. See the discussion below for more information on our base and incentive fee expenses.

In connection with our initial public offering in May 2013, HCAP Advisors, our investment adviser, agreed to permanently waive all or such portion of the incentive fee that it would have otherwise collected from us to the extent necessary to support a minimum dividend yield of 9% for the period of time commencing with our initial public offering through March 31, 2014. The 9% dividend hurdle was based upon our initial public offering price of $15 times the number of shares of our common stock outstanding plus the number of shares of common stock issued pursuant to our dividend reinvestment plan during the waiver period. Incentive fees waived under the waiver agreement totaled $320,827 and were all in the quarter ended March 31, 2014. The capital gains incentive fee is determined and paid annually with respect to realized capital gains (but not unrealized capital gains) to the extent such realized capital gains exceed realized and unrealized capital losses for such year. The Company records an expense accrual relating to the capital gains incentive fee payable by the Company to its investment adviser when the unrealized gains on its investments exceed all realized and unrealized capital losses on its investments given the fact that a capital gains incentive fee would be owed to the investment adviser if the Company were to liquidate its investment portfolio at such time. The actual incentive fee payable to the Company’s investment adviser related to capital gains is determined and payable in arrears at the end of each fiscal year and includes only realized capital gains for the period. The Company recorded net unrealized depreciation of $1,744,157 for the three months ended March 31, 2015 and net unrealized depreciation of $3,504,262 since our initial public offering.

The incentive fee expense also included the waiver of $320,827 in income incentive fees that would otherwise have been payable to the Company’s investment adviser for the period ended March 31, 2014 but for the 9% minimum dividend yield waiver provision described above.

Other operating expenses included general and administrative expenses such as legal, accounting and valuation expense.

Net Investment Income

For the three months ended March 31, 2015, net investment income was $2.0 million, compared to $2.1 million for the three months ended March 31, 2014. For the three months ended March 31, 2015, net investment income per share was $0.32, compared to $0.34 for the three months ended March 31, 2014.

Net Realized Gains and Losses

We recognized $15,819 in realized gains on our investments for the three months ended March 31, 2015, and we did not recognize any realized gains or losses on our investments in the three months ended March 31, 2014.

Net Change in Unrealized (Depreciation) Appreciation of Investments

Net change in unrealized appreciation (depreciation) primarily reflects the change in portfolio investment values during the reporting period, including the reversal of previously recorded appreciation or depreciation when gains or losses are realized.

Net change in unrealized (depreciation) appreciation on investments totaled $(1.7) million for the three months ended March 31, 2015 and $0.2 million for the three months ended March 31, 2014.

Net Increase in Net Assets Resulting from Operations

The net increase in net assets resulting from operations was $0.3 million for the three months ended March 31, 2015 compared to $2.2 million for the three months ended March 31, 2014. The $2.0 million decrease for the three months ended March 31, 2015, compared to the three months ended March 31, 2014 is primarily the result of $1.9 million in unrealized depreciation in the three months ended March 31, 2015.

Financial Condition, Liquidity and Capital Resources

Cash Flows from Operating and Financing Activities

Our operating activities used cash of $11.4 million and $8.4 million for the three months ended March 31, 2015 and March 31, 2014, respectively, primarily in connection with the funding of new investments. Our financing activities provided cash of $11.6 million and used cash of $1.8 million, respectively, for the quarters ended March 31, 2015 and 2014. Our financing activity proceeds for the three months ended March 31, 2015 were primarily in connection with dividends paid to shareholders and net borrowings on our Credit Facility and proceeds from the issuance of the Notes (defined below). Our financing activity proceeds for the three months ended March 31, 2014 were primarily in connection with dividends paid to shareholders.

Our liquidity and capital resources are derived from our Credit Facility (defined below), proceeds received from our initial public offering, proceeds received from the public offering of our Notes in January 2015, cash flows from operations, including investment sales and repayments, and income earned. Our primary use of funds from operations includes investments in portfolio companies and other operating expenses we incur, as well as the payment of dividends to the holders of our common stock. We used, and expect to continue to use, these capital resources as well as proceeds from public and private offerings of securities to finance our investment activities.

Although we expect to fund the growth of our investment portfolio through the net proceeds from future equity offerings or future borrowings to the extent permitted by the 1940 Act, our plans to raise capital may not be successful. In this regard, if our common stock trades at a price below our then-current net asset value per share, we may be limited in our ability to raise

equity capital given that we cannot sell our common stock at a price below net asset value per share unless our stockholders approve such a sale and our board of directors makes certain determinations in connection therewith.

In addition, we intend to distribute between 90% and 100% of our taxable income to our stockholders in order to satisfy the requirements applicable to RICs under Subchapter M of the Code. Consequently, we may not have the funds or the ability to fund new investments, to make additional investments in our portfolio companies, to fund our unfunded commitments to portfolio companies or to repay borrowings. In addition, the illiquidity of our portfolio investments may make it difficult for us to sell these investments when desired and, if we are required to sell these investments, we may realize significantly less than their recorded value.

Also, as a BDC, we are generally required to meet a coverage ratio of total assets, less liabilities and indebtedness not represented by senior securities, to total senior securities, which include all of our borrowings and any outstanding preferred stock, of at least 200%. This requirement limits the amount that we may borrow. The amount of leverage that we employ will depend on our assessment of market conditions and other factors at the time of any proposed borrowing, such as the maturity, covenant package and rate structure of the proposed borrowings, our ability to raise funds through the issuance of shares of our common stock and the risks of such borrowings within the context of our investment outlook.

As of March 31, 2015 and December 31, 2014, we had cash of $2.4 million and $8.8 million, respectively.

Credit Facility

On October 29, 2013, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with CapitalSource Bank, as agent and a lender, and each of the lenders from time to time party thereto, including City National Bank, to provide the Company with a $55 million senior secured revolving credit facility (the “Credit Facility”). The Credit Facility is secured by all of the Company’s assets. The Loan Agreement, among other things, has a revolving period that expires on October 29, 2015 and a final maturity date of October 29, 2018. Advances under the Credit Facility bear interest at a rate per annum equal to the lesser of (i) LIBOR plus 4.50% and (ii) the maximum rate permitted under applicable law. In addition, the Loan Agreement requires payment of a fee for unused amounts during the revolving period, which fee varies depending on the obligations outstanding as follows: (i) 0.75% per annum, if the average daily principal balance of the obligations outstanding for the prior month are less than fifty percent of the maximum loan amount; and (ii) 0.50% per annum, if such obligations outstanding are equal to or greater than fifty percent of the maximum loan amount. In each case, the fee is calculated based on the difference between (i) the maximum loan amount under the Credit Facility and (ii) the average daily principal balance of the obligations outstanding during the prior calendar month.

The Loan Agreement also contains customary terms and conditions, including, without limitation, affirmative and negative covenants, including, without limitation, information reporting requirements, a minimum tangible net worth, a minimum debt service coverage ratio, a minimum liquidity of 4% of the maximum loan amount, a maximum leverage ratio of 1.00 to 1.00, and maintenance of RIC and business development company status. In addition, the Loan Agreement contains a covenant that limits the amount of our unsecured longer-term indebtedness (as defined in the Loan Agreement), which includes our Notes, to 50% of the maximum borrowing amount under the Credit Facility. The Loan Agreement also contains customary events of default, including, without limitation, nonpayment, misrepresentation of representations and warranties in a material respect, breach of covenant, cross-default to other indebtedness, bankruptcy, change of control, and the occurrence of a material adverse effect. In addition, the Loan Agreement provides that, upon the occurrence and during the continuation of such an event of default, the Company’s administration agreement could be terminated and a backup administrator could be substituted by the agent.

As of March 31, 2015 and December 31, 2014, the outstanding balance on the Credit Facility was $13.1 million and $26.1 million, respectively.

Notes Offering

indebtedness that expressly provides it is subordinated to the Notes; effectively subordinated to all of the existing and future secured indebtedness of the Company, to the extent of the value of the assets securing such indebtedness, including borrowings under the Credit Facility; and structurally subordinated to all existing and future indebtedness and other obligations of any subsidiaries, financing vehicles, or similar facilities the Company may form in the future, with respect to claims on the assets of any such subsidiaries, financing vehicles, or similar facilities. The Notes may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after January 16, 2017. Interest on the Notes is payable quarterly on January 16, April 16, July 16, and October 16 of each year, beginning April 16, 2015. The Notes are listed on the NASDAQ Global Market under the trading symbol “HCAPL.” The Company may from time to time repurchase Notes in accordance with the 1940 Act and the rules promulgated thereunder. As of March 31, 2015, the outstanding balance of the Notes was $27.5 million.

Off-Balance Sheet Arrangements

We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. As of March 31, 2015, our only off-balance sheet arrangements consisted of $3.9 million of unfunded delayed draw commitments to provide debt financing to one of our portfolio companies and $1.7 million of unfunded revolving line of credit commitments to four of our portfolio companies. As of December 31, 2014, our only off-balance sheet arrangements consisted of $0.5 million of unfunded delayed draw commitments to provide debt financing to one of our portfolio companies and $2.1 million of unfunded revolving line of credit commitments to four of our portfolio companies.

Regulated Investment Company Status and Dividends

We have elected to be treated as a RIC under Subchapter M of the Code. If we maintain our qualification as a RIC, we will not be taxed on our investment company taxable income or realized net capital gains, to the extent that such taxable income or gains are distributed, or deemed to be distributed, to stockholders on a timely basis.

Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation until realized. Dividends declared and paid by us in a year may differ from taxable income for that year as such dividends may include the distribution of current year taxable income or the distribution of prior year taxable income carried forward into and distributed in the current year. Distributions also may include returns of capital.

To maintain our qualification as a RIC, the Company is required to meet certain income and asset diversification tests in addition to distributing at least 90% of ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, out of the assets legally available for distribution. As a RIC, the Company will be subject to a 4% nondeductible U.S. federal excise tax on certain undistributed income unless the Company distributes in a timely manner an amount at least equal to the sum of (1) 98% of its ordinary income for each calendar year, (2) 98.2% of its capital gain net income for the 1-year period ending October 31 in that calendar year and (3) any ordinary income and net capital gains for preceding years that were not distributed during such years and on which the Company paid no U.S. federal income tax.

We intend to distribute to our stockholders between 90% and 100% of our annual taxable income (which includes our taxable interest and fee income). However, the covenants contained in the Credit Facility may prohibit us from making distributions to our stockholders, and, as a result, could hinder our ability to satisfy the distribution requirement. In addition, we may retain for investment some or all of our net taxable capital gains (i.e., realized net long-term capital gains in excess of realized net short-term capital losses) and treat such amounts as deemed distributions to our stockholders. If we do this, our stockholders will be

treated as if they received actual distributions of the capital gains we retained and then reinvested the net after-tax proceeds in our common stock. Our stockholders also may be eligible to claim tax credits (or, in certain circumstances, tax refunds) equal to their allocable share of the tax we paid on the capital gains deemed distributed to them. To the extent our taxable earnings for a fiscal taxable year fall below the total amount of our dividends for that fiscal year, a portion of those dividend distributions may be deemed a return of capital to our stockholders.

We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage test for borrowings applicable to us as a BDC under the 1940 Act and due to provisions in the Credit Facility. We cannot assure stockholders that they will receive any distributions or distributions at a particular level.

In accordance with certain applicable Treasury regulations and private letter rulings issued by the Internal Revenue Service, a RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder may elect to receive his or her entire distribution in either cash or stock of the RIC, subject to a limitation that the aggregate amount of cash to be distributed to all stockholders must be at least 20% of the aggregate declared distribution. If too many stockholders elect to receive cash, each stockholder electing to receive cash must receive a pro rata amount of cash (with the balance of the distribution paid in stock). In no event will any stockholder, electing to receive cash, receive less than 20% of his or her entire distribution in cash. If these and certain other requirements are met, for U.S. federal income tax purposes, the amount of the dividend paid in stock will be equal to the amount of cash that could have been received instead of stock. We have no current intention of paying dividends in shares of our stock in accordance with these Treasury regulations or private letter rulings.

Recent Developments

On May 1, 2015, the Company declared monthly distributions of $0.1125 per share payable on each of May 28, 2015, June 25, 2015, and July 30, 2015.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are subject to financial market risks, including changes in interest rates. For the three months ended March 31, 2015, eighteen of our debt investments, or 63.1%, of the fair value of our debt investments bore interest at floating rates. Fourteen of these floating rate loans have interest rate floors, which have effectively converted the loans to fixed rate loans in the current interest rate environment. For the three months ended March 31, 2014, thirteen loans, or 45.9%, of the fair value of the portfolio bore interest at floating rates. Eleven of these investments had interest rate floors. In the future, we expect other loans in our portfolio will have floating rates. Assuming that the Statement of Assets and Liabilities as of March 31, 2015 were to remain constant and no actions were taken to alter the existing interest rate sensitivity, a hypothetical one percent increase in LIBOR would increase our net investment income by a maximum of $0.4 million. Alternatively, a hypothetical decrease in LIBOR would have no impact on our net income as most of our floating rate loans and borrowing rates have LIBOR floors that would not be affected by the one percent decrease. Although we believe that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in credit quality, size and composition of the assets on the balance sheet and other business developments that could affect net increase in net assets resulting from operations, or net income. Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome simulated by this estimate. We may hedge against interest rate fluctuations by using standard hedging instruments such as futures, options and forward contacts subject to the requirements of the 1940 Act. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to our portfolio of investments. We have not engaged in any hedging activities to date.

Item 4. Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures

As of March 31, 2015 (the end of the period covered by this report), we, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the 1934 Act). Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed in our periodic SEC filings is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

(b) Changes in Internal Control Over Financial Reporting

Management did not identify any change in the Company’s internal control over financial reporting that occurred during the three months ended March 31, 2015 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings


Item 1A.	Risk Factors

There has been no material change in the information provided under the heading “Risk Factors” in our annual report on Form 10-K for the fiscal year ended December 31, 2014. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may materially affect our business, financial condition and/or operating results.

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

Sales of Unregistered Securities

During the three months ended March 31, 2015, we issued a total of 21,636 shares of our common stock under our dividend reinvestment plan (“DRIP”). This issuance was not subject to the registration requirements of the Securities Act of 1933. The aggregate value of the shares of our common stock issued under the DRIP was approximately $261,956.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

EXHIBIT INDEX



Exhibit Number		Description
31.1		Chief Executive Officer Certification Pursuant to Exchange Act Rule 13a-14 (a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Chief Financial Officer Certification Pursuant to Exchange Act Rule 13a-14 (a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Filed herewith.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



	HARVEST CAPITAL CREDIT CORPORATION

Date: May 7, 2015	/s/ Richard P. Buckanavage
	Richard P. Buckanavage Chief Executive Officer and President

	/s/ Craig R. Kitchin
	Craig R. Kitchin Chief Financial Officer, Chief Compliance Officer and Secretary (Principal Financial and Accounting Officer)

Attached files

Harvest Capital Credit Corp Reports

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