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EX-32.1 - EX-32.1 - NexPoint Capital, Inc.d489799dex321.htm
EX-31.2 - EX-31.2 - NexPoint Capital, Inc.d489799dex312.htm
EX-31.1 - EX-31.1 - NexPoint Capital, Inc.d489799dex311.htm
EX-10.11 - EX-10.11 - NexPoint Capital, Inc.d489799dex1011.htm
EX-10.10 - EX-10.10 - NexPoint Capital, Inc.d489799dex1010.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017

OR

 

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

FOR THE TRANSITION PERIOD FROM                      TO                     

COMMISSION FILE NUMBER: 814-01074

 

 

NexPoint Capital, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   38-3926499

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

300 Crescent Court, Suite 700

Dallas, Texas

  75201
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code (972) 628-4100

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.001 per share

 

 

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 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 “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☒  (Do not check if a smaller reporting company)    Smaller reporting company  
Emerging growth company      Yes  ☒    No  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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

As of November 6, 2017, the Registrant had 9,296,862 shares of common stock, $0.001 par value, outstanding.

 

 

 


Part I – Financial Information

Item 1. Financial Statements

NexPoint Capital, Inc.

Statements of Assets and Liabilities

 

     September 30,
2017
(Unaudited)
     December 31,
2016
 

Assets

 

Unaffiliated investments, at fair value (cost of $69,389,697 and $78,591,669, respectively)

   $ 69,960,861      $ 78,290,596  

Affiliated investments, at fair value (cost of $14,154 and $0, respectively)(1)

     15,305        —    

Cash and cash equivalents

     6,791,502        3,948,113  

Due from counterparty(2)

     13,120,000        —    

Receivable for common stock sold

     4,385        56,890  

Dividends and interest receivable

     1,495,388        829,876  

Receivable from Adviser(3)

     —          4,096,447  

Prepaid expenses

     127,294        23,241  

Capitalized offering costs

     133,722        228,555  
  

 

 

    

 

 

 

Total assets

     91,648,457        87,473,718  
  

 

 

    

 

 

 

Liabilities

 

Credit facility payable(4)

     —          11,200,000  

Payable for investments purchased

     1,990,205        8,536,248  

Payable on total return swap(2)

     719,171        —    

Unrealized depreciation on total return swap(2)

     633,427        —    

Common stock repurchased

     348,982        38,533  

Payable to Adviser(3)

     20,092        —    

Interest expense and commitment fees payable

     —          21,583  

Accrued expenses and other liabilities

     426,575        384,400  
  

 

 

    

 

 

 

Total liabilities

     4,138,452        20,180,764  
  

 

 

    

 

 

 

Commitments and contingencies(5)

 

Net assets

 

Preferred stock, $0.001 par value (25,000,000 shares authorized, 0 shares issued and outstanding)

     —          —    

Common stock, $0.001 par value (200,000,000 shares authorized, 9,156,755 and 7,102,226 shares issued and outstanding, respectively)

     9,157        7,102  

Paid-in capital in excess of par

     81,939,104        61,925,016  

Accumulated net realized gain

     2,461,350        3,258,750  

Undistributed net investment income

     886,506        128,159  

Net unrealized appreciation (depreciation) on investments and total return swaps (including net increase from amounts committed by affiliates of $2,275,000 and $2,275,000, respectively)

     2,213,888        1,973,927  
  

 

 

    

 

 

 

Total net assets

   $ 87,510,005      $ 67,292,954  
  

 

 

    

 

 

 

Net asset value per share of common stock

   $ 9.56      $ 9.47  
  

 

 

    

 

 

 

 

(1)  See Note 10 for a discussion of affiliated investments.
(2)  See Note 7 for a discussion of total return swaps.
(3)  See Note 4 for a discussion of related party transactions and arrangements.
(4)  See Note 7 for a discussion of credit facility.
(5)  See Note 4 and Note 8 for a discussion of the commitments and contingencies of the Company (as defined in Note 1).

See Notes to Financial Statements


NexPoint Capital, Inc.

Statements of Operations

(Unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2017     2016     2017     2016  

Investment income:

 

Interest

   $ 1,429,935     $ 1,259,654     $ 5,831,372     $ 2,818,052  

Dividend income from unaffiliated investments

     140,991       124,376       322,131       184,166  

Dividend income from affiliated investments(1)

     398       —         551       —    

Other fee income

     173       —         8,337       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     1,571,497       1,384,030       6,162,391       3,002,218  
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

 

Investment advisory fees(2)

     305,288       363,595       1,106,346       797,215  

Amortized offering costs

     91,937       64,887       308,713       104,135  

Stock transfer fee

     136,158       62,989       305,530       200,123  

Custodian and accounting service fees

     79,982       47,140       234,276       148,357  

Administration fees(2)

     69,308       72,719       229,520       159,441  

Audit and tax fees

     58,382       38,540       161,527       157,025  

Legal fees

     46,772       67,623       127,296       205,324  

Reports to stockholders

     —         15,040       95,887       75,953  

Other expenses

     28,885       37,829       90,315       80,742  

Interest expense and commitment fees(3)

     —         50,269       50,379       106,237  

Directors’ fees(2)

     4,526       1,442       11,129       5,903  

Capital gains incentive fees(2)

     (315,928     313,850       (111,488     313,850  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     505,310       1,135,923       2,609,430       2,354,305  

Expenses waived or reimbursed by the Adviser(2)

     (311,621     (782,827     (1,675,809     (1,550,394
  

 

 

   

 

 

   

 

 

   

 

 

 

Net expenses

     193,689       353,096       933,621       803,911  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

     1,377,808       1,030,934       5,228,770       2,198,307  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gains (losses) on investments:

 

Net realized gain/(loss) on:

 

Unaffiliated investments and securities sold short

     141,187       695,515       (272,623     1,197,232  

Affiliated investments(1)

     —         —         —         —    

Total return swaps(4)

     (524,777     —         (524,777     —    

Net change in unrealized appreciation (depreciation) on:

 

Unaffiliated investments and securities sold short

     (775,493     1,191,250       872,237       3,844,531  

Affiliated investments(1)

     843       —         1,151       —    

Total return swaps(4)

     (421,401     —         (633,427     —    

Net increase from amounts committed by affiliates(2)

     —         —         —         872,000  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gains (losses)

     (1,579,641     1,886,765       (557,439     5,913,763  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

   $ (201,833   $ 2,917,699     $ 4,671,331     $ 8,112,070  
  

 

 

   

 

 

   

 

 

   

 

 

 

Per share information—basic and diluted per common share

 

Net investment income:

   $ 0.15     $ 0.19     $ 0.63     $ 0.52  

Earnings per share:

   $ (0.02   $ 0.53     $ 0.56     $ 1.91  

Weighted average shares outstanding:

     8,966,250       5,507,237       8,287,409       4,250,687  

Distributions declared per share:

   $ 0.18     $ 0.18     $ 0.54     $ 0.53  

 

(1)  See Note 10 for a discussion of affiliated investments.
(2)  See Note 4 for a discussion of related party transactions and arrangements.
(3)  See Note 7 for a discussion of credit facility.
(4)  See Note 7 for a discussion of total return swaps.

See Notes to Financial Statements


NexPoint Capital, Inc.

Statements of Changes in Net Assets

(Unaudited)

 

     Nine Months Ended
September 30,
 
     2017     2016  

Increase (decrease) in net assets resulting from operations:

 

Net investment income

   $ 5,228,770     $ 2,198,307  

Net realized gain (loss) on investments and securities sold short

     (272,623     1,197,232  

Net realized gain (loss) on total return swaps(1)

     (524,777     —    

Net change in unrealized appreciation (depreciation) on investments and securities sold short

     873,388       3,844,531  

Net change in unrealized appreciation (depreciation) on total return swaps(1)

     (633,427     —    

Net increase from amounts committed by affiliates(2)

     —         872,000  
  

 

 

   

 

 

 

Net increase in net assets resulting from operations

     4,671,331       8,112,070  
  

 

 

   

 

 

 

Distributions to stockholders:

 

Net investment income

     (4,470,423     (2,120,408

Net realized gains

     —         (162,959
  

 

 

   

 

 

 

Total distributions to stockholders

     (4,470,423     (2,283,367
  

 

 

   

 

 

 

Capital share transactions:

 

Issuance of common stock

     18,195,548       27,972,673  

Issuance of common shares pursuant to distribution reinvestment plan

     2,959,396       1,726,656  

Repurchase of common stock

     (1,138,801     (43,100
  

 

 

   

 

 

 

Net increase in net assets resulting from capital transactions

     20,016,143       29,656,229  
  

 

 

   

 

 

 

Total increase in net assets

     20,217,051       35,484,932  

Net assets at beginning of period

     67,292,954       22,298,879  
  

 

 

   

 

 

 

Net assets at end of period

   $ 87,510,005     $ 57,783,811  
  

 

 

   

 

 

 

Undistributed net investment income

   $ 886,506     $ —    

Changes in common shares

 

Issuance of common stock

     1,870,378       3,061,301  

Reinvestment of common stock

     303,769       188,186  

Repurchase of common stock

     (119,618     (4,896
  

 

 

   

 

 

 

Net increase in common shares

     2,054,529       3,244,591  
  

 

 

   

 

 

 

 

(1)  See Note 7 for a discussion of total return swaps.
(2)  See Note 4 for a discussion of related party transactions and arrangements.

See Notes to Financial Statements


Statements of Cash Flows

(Unaudited)

 

     Nine Months Ended
September 30,
 
     2017     2016  

Cash flows used in operating activities

 

Net increase in net assets resulting from operations

   $ 4,671,331     $ 8,112,070  

Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash used in operating activities:

    

Purchases of investment securities

     (62,241,424     (63,279,264

Purchases of securities sold short

     —         (503,860

Proceeds from securities sold short

     —         939,022  

Payment-in-kind investments

     (182,695     —    

Proceeds from sales and principal repayments of investment securities

     72,746,045       27,907,573  

Net realized (gain) loss on investments

     272,623       (1,197,232

Net change in unrealized (appreciation) depreciation on investments

     (873,388     (3,844,531

Net change in unrealized (appreciation) depreciation on total return swaps

     633,427       —    

Amortization of premium/discount, net

     (1,406,731     (345,021

Amortization of capitalized offering costs

     308,713       104,135  

Increase (decrease) in operating assets and liabilities:

    

(Increase) decrease in receivable for investments sold

     —         (525,153

(Increase) decrease in dividends and interest receivable

     (665,512     (585,532

(Increase) decrease in receivable from Adviser

     4,096,447       (943,712

(Increase) decrease in other receivables

     —         81,258  

(Increase) decrease in prepaid expenses

     (104,053     (2,198

(Increase) decrease in due from counterparty

     (13,120,000     —    

Increase (decrease) in payable for investments purchased

     (6,546,043     (5,712,784

Increase (decrease) in payable to Adviser

     20,092       —    

Increase (decrease) in directors’ fees payable

     —         1,249  

Increase (decrease) in interest expense and commitment fees payable

     (21,583     19,516  

Increase (decrease) in accrued expenses and other liabilities

     42,175       124,222  

Increase (decrease) in payable due on total return swap

     719,171       —    
  

 

 

   

 

 

 

Net cash flow (used in) operating activities

     (1,651,405     (39,650,242
  

 

 

   

 

 

 

Cash flows provided by financing activities

 

Proceeds from issuance of common stock, net of receivable for common stock sold

     18,248,053       28,156,373  

Repurchase of common stock, net of payable

     (828,352     (43,100

Distributions paid in cash

     (1,511,027     (556,711

Offering costs paid, net of due to Adviser

     (213,880     (317,141

Borrowings under credit facilities

     8,700,000       14,000,000  

Repayments of credit facilities

     (19,900,000     (4,100,000
  

 

 

   

 

 

 

Net cash flow provided by financing activities

     4,494,794       37,139,421  
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     2,843,389       (2,510,821

Cash and cash equivalents

 

Beginning of the period

     3,948,113       7,350,748  
  

 

 

   

 

 

 

End of the period

   $ 6,791,502     $ 4,839,927  
  

 

 

   

 

 

 

Supplemental disclosure and non-cash financing activities

 

Paid-in-kind interest income

   $ 182,695     $ —    

Cash paid during the period for interest

   $ 54,473     $ 50,243  

Reinvestment of distributions paid

   $ 2,959,396     $ 1,726,656  

Local and excise taxes paid

   $ 124,672     $ 7,307  

See Notes to Financial Statements


NexPoint Capital, Inc.

Schedule of Investments

As of September 30, 2017

(Unaudited)

 

Portfolio Company(1)(2)

  Interest
Rate
    Base Rate
Floor
    Maturity
Date
    Principal
Amount
    Amortized
Cost(3)
    Fair
Value
 

Senior Secured Loans – 21.4%(4)

           

Healthcare – 18.0%

           

BioClinica, Inc. (First Lien Term Loan)(5)

    L + 425       1.00     10/20/2023     $ 994,987     $ 980,369     $ 980,685  

Quorum Health Corporation (First Lien Term Loan)(5)(6)

    L + 675       1.00     4/29/2022       1,990,205       1,987,874       2,021,302  

U.S. Renal Care, Inc. (First Lien Term Loan)(5)

    L + 425       1.00     12/31/2022       3,979,747       3,867,954       3,863,339  

U.S. Renal Care, Inc. (Second Lien Term
Loan)(5)(7)

    L + 800       1.00     12/31/2023       4,500,000       4,424,356       4,393,125  

Valeant Pharmaceuticals International, Inc. (First Lien Term Loan)(8)(9)

    L + 475       0.75     4/1/2022       4,386,924       4,459,082       4,470,078  
           

 

 

 
              15,728,529  
           

 

 

 

Retail – 3.4%

           

Toys ‘R’ Us-Delaware, Inc. (First Lien Term Loan)(10)

          4,946,815       3,215,430       2,984,562  
           

 

 

 

Utility – 0.0%

           

Texas Competitive Electric Holdings

           

Company LLC (TXU) (Escrow Loan)(11)

          3,500,000       87,816       8,750  
           

 

 

 

Total Senior Secured Loans

              18,721,841  
           

 

 

 

Asset-Backed Securities – 2.3%

           

Financials – 2.3%

           

Grayson Investor Corp.(9)(12)(13)(14)

        11/1/2021       800       456,000       303,000  

Highland Park CDO I Ltd. 2006 1A A2(5)(9)(12)(14)

    L + 40         11/25/2051       1,441,371       1,190,298       1,369,303  

PAMCO CLO 1997-1A B(7)(9)(10)(12)(14)(15)

          559,644       321,796       288,776  
           

 

 

 
              1,961,079  
           

 

 

 

Total Asset-Backed Securities

              1,961,079  
           

 

 

 
                      Shares              

Closed-End Mutual Funds – 0.0%

           

Financials – 0.0%

           

NexPoint Credit Strategies Fund(9)(16)

          664       14,154       15,305  
           

 

 

 

Total Closed-End Mutual Funds

              15,305  
           

 

 

 

Portfolio Company(1)(2)

  Interest
Rate
    Base Rate
Floor
    Maturity
Date
    Principal
Amount
    Amortized
Cost(3)
    Fair
Value
 

Corporate Bonds – 42.9%

           

Financials – 2.2%

           

ASP AMC Merger Sub, Inc.(12)

    8.000       5/15/2025     $ 2,000,000       1,912,231       1,935,000  
           

 

 

 

Healthcare – 36.6%

           

DJO Finance LLC / DJO Finance Corp.(12)

    8.125       6/15/2021       2,000,000       1,896,413       1,925,000  

Endo Finance LLC / Endo Finco Inc.(12)

    6.000       7/15/2023       4,000,000       3,451,893       3,320,000  

Ortho-Clinical Diagnostics(12)

    6.625       5/15/2022       9,217,000       8,301,628       9,078,745  

Quorum Health Corp.

    11.625       4/15/2023       5,572,000       4,615,390       5,154,100  

Surgery Center Holdings(9)(12)

    6.750       7/1/2025       4,250,000       4,035,904       4,005,625  

Tenet Healthcare Corp.(9)

    8.125       4/1/2022       1,000,000       971,188       1,020,000  

Valeant Pharmaceuticals International, Inc.(9)(12)

    5.875       5/15/2023       4,000,000       3,369,539       3,545,000  

Valeant Pharmaceuticals International, Inc.(9)(12)

    6.125       4/15/2025       4,500,000       3,771,007       3,960,000  
           

 

 

 
              32,008,470  
           

 

 

 

Media/Telecommunications – 1.5%

           

iHeartCommunications, Inc.

   

2

12

% PIK, 

% Cash 

      2/1/2021       9,180,900       3,478,685       1,331,231  
           

 

 

 

Telecommunication Services – 2.6%

           

Intelsat Jackson Holdings S.A.(9)(12)

    9.750       7/15/2025       2,254,000       2,264,199       2,282,175  
           

 

 

 

Total Corporate Bonds

              37,556,876  
           

 

 

 
                      Shares              

Common Stocks – 8.2%

           

Chemicals – 0.1%

           

MPM Holdings, Inc.(9)(17)

          8,500       250,750       136,000  
           

 

 

 

 

 

See Notes to Financial Statements.


NexPoint Capital, Inc.

Schedule of Investments (continued)

As of September 30, 2017

(Unaudited)

 

Portfolio Company(1)(2)

   Interest
Rate
    Base
Rate

Floor
     Maturity
Date
     Principal
Amount
     Amortized
Cost(3)
     Fair
Value
 

Energy – 0.7%

                

Energy Transfer Partners L.P.(9)

             10,800      $ 202,528      $ 197,532  

EnLink Midstream Partners L.P.(9)

             13,100        202,669        219,556  

Targa Resources Corp.(9)

             5,000        202,844        236,500  
                

 

 

 
                   653,588  
                

 

 

 

Healthcare – 1.5%

                

Forward Pharma A/S ADR(9)(17)

             17,000        88,774        100,130  

Kadmon Holdings, Inc.(17)

             227,300        763,728        761,455  

SteadyMed Ltd.(9)(17)

             125,790        750,023        427,686  
                

 

 

 
                   1,289,271  
                

 

 

 

Real Estate Investment Trusts (REITs) – 3.4%

                

Jernigan Capital, Inc.(9)

             23,000        506,000        472,650  

Independence Realty Trust, Inc.(9)

             246,727        2,216,203        2,509,214  
                

 

 

 
                   2,981,864  
                

 

 

 

Utility – 2.5%

                

Vistra Energy Corp.

             115,000        1,776,757        2,149,358  
                

 

 

 

Total Common Stocks

                   7,210,081  
                

 

 

 
     Preferred
Dividend
Rate
                                   

Preferred Stocks – 2.7%

                

Real Estate Investment Trust (REIT) – 2.7%

                

RAIT Financial Trust

     8.875        —          148,057        3,215,965        2,330,417  
                

 

 

 

Total Preferred Stocks

                   2,330,417  
                

 

 

 

Rights – 0.1%

                

Utility – 0.1%

                

Texas Competitive Electric Holdings Company, LLC (TXU)(17)

             58,356        154,404        65,651  
                

 

 

 

Total Rights

                   65,651  
                

 

 

 

Warrants – 2.4%

                

Healthcare – 2.4%

                

CareDx, Inc.(15)(17)

          4/14/2023        250,626        —          807,762  

Galena Biopharma, Inc.(15)(17)

          1/12/2021        1,500,054        —          335  

Gemphire Therapeutics, Inc.(15)(17)

          3/15/2022        118,796        —          922,980  

Kadmon Holdings, Inc.(15)(17)

          4/13/2018        119,047        —          47,924  

SCYNEXIS, Inc.(15)(17)

          6/21/2021        195,000        —          231,429  

SteadyMed Ltd.(9)(15)(17)

          4/25/2022        62,895        —          104,486  
                

 

 

 
                   2,114,916  
                

 

 

 

Total Warrants

                   2,114,916  
                

 

 

 

Total Investments- 80.0%

              $ 69,403,851      $ 69,976,166  
             

 

 

    

 

 

 

Cash Equivalents – 7.6%(18)

                 $ 6,620,362  
                

 

 

 

Other Assets & Liabilities, net- 12.4%

                 $ 10,913,477  
                

 

 

 

Net Assets- 100.0%

                 $ 87,510,005  
                

 

 

 
                                Notional
Amount(19)
     Unrealized
Depreciation
 

Total Return Swap – (0.7%)

                

BNP Paribas TRS Facility(14) (Note 7)

              $ 38,185,770        (633,427
             

 

 

    

 

 

 

 

(1)  Unless otherwise noted, the Company did not “control” and was not an “affiliated person” of any of its portfolio companies, each as defined in the Investment Company Act of 1940, as amended (the “1940 Act”). In general, under the 1940 Act, the Company would be presumed to “control” a portfolio company if it owned 25% or more of its voting securities or had the power to exercise control over the management or policies of such portfolio company, and would be an “affiliated person” of a portfolio company if it owned 5% or more of its voting securities. Additionally, companies under common control (e.g., companies with a common owner of greater than 25% of their respective voting securities) are affiliates under the 1940 Act.
(2)  All investments are denominated in United States Dollars.
(3)  Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on investments.

 

 

See Notes to Financial Statements.


NexPoint Capital, Inc.

Schedule of Investments (continued)

As of September 30, 2017

(Unaudited)

 

(4)  Senior secured loans in which the Company invests generally pay interest at rates which are periodically determined by reference to a base lending rate plus a spread (unless otherwise identified, all senior secured loans carry a variable rate of interest). These base lending rates are generally (i) the Prime Rate offered by one or more major United States banks, (ii) the lending rate offered by one or more European banks such as the London Interbank Offered Rate (“LIBOR”) or (iii) the coupon rate. Rate shown represents the actual rate at September 30, 2017. Senior secured loans, while exempt from registration under the Securities Act of 1933 (the “1933 Act”), contain certain restrictions on resale and cannot be sold publicly. Senior secured floating rate loans often require prepayments from excess cash flow or permit the borrower to repay at its election. The degree to which borrowers repay, whether as a contractual requirement or at their election, cannot be predicted with accuracy. As a result, the actual remaining maturity may be substantially less than the stated maturity shown.
(5)  The interest rate on these investments is subject to a base rate of 3-Month LIBOR, which at September 30, 2017 was 1.33%. The LIBOR rate used to calculate interest is the higher of the prevailing 3 month LIBOR rate in effect on the date of the quarterly reset, or the LIBOR base rate floor shown.
(6)  All or a portion of this position has not settled. Full contract rates do not take effect until settlement date.
(7)  Classified as Level 3 within the three-tier fair value hierarchy. Please see Note 2 for an explanation of this hierarchy, as well as a list of unobservable inputs used in the valuation of these instruments.
(8)  The interest rate on these investments is subject to a base rate of 1-Month LIBOR, which at September 30, 2017 was 1.23%. The LIBOR rate used to calculate interest is the higher of the prevailing 1 month LIBOR rate in effect on the date of the monthly reset, or the LIBOR base rate floor shown.
(9)  The investment is not a qualifying asset under Section 55 of the 1940 Act. A business development company, such as the Company, may not acquire any asset other than a qualifying asset, unless at the time the acquisition is made, qualifying assets represent at least 70% of the business development company’s total assets. Non-qualifying assets represented 29.1% of the Company’s total assets as of September 30, 2017.
(10)  The issuer is in default of its payment obligation. In some cases, partial payments are still being paid to the lenders.
(11)  The investment represents value held in escrow pending future events. No interest is being accrued.
(12)  Securities exempt from registration under Rule 144A of the 1933 Act. These securities may only be resold in transactions exempt from registration to qualified institutional buyers. As of September 30, 2017, these securities amounted to $32,012,624, or 36.6% of net assets.
(13)  The investment is considered to be the equity tranche of the issuer.
(14)  Securities of collateralized loan obligations where an affiliate of the Adviser serves as collateral manager.
(15)  Represents fair value as determined by the Company’s Board of Directors (the “Board”), or its designee in good faith, pursuant to the policies and procedures approved by the Board. The Board considers fair valued securities to be securities for which market quotations are not readily available and these securities may be valued using a combination of observable and unobservable inputs. Securities with a total aggregate value of $2,403,692, or 2.7% of net assets were fair valued under the Company’s valuation procedures as of September 30, 2017.
(16)  Represents an affiliated issuer. Assets with a total aggregate market value of $15,305, or 0.0% of net assets, were affiliated with the Company as of September 30, 2017 (see Note 10).
(17)  Non-income producing security.
(18)  State Street U.S. Government Money Market Fund.
(19)  Notional value of the underlying securities in the Total Return Swap is calculated by multiplying par by the initial price.

Glossary:

ADR  American Depositary Receipt
PIK  Payment-in-Kind

 

 

See Notes to Financial Statements.


NexPoint Capital, Inc.

Schedule of Investments

As of December 31, 2016

 

Portfolio Company(1)(2)

  Interest
Rate
    Base Rate
Floor
    Maturity
Date
    Principal
Amount
    Amortized
Cost(3)
    Fair Value  

Senior Secured Loans – 61.8%(4)

           

Energy – 5.2%

           

EnergySolutions, LLC (First Lien Term Loan)(5)

    L+575       1.00     5/29/2020     $ 1,271,516     $ 1,157,116     $ 1,284,231  

Fieldwood Energy, LLC (First Lien Term Loan)(6)

    L+700       1.00     8/31/2020       1,800,549       1,561,679       1,717,274  

Fieldwood Energy, LLC (First Lien Term Loan)(6)

    L+712.5       1.25     9/30/2020       567,797       541,399       498,241  
           

 

 

 
              3,499,746  
           

 

 

 

Healthcare – 34.3%

           

American Renal Holdings, Inc. (First Lien Term Loan)(6)(7)

    L+350       1.25     9/22/2019       994,684       989,745       999,036  

BioScrip, Inc. (First Lien Initial Term Loan)(6)

    L+525       1.25     7/31/2020       587,430       565,881       560,995  

BioScrip, Inc. (First Lien Term Loan)(6)

    L+525       1.25     7/31/2020       352,458       339,528       336,597  

MPH Acquisition Holdings, LLC (First Lien Term Loan)(6)

    L+400       1.00     6/7/2023       4,639,769       4,662,125       4,728,435  

Onex Carestream Finance LP (Second Lien Term Loan)(6)

    L+850       1.00     12/7/2019       819,967       826,664       676,473  

Quorum Health Corp. (First Lien Term Loan)(6)

    L+575       1.00     4/29/2022       6,446,692       6,224,337       6,336,551  

Radnet, Inc. (Second Lien Term Loan)(6)

    L+700       1.00     3/25/2021       5,457,917       5,285,401       5,406,749  

U.S. Renal Care, Inc. (Second Lien Term Loan)(6)

    L+800       1.00     12/31/2023       4,500,000       4,417,808       4,005,000  
           

 

 

 
              23,049,836  
           

 

 

 

Media/Telecommunications – 6.1%

           

iHeartCommunications, Inc. (First Lien Term Loan)(5)(8)

    L+675       —         1/30/2019       5,000,000       3,956,219       4,087,500  
           

 

 

 

Retail – 4.7%

           

Leslie’s Poolmart, Inc. (First Lien Term Loan)(6)

    L+425       1.00     8/16/2023       564,623       561,901       572,036  

Toys ‘R’ Us-Delaware, Inc. (First Lien Term Loan)(6)

    L+875       1.00     4/24/2020       2,974,709       2,428,339       2,621,463  
           

 

 

 
              3,193,499  
           

 

 

 

Service – 5.6%

           

Advantage Sales & Marketing, Inc. (Second Lien Term Loan)(6)

    L+650       1.00     7/25/2022       500,000       497,570       489,690  

Weight Watchers International, Inc. (First Lien Term Loan)(5)(7)(9)

    L+325       0.75     4/2/2020       3,958,869       2,762,942       3,301,420  
           

 

 

 
              3,791,110  
           

 

 

 

Technology – 4.4%

           

SkillSoft Corp. (Second Lien Term Loan)(6)(7)

    L+825       1.00     4/28/2022       1,500,000       816,718       1,130,160  

SkillSoft Corp. (First Lien Term Loan)(6)(7)

    L+475       1.00     4/28/2021       1,986,034       1,643,329       1,820,329  
           

 

 

 
              2,950,489  
           

 

 

 

Utility – 1.5%

           

Granite Acquisition, Inc. (Second Lien Term Loan)(6)(7)

    L+725       1.00     12/19/2022       1,000,000       946,087       965,000  

Texas Competitive Electric Holdings Company LLC (TXU) (Escrow Loan)(10)

          3,500,000       87,816       17,500  
           

 

 

 
              982,500  
           

 

 

 

Total Senior Secured Loans

              41,554,680  
           

 

 

 

Asset-Backed Securities – 3.9%

           

Financials – 3.9%

           

CIFC Funding Ltd. 2015-1A(7)(11)(12)

        1/22/2027       550,000       437,250       490,875  

Grayson Investor Corp.(7)(11)(12)(13)

        11/1/2021       800       456,000       275,668  

Highland Park CDO I Ltd. 2006 1A A2(6)(7)(11)(13)

    L+40         11/25/2051       1,654,789       1,361,664       1,572,049  

PAMCO CLO 1997-1A B(7)(11)(13)(14)(15)

          559,644       321,795       275,625  
           

 

 

 
              2,614,217  
           

 

 

 

Total Asset-Backed Securities

              2,614,217  
           

 

 

 

 

See Notes to Financial Statements.


NexPoint Capital, Inc.

Schedule of Investments (continued)

As of December 31, 2016

 

Portfolio Company(1)(2)

  Interest
Rate
    Base Rate
Floor
    Maturity
Date
    Principal
Amount
    Amortized
Cost(3)
    Fair Value  

Convertible Bonds – 1.0%

           

Healthcare – 1.0%

           

Fluidigm Corp.

    2.750       2/1/2034     $ 1,000,000     $ 569,431     $ 700,625  
           

 

 

 

Total Convertible Bonds

              700,625  
           

 

 

 

Corporate Bonds – 41.8%

           

Energy – 2.7%

           

GenOn Energy, Inc.(8)

    7.875       6/15/2017       2,500,000       1,793,750       1,793,750  
           

 

 

 

Healthcare – 33.1%

           

CHS/Community Health Systems, Inc.(7)

    6.875       2/1/2022       4,000,000       3,523,811       2,800,000  

Kindred Healthcare, Inc.(7)

    8.750       1/15/2023       1,500,000       1,477,525       1,408,125  

Ortho-Clinical Diagnostics(8)(11)

    6.625       5/15/2022       12,717,000       11,425,209       11,318,130  

Quorum Health Corp.(11)

    11.625       4/15/2023       4,000,000       3,002,425       3,370,000  

Valeant Pharmaceuticals International, Inc.(8)(7)(11)

    6.125       4/15/2025       4,500,000       3,722,965       3,397,500  
           

 

 

 
              22,293,755  
           

 

 

 

Retail – 1.4%

           

Guitar Center, Inc.(11)

    6.500       4/15/2019       1,000,000       886,466       912,500  
           

 

 

 

Technology – 3.2%

           

Diamond 1 Finance Corp. / Diamond 2 Finance Corp.(11)

    6.020       6/15/2026       2,000,000       2,052,663       2,170,446  
           

 

 

 

Telecommunication Services – 1.4%

           

Intelsat Jackson Holdings S.A.(7)

    7.250       10/15/2020       1,209,000       962,999       943,020  
           

 

 

 

Total Corporate Bonds

              28,113,471  
           

 

 

 
                      Shares              

Common Stocks – 6.7%

           

Chemicals – 0.1%

           

MPM Holdings, Inc.(7)(16)

          8,500       250,750       73,665  
           

 

 

 

Healthcare – 2.0%

           

CareDx, Inc.(16)

          501,252       1,999,995       1,353,380  
           

 

 

 

Real Estate Investment Trust (REIT) – 3.3%

           

Independence Realty Trust, Inc.(7)

          246,727       2,216,203       2,200,805  
           

 

 

 

Utility – 1.3%

           

Vistra Energy Corp.

          58,356       1,703,760       904,525  
           

 

 

 

Total Common Stocks

              4,532,375  
           

 

 

 

Rights – 0.1%

           

Utility – 0.1%

           

Vistra Energy Corp.(16)

          58,356       154,404       96,288  
           

 

 

 

Total Rights

              96,288  
           

 

 

 

Warrants – 1.0%

           

Healthcare – 1.0%

           

CareDx, Inc.(15)(16)

        6/14/2017       250,626       —         395,318  

Galena Biopharma, Inc.(15)(16)

        1/21/2021       1,500,054       —         23,851  

SCYNEXIS, Inc.(15)(16)(17)

        6/21/2021       195,000       —         259,771  
           

 

 

 
              678,940  
           

 

 

 

Total Warrants

              678,940  
           

 

 

 

Total Investments- 116.3%

          $ 78,591,669     $ 78,290,596  
         

 

 

   

 

 

 

Other Assets & Liabilities, net- (16.3%)

            $ (10,997,642
           

 

 

 

Net Assets- 100.0%

            $ 67,292,954  
           

 

 

 

 

 

See Notes to Financial Statements.


NexPoint Capital, Inc.

Schedule of Investments (continued)

As of December 31, 2016

 

 

(1)  The Company did not “control” and was not an “affiliated person” of any of its portfolio companies, each as defined in the Investment Company Act of 1940, as amended (the “1940 Act”). In general, under the 1940 Act, the Company would be presumed to “control” a portfolio company if it owned 25% or more of its voting securities or had the power to exercise control over the management or policies of such portfolio company, and would be an “affiliated person” of a portfolio company if it owned 5% or more of its voting securities. Additionally, companies under common control (e.g., companies with a common owner of greater than 25% of their respective voting securities) are affiliates under the 1940 Act.
(2)  All investments are denominated in United States Dollars.
(3)  Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on investments.
(4)  Senior secured loans in which the Company invests generally pay interest at rates which are periodically determined by reference to a base lending rate plus a spread (unless otherwise identified, all senior secured loans carry a variable rate of interest). These base lending rates are generally (i) the Prime Rate offered by one or more major United States banks, (ii) the lending rate offered by one or more European banks such as the London Interbank Offered Rate (“LIBOR”) or (iii) the coupon rate. Rate shown represents the actual rate at December 31, 2016. Senior secured loans, while exempt from registration under the Securities Act of 1933 (the “1933 Act”), contain certain restrictions on resale and cannot be sold publicly. Senior secured floating rate loans often require prepayments from excess cash flow or permit the borrower to repay at its election. The degree to which borrowers repay, whether as a contractual requirement or at their election, cannot be predicted with accuracy. As a result, the actual remaining maturity may be substantially less than the stated maturity shown.
(5)  The interest rate on these investments is subject to a base rate of 1-Month LIBOR, which at December 31, 2016 was 0.77%.The LIBOR rate used to calculate interest is the higher of the prevailing 1 month LIBOR rate in effect on the date of the monthly reset, or the LIBOR base rate floor shown.
(6)  The interest rate on these investments is subject to a base rate of 3-Month LIBOR, which at December 31, 2016 was 1.00%. The LIBOR rate used to calculate interest is the higher of the prevailing 3 month LIBOR rate in effect on the date of the quarterly reset, or the LIBOR base rate floor shown.
(7)  The investment is not a qualifying asset under Section 55 of the Investment Company Act of 1940, as amended (the “1940 Act”). A business development company may not acquire any asset other than a qualifying asset, unless at the time the acquisition is made, qualifying assets represent at least 70% of the business development company’s total assets. Non-qualifying assets represented 24.75% of the Company’s total assets as of December 31, 2016.
(8)  All or a portion of this position has not settled. Full contract rates do not take effect until settlement date.
(9)  The Company views Weight Watchers to be included in the Healthcare Industry as defined in the Company’s organizational documents. If this classification were reflected, value and percentage of the healthcare sector under Senior Secured Loans would increase to $26,351,256 and 39.16%, respectively.
(10)  The investment represents value held in escrow pending future events. No interest is being accrued.
(11)  Securities exempt from registration under Rule 144A of the 1933 Act. These securities may only be resold in transactions exempt from registration to qualified institutional buyers. As of December 31, 2016, these securities amounted to $23,782,793, or 35.34% of net assets.
(12)  The investment is considered to be the equity tranche of the issuer.
(13)  Securities of collateralized loan obligations where an affiliate of the Adviser serves as collateral manager.
(14)  The issuer is, or is in danger of being, in default of its payment obligation.
(15)  Represents Fair Value as determined by the Company’s Board of Directors (the “Board”), or its designee in good faith, pursuant to the policies and procedures approved by the Board. The Board considers fair valued securities to be securities for which market quotations are not readily available and these securities may be valued using a combination of observable and unobservable inputs. Securities with a total aggregate value of $954,565 or 1.42% of net assets were fair valued under the Company’s valuation procedures as of December 31, 2016.
(16)  Non-income producing security.
(17)  Restricted Securities. These securities are not registered and may not be sold to the public. There are legal and/or contractual restrictions on resale. The Company does not have the right to demand that such securities be registered. The values of these securities are determined by valuations provided by pricing services, brokers, dealers, market makers, or in good faith under the procedures established by the Board.

 

 

See Notes to Financial Statements.


NexPoint Capital, Inc.

Notes To Financial Statements (Unaudited)

Note 1 — Organization

NexPoint Capital, Inc. (the “Company”) is an externally managed, non-diversified, closed-end management investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). The Company follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification Topic 946 Financial Services—Investment Companies. The Company’s investment objective is to generate current income and capital appreciation primarily through investments in middle-market healthcare companies, middle-market companies in non-healthcare sectors, syndicated floating rate debt of large public and nonpublic companies and collateralized loan obligations. The Company has elected to be treated for federal income tax purposes, and intends to qualify annually thereafter, as a regulated investment company (“RIC”), under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).

The Company was formed in Delaware on September 30, 2013 and formally commenced operations on September 2, 2014 upon satisfying the minimum offering requirement by raising gross proceeds of $10.0 million in connection with a private placement with NexPoint Advisors, L.P. (the “Adviser”), our external advisor. In aggregate through September 30, 2017, the Adviser controls 2,117,895 total shares, including reinvestment of dividends, for a net amount of approximately $20.2 million.

The Company has retained the Adviser to manage certain aspects of its affairs on a day-to-day basis. Highland Capital Funds Distributor, Inc. (the “Dealer Manager”), an entity under common ownership with the Adviser, serves as the dealer manager of the Company’s continuous public offering. The shares are being offered on a “best efforts” basis, which means generally that the Dealer Manager is required to use only its best efforts to sell the shares and it has no firm commitment or obligation to purchase any of the shares. The Adviser and Dealer Manager are related parties and will receive fees and other compensation for services related to the investment and management of the Company’s assets and the continuous public offering.

Note 2 — Summary of Significant Accounting Policies

Basis of Accounting

The accompanying financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Additionally, the accompanying financial statements of the Company and related financial information have been prepared pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Certain financial information that is normally included in annual financial statements is not required for interim financial statements and has been condensed or omitted. The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ending December 31, 2017. The interim financial data as of September 30, 2017, and for the nine months ended September 30, 2017, and September 30, 2016 is unaudited. In the opinion of management, the interim financial data includes all adjustments, consisting only of normal recurring adjustments, necessary to a fair statement of the results for the interim periods.

Use of Estimates

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

Statements of Cash Flows

Information on financial transactions which have been settled through the receipt or disbursement of cash is presented in the Statements of Cash Flows. The cash amount shown in the Statements of Cash Flows is the amount included within the Company’s Statements of Assets and Liabilities and includes cash on hand at its custodian bank.


Cash and Cash Equivalents

The Company considers liquid assets deposited with a bank and certain short-term debt instruments with original maturities of three months or less to be cash equivalents. These investments represent amounts held with financial institutions that are readily accessible to pay Company expenses or purchase investments. Cash and cash equivalents are valued at cost plus accrued interest, which approximates market value. The value of cash equivalents denominated in foreign currencies is determined by converting to U.S. dollars on the date of the Statements of Assets and Liabilities. As of September 30, 2017 and December 31, 2016, the Company had cash and cash equivalents of $6,791,502 and $3,948,113, respectively. As of September 30, 2017 and December 31, 2016, $6,620,362 and $3,913,546 was held in the State Street U.S. Government Money Market Fund, and $171,140 and $34,567 was held in a custodial account with State Street Bank and Trust Company, respectively.

Securities Sold Short and Restricted Cash

The Company may sell securities short. A security sold short is a transaction in which the Company sells a security it does not own in anticipation that the market price of that security will decline. When the Company sells a security short, it must borrow the security sold short from a broker-dealer and deliver it to the buyer upon conclusion of the transaction. The Company may have to pay a fee to borrow particular securities and is often obligated to pay over any dividends or other payments received on such borrowed securities. Cash held as collateral for securities sold short is classified as restricted cash on the Statements of Assets and Liabilities. Securities held as collateral for securities sold short are shown on the Schedule of Investments for the Company, as applicable. As of September 30, 2017 and December 31, 2016, the Company did not have any securities sold short.

When securities are sold short, the Company intends to limit exposure to a possible market decline in the value of its portfolio companies through short sales of securities that the Adviser believes possess volatility characteristics similar to those being hedged. In addition, the Company may use short sales for non-hedging purposes to pursue its investment objective. Subject to the requirements of the 1940 Act and the Code, the Company will not make a short sale if, after giving effect to such sale, the market value of all securities sold short by the Company exceeds 25% of the value of its total assets.

Other Fee Income

Fee income may consist of origination/closing fees, amendment fees, administrative agent fees, transaction break-up fees and other miscellaneous fees. Origination fees, amendment fees, and other similar fees are non-recurring fee sources. Such fees are received on a transaction by transaction basis and do not constitute a regular stream of income. For the three and nine months ended September 30, 2017, the Company recognized $173 and $8,337 of fee income, respectively. For the three and nine months ended September 30, 2016, the Company did not recognize any fee income.

Fair Value of Financial Instruments

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

The Company determines the net asset value of its investment portfolio each quarter, or more frequently as needed. Securities that are publicly-traded are valued at the reported closing price on the valuation date. Securities that are not publicly-traded are valued at fair value as determined in good faith by the board of directors of the Company (the “Board”) or by the Adviser, pursuant to board-approved procedures. In connection with that determination, the Company will provide the Board with portfolio company valuations which are based on relevant inputs, including indicative dealer quotes, values of like securities, recent portfolio company financial statements and forecasts, and valuations prepared by third-party valuation services.


With respect to investments for which market quotations are not readily available, the Board and the Adviser undertake a multi-step valuation process, as described below:

 

    The valuation process begins with each portfolio company or investment being initially valued by investment professionals of the Adviser responsible for credit monitoring.

 

    Preliminary valuation conclusions are then documented and discussed with senior management of the Adviser (the “Valuation Committee”).

 

    The audit committee of the Board reviews these preliminary valuations.

 

    At least once each quarter, the valuations for approximately one quarter of the portfolio investments that have been fair valued are reviewed by an independent valuation firm such that, over the course of a year, each material portfolio investment that has been fair valued shall have been reviewed by an independent valuation firm at least once.

 

    Based on this information, the Board discusses valuations and determines the fair value of each investment in the portfolio in good faith.

As of September 30, 2017, the Company held the following investments for which a sufficient level of current, reliable market quotations were not available:

 

Instrument

   Type    Market value  

PAMCO CLO 1997-1A B

   Asset-Backed    $ 288,776  

CareDx, Inc.

   Warrant      807,762  

Galena Biopharma, Inc.

   Warrant      335  

Gemphire Therapeutics, Inc.

   Warrant      922,980  

Kadmon Holdings, Inc.

   Warrant      47,924  

SCYNEXIS, Inc.

   Warrant      231,429  

SteadyMed Ltd.

   Warrant      104,486  

As of December 31, 2016, the Company held the following investments for which a sufficient level of current, reliable market quotations were not available:

 

Instrument

   Type    Market value  

CareDx, Inc.

   Warrant    $ 395,318  

SCYNEXIS, Inc.

   Warrant      259,771  

PAMCO CLO 1997-1A B

   Asset-Backed      275,625  

Galena Biopharma, Inc.

   Warrant      23,851  

Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to the Company’s financial statements will refer to the uncertainty with respect to the possible effect of such valuations, and any change in such valuations, in the Company’s financial statements. Below is a description of factors that the Valuation Committee and the Board may consider when valuing the Company’s debt and equity investments.


Valuation of fixed income investments, such as loans and debt securities, depends upon a number of factors, including prevailing interest rates for like securities, expected volatility in future interest rates, call features, put features and other relevant terms of the debt. For investments without readily available market prices, the Company may incorporate these factors into discounted cash flow models to arrive at fair value. Other factors that the Board may consider include the borrower’s ability to adequately service its debt, the fair market value of the portfolio company in relation to the face amount of its outstanding debt and the quality of collateral securing the Company’s debt investments.

The Company’s equity investments in portfolio companies for which there is no liquid public market will be valued at fair value. The Valuation Committee and the Board, in its analysis of fair value, may consider various factors, such as multiples of earnings before interest, taxes, depreciation and amortization (“EBITDA”), cash flows, net income, revenues or, in limited instances, book value or liquidation value. All of these factors may be subject to adjustments based upon the particular circumstances of a portfolio company or the Company’s actual investment position. For example, adjustments to EBITDA may take into account compensation to previous owners or acquisition, recapitalization, restructuring or other related items.

The Valuation Committee and the Board may also look to private merger and acquisition statistics, public trading multiples discounted for illiquidity and other factors, valuations implied by third-party investments in the portfolio companies or industry practices in determining fair value. The Valuation Committee and the Board may also consider the size and scope of a portfolio company and its specific strengths and weaknesses, as well as any other factors it deems relevant in assessing the value. Generally, the value of the Company’s equity interests in public companies for which market quotations are readily available will be based upon the most recent closing public market price.

If the Company receives warrants or other equity-linked securities at nominal or no additional cost in connection with an investment in a debt security, the Company will allocate the cost basis in the investment between the debt securities and any such warrants or other equity-linked securities received at the time of origination. The Valuation Committee and the Board will subsequently value these warrants or other equity-linked securities received at fair value.

As applicable, the Company values its Level 2 assets by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which is provided by an independent third-party pricing service and screened for validity by such service. For investments for which the third-party pricing service is unable to obtain quoted prices, the Company obtains bid and ask prices directly from dealers who make a market in such investments.

To the extent that the Company holds investments for which no active secondary market exists and, therefore, no bid and ask prices can be readily obtained, the Valuation Committee utilizes an independent third-party valuation service to value such investments.

The Company periodically benchmarks the bid and ask prices received from the third-party pricing service and/or dealers, as applicable, and valuations received from the third-party valuation service against the actual prices at which it purchases and sells its investments. The Company believes that these prices are reliable indicators of fair value. The Company’s Valuation Committee and the Board review and approve the valuation determinations made with respect to these investments in a manner consistent with the Company’s valuation process.

As of September 30, 2017, the Company’s investments consisted of senior secured loans, bonds, asset-backed securities, common stocks, preferred stock, a total return swap (“TRS”) and rights and warrants, which may be purchased for a fraction of the price of the underlying securities. The fair value of the Company’s loans, bonds and asset-backed securities are generally based on quotes received from brokers or independent pricing services. Loans, bonds and asset-backed securities with quotes that are based on actual trades with a sufficient level of activity on or near the measurement date are classified as Level 2 assets. Loans, bonds and asset-backed securities that are priced using quotes derived from implied values, indicative bids or a limited number of actual trades are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable.


The fair value of the Company’s common stocks and options that are not actively traded on national exchanges are generally priced using quotes derived from implied values, indicative bids, or a limited amount of actual trades and are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable. Exchange traded options are valued based on the last trade price on the primary exchange on which they trade. If an option does not trade, the mid-price is utilized to value the option.

The Company values the TRS in accordance with the agreement (the “TRS Agreement”) with BNP Paribas (“BNP Paribas”) that establishes the TRS. Pursuant to the TRS Agreement, the value of the TRS is based on the increase or decrease in the value of the loans underlying the TRS, together with accrued interest income, interest expense and certain other expenses incurred under the TRS. The loans underlying the TRS are valued based on indicative bid prices provided by an independent third-party pricing service. Bid prices reflect the highest price that market participants may be willing to pay. These valuations are sent to the Company for review and testing. The Valuation Committee and the Board review and approve the value of the TRS, as well as the value of the loans underlying the TRS, on a quarterly basis. To the extent the Valuation Committee or the Board have any questions or concerns regarding the valuation of the loans underlying the TRS, such valuation is discussed or challenged pursuant to the terms of the TRS Agreement. For additional information on the TRS, see Note 7.

At the end of each calendar quarter, the Company evaluates the Level 2 and 3 investments for changes in liquidity, including: whether a broker is willing to execute at the quoted price, the depth and consistency of prices from third party services, and the existence of contemporaneous, observable trades in the market. Additionally, management evaluates the Level 1 and 2 assets and liabilities on a quarterly basis for changes in listings or delistings on national exchanges.

Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market price, the fair value of the Company’s investments may fluctuate from period to period. Additionally, the fair value of investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values the Company may ultimately realize. Further, such investments may be subject to legal and other restrictions on resale or otherwise less liquid than publicly traded securities.

The inputs or methodology used for valuing investments are not necessarily an indication of the risk associated with investing in those investments. Transfers in and out of the levels are recognized at the fair value at the end of the period. The following are summaries of the Company’s investments categorized within the fair value hierarchy as of September 30, 2017 and December 31, 2016:

 

     September 30, 2017  

Investments

   Level 1      Level 2      Level 3      Total  

Assets

 

Senior Secured Loans

 

Healthcare

   $ —        $ 11,335,404      $ 4,393,125      $ 15,728,529  

Retail

     —          2,984,562        —          2,984,562  

Utility

     —          8,750        —          8,750  

Asset-Backed Securities

     —          1,672,303        288,776        1,961,079  

Closed-End Mutual Funds

     —          15,305        —          15,305  

Corporate Bonds

     —          37,556,876        —          37,556,876  

Common Stocks

     7,210,081        —          —          7,210,081  

Preferred Stocks

     —          2,330,417        —          2,330,417  

Rights

     —          65,651        —          65,651  

Warrants

     —          2,114,916        —          2,114,916  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

   $ 7,210,081      $ 58,084,184      $ 4,681,901      $ 69,976,166  
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Derivatives

           

Total Return Swap Contracts

   $ —        $ —        $ (633,427    $ (633,427
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Liabilities

   $ —        $ —        $ (633,427    $ (633,427
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Investments Net of Swap Contracts

   $ 7,210,081      $ 58,084,184      $ 4,048,474      $ 69,342,739  
  

 

 

    

 

 

    

 

 

    

 

 

 


     December 31, 2016  

Investments

   Level 1      Level 2      Level 3      Total  

Assets

           

Senior Secured Loans

           

Energy

   $ —        $ 3,499,746      $ —        $ 3,499,746  

Healthcare

     —          19,044,836        4,005,000        23,049,836  

Media/Telecommunications

     —          4,087,500        —          4,087,500  

Retail

     —          3,193,499        —          3,193,499  

Service

     —          3,791,110        —          3,791,110  

Technology

        2,950,489        —          2,950,489  

Utility

     —          982,500        —          982,500  

Asset–Backed Securities

     —          2,338,592        275,625        2,614,217  

Convertible Bonds

     —          700,625        —          700,625  

Corporate Bonds

     —          28,113,471        —          28,113,471  

Common Stock

           

Chemicals

     —          —          73,665        73,665  

Healthcare

     1,353,380        —          —          1,353,380  

Real Estate Investment Trust (REIT)

     2,200,805        —          —          2,200,805  

Utility

     —          904,525        —          904,525  

Rights

     —          96,288        —          96,288  

Warrants

     —          655,089        23,851        678,940  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

   $ 3,554,185      $ 70,358,270      $ 4,378,141      $ 78,290,596  
  

 

 

    

 

 

    

 

 

    

 

 

 

The table below sets forth a summary of changes in the Company’s Level 3 investments (measured at fair value using significant unobservable inputs) for the nine months ended September 30, 2017.

 

Investments:

  Balance
as of
December

31, 2016
    Transfers
into
Level 3
    Transfer
out of
Level 3
    Net
amortization
(accretion)

of premium/
(discount)
    Net
realized
gains/
(losses)
    Net
change in
unrealized
gains/
(losses)
    Purchases     (Sales
and
redemptions)
    Balance
as of
September

30, 2017
    Change in
unrealized
gain/(loss)
on Level 3
securities

still held
at period
end
 

Assets

                   

Senior Secured Loans Healthcare

  $ 4,005,000     $ —       $ —       $ 6,549     $ —       $ 381,576     $ —       $ —       $ 4,393,125     $ 381,576  

Asset-Backed Securities Financials

    275,625       —         —         —         —         13,151       —         —         288,776       13,151  

Common Stocks Chemicals

    73,665       —         (136,000     —         —         62,335       —         —         —         —    

Warrants Healthcare

    23,851       —         (335     —         —         (23,516     —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 4,378,141     $ —       $ (136,335   $ 6,549     $ —       $ 433,546     $ —       $ —       $ 4,681,901     $ 394,727  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

                   

Total Return

Swaps(1)

  $ —       $ —       $ —       $ —       $ —       $ (633,427   $ —       $ —       $ (633,427   $ (633,427
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) During the nine months ended September 30, 2017, the Company recognized a net realized loss on the TRS amounting to $524,777. The Company received $194,394 in cash payments from the TRS during the period, with $719,171 being payable to BNP Paribas as of September 30, 2017.


The table below sets forth a summary of changes in the Company’s Level 3 investments (measured at fair value using significant unobservable inputs) for the nine months ended September 30, 2016.

 

Investments:

  Balance
as of
December

31, 2015
    Transfers
into
Level 3
    Transfer
out of
Level 3
    Net
amortization
(accretion)

of premium/
(discount)
    Net
realized
gains/
(losses)
    Net
change in
unrealized
gains/
(losses)
    Purchases     (Sales
and
redemptions)
    Balance
as of
September

30, 2016
    Change in
unrealized
gain/(loss)
on Level 3
securities

still held
at period
end
 

Senior Secured Loans Healthcare

  $ 4,438,125     $ 5,403,338     $ —       $ 5,758     $ —       $ (78,883   $ —       $ —       $ 9,768,338     $ (78,883

Asset-Backed Securities Financials

    —         270,028       —         —         —         —         —         —         270,028       —    

Common Stocks Chemicals

    87,125       —         —         —         —         4,607       —         —         91,732       4,607  

Warrants Healthcare

    —         —         —         —         —         187,057       —         —         187,057       187,057  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 4,525,250     $ 5,673,366     $ —       $ 5,758     $ —       $ 112,781     $ —       $ —       $ 10,317,155     $ 112,781  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investments designated as Level 3 may include investments valued using quotes or indications furnished by brokers which are based on models or estimates and may not be executable prices. In light of the developing market conditions, the Adviser continues to search for observable data points and evaluate broker quotes and indications received for investments. Determination of fair values is uncertain because it involves subjective judgments and estimates that are unobservable. Transfers from Level 3 to Level 2 and from Level 2 to Level 1 are due to an increase in market activity (e.g. frequency of trades), which resulted in an increase of available market inputs to determine price. For the nine months ended September 30, 2017, $335 was transferred from Level 3 to Level 2, $2,149,358 was transferred from Level 2 to Level 1, and $136,000 was transferred from Level 3 to Level 1. The Company uses end of period market value in the determination of the amount associated with any transfers between levels.

The following are summaries of significant unobservable inputs used in the fair valuations of investments categorized within Level 3 of the fair value hierarchy as of September 30, 2017 and December 31, 2016:

 

Investment

  Fair value at
September
30, 2017
    Valuation
technique
    Unobservable
inputs
  Range of
input value(s)
(weighted
average)

Senior Secured Loans

  $ 4,393,125       Third Party Pricing Vendor     N/A   N/A

Asset-Backed Securities

    288,776       Discounted Cash Flow     Discounted Rate   20.85%
 

 

 

       

Total

  $ 4,681,901        
 

 

 

       

Total Return Swaps

    (633,427     Third Party Pricing Vendor     N/A   N/A


Investment

  Fair value at
December 31,
2016
    Valuation
technique
  Unobservable
inputs
  Range of
input value(s)
(weighted
average)

Senior Secured Loans

  $ 4,005,000     Third Party Pricing Vendor   N/A   N/A

Common Stocks

    73,665     Third Party Pricing Vendor   N/A   N/A

Warrants

    23,851     Black-Scholes Option Pricing   Volatility   90%

Asset-Backed Securities

    275,625     Discounted Cash Flow   Discount Rate   20.85%
 

 

 

       

Total

  $ 4,378,141        
 

 

 

       

The Company’s determinations of fair value may differ materially from the values that would have been used if a ready market for Company’s portfolio investments existed. The determination of fair value (and thus the amount of unrealized losses the Company may incur in any year) is, to a degree, subjective, because it is based on unobservable inputs and certain assumptions.

Derivative Transactions

The Company is subject to equity price risk, interest rate risk and foreign currency exchange rate risk in the normal course of pursuing its investment objective. The Company may invest without limitation in warrants and may also use derivatives, primarily swaps (including equity, variance and volatility swaps), options and futures contracts on securities, interest rates, commodities and/or currencies, as substitutes for direct investments the Company can make. The Company may also use derivatives such as swaps, options (including options on futures), futures, and foreign currency transactions (e.g., foreign currency swaps, futures and forwards) to any extent deemed by the Adviser to be in the best interest of the Company, and to the extent permitted by the 1940 Act, to hedge various investments for risk management and speculative purposes. For additional information on the TRS, please see Note 7.

Options

The Company purchases options, subject to certain limitations. The Company may invest in options contracts to manage its exposure to the stock and bond markets and fluctuations in foreign currency values. Writing puts and buying calls tend to increase the Company’s exposure to the underlying instrument while buying puts and writing calls tend to decrease the Company’s exposure to the underlying instrument, or economically hedge other Company investments. The Company’s risks in using these contracts include changes in the value of the underlying instruments, nonperformance of the counterparties under the contracts’ terms and changes in the liquidity of the secondary market for the contracts. Options are valued at the last sale price, or if no sales occurred on that day, at the last quoted bid price. As of and during the nine months ended September 30, 2017, the Company did not hold options.

The average quarterly volume of derivative activity for the nine months ended September 30, 2016, is as follows:

 

     Average
Units/
Contracts
     Total Unrealized
Appreciation/
(Depreciation)
     Total Realized
Gain (loss)
     Ending Notional
Amount
 

Purchased Options Contracts

     1,317      $ —        $ (211,941      —    

Investment Transactions

Investment transactions are accounted for on trade date. Realized gains/(losses) on investments sold are recorded on the basis of specific identification method for both financial statement and U.S. federal income tax purposes. Payable for investments purchased and receivable for investments sold on the Statements of Assets and Liabilities, if any, represents the cost of purchases and proceeds from sales of investment securities, respectively, for trades that have been executed but not yet settled. “Due from Broker,” if any, represents certain receivables from counterparties related to principal paydowns, among other things.


Income Recognition

Corporate actions (including cash dividends from common stock and equity tranches of asset-backed securities) are recorded on the ex-dividend date, net of applicable withholding taxes, except for certain foreign corporate actions, which are recorded as soon after the ex-dividend date as such information becomes available. Interest income is recorded on the accrual basis. The Company does not accrue as a receivable interest or dividends on loans, asset-backed securities and other securities if there is a reason to doubt the Company’s ability to collect such income. 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. Loan origination fees, original issue discount and market discount are capitalized and such amounts are amortized as interest income over the respective term of the loan or security. Upon the prepayment of a loan or security, any unamortized loan origination fees and original issue discount are recorded as interest income.

Accretion of discounts and amortization of premiums on taxable bonds, loans and asset-backed securities are computed to the call or maturity date, whichever is shorter, using the effective yield method. Withholding taxes on foreign dividends have been provided for in accordance with the Company’s understanding of the applicable country’s tax rules and rates.

Organization and Offering Costs

Organization costs are paid by the Adviser and include the cost of incorporating, such as the cost of legal services and other fees pertaining to our organization. Offering costs include legal fees, promotional costs and other costs pertaining to the public offering of our shares of common stock and are also paid by the Adviser. As we raise proceeds, these organization and offering costs are expensed and become payable to the Adviser. Organization and offering costs are limited to 1% of total gross proceeds raised and are not due and payable to the Adviser to the extent they exceed that amount. Please refer to Note 4 for additional information on Organization and Offering Costs.

Paid-in Capital

The proceeds from the issuance of common stock as presented on the Company’s Statements of Changes in Net Assets is presented net of selling commissions and fees for the nine months ended September 30, 2017 and September 30, 2016. Selling commissions and fees of $1,453,224 and $2,142,925 were paid for the nine months ended September 30, 2017 and September 30, 2016, respectively.

Earnings Per Share

In accordance with the provisions of ASC Topic 260 — Earnings per Share (“ASC 260”), basic earnings per share is computed by dividing earnings available to common stockholders 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.


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

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

Basic and diluted

   2017      2016      2017      2016  

Net increase (decrease) in net assets from operations

   $ (201,833    $ 2,917,699      $ 4,671,331      $ 8,112,070  

Weighted average common shares outstanding

     8,966,250        5,507,237        8,287,409        4,250,687  

Earnings (loss) per common share-basic and diluted

   $ (0.02    $ 0.53      $ 0.56      $ 1.91  


Distributions

Distributions to the Company’s stockholders will be recorded as of the record date. Subject to the discretion of the Board and applicable legal restrictions, the Company intends to authorize and declare ordinary cash distributions on a weekly basis and pay such distributions on a monthly basis. Net realized capital gains, if any, will be distributed or deemed distributed at least every 12-month period.

Recent Accounting Pronouncements

The Company generally intends to take advantage of the extended transition period available to emerging growth companies to comply with the new or revised accounting standards below until those standards are applicable to private companies.

In January 2016, the FASB issued Accounting Standards Update 2016-01, Financial Instruments (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities. The amendments in this update makes improvements to the requirements for accounting for equity investments and simplifying the impairment assessment of equity investments. For public entities this update will be effective for fiscal years beginning after December 15, 2017. For all other entities, this update will be effective for fiscal years beginning after December 31, 2018, and for interim periods within fiscal years beginning after December 15, 2019. The Company is currently evaluating the impact of this new guidance on its financial statement presentation and disclosures.

In March 2016, the FASB issued Accounting Standards Update 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. The amendments in this update clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. For public entities this update will be effective for interim periods and fiscal years beginning after December 15, 2016. For all other entities, this update will be effective for fiscal years beginning after December 31, 2017, and for interim periods within fiscal years beginning after December 15, 2018. The Company is currently evaluating the impact of this new guidance on its financial statement presentation and disclosures.

In August 2016, the FASB issued Accounting Standards Update 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Receipts and Cash Payments. The amendments in this update address eight specific issues, where there has been diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230. For public entities this update will be effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. For all other entities, this update is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The Company is currently evaluating the impact of this new guidance on its financial statement presentation and disclosures.

In October 2016, the U.S. Securities and Exchange Commission adopted new rules and amended existing rules (together, “final rules”) intended to modernize the reporting and disclosure of information by registered investment companies. In part, the final rules amend Regulation S-X and require standardized, enhanced disclosure about derivatives in investment company financial statements, as well as other amendments. The compliance date for the amendments to Regulation S-X is August 1, 2017, and the Company has implemented the applicable requirements into this report.

In November 2016, the FASB issued Accounting Standards Update 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The amendments in this update require the statement of cash flows explain the change during the period in the total of cash, cash equivalents. Amounts generally described as restricted cash or restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. For public entities this update will be effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. For all other entities, this update is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. In addition, Accounting Standards Update 2016-18 must be adopted at the same time as Accounting Standards Update 2016-15. The Company is currently evaluating the impact of this new guidance on its financial statement presentation and disclosures.

In December 2016, the FASB issued Accounting Standards Update 2016-19, Technical Corrections and Improvements. The amendments in this update include an amendment to FASB ASC Topic 820, Fair Value Measurement and Disclosures to clarify the difference between a valuation approach and a valuation technique. The amendment also requires an entity to disclose when there has been a change in either or both a valuation approach and/or a valuation technique. For public entities, this update will be effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. For all other entities, this update is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The Company is currently evaluating the impact of this new guidance on its financial statement presentation and disclosures.


In March 2017, the FASB issued Accounting Standards Update 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20). The amendments in this update shorten the amortization period for certain callable debt securities held at premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. For public entities this update will be effective for fiscal years beginning after December 15, 2018, and for interim periods within those fiscal years. For all other entities, this update is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company is currently evaluating the impact of this new guidance on its financial statement presentation and disclosures.

Note 3 — Investment Portfolio

The following table shows the composition of the Company’s invested assets by industry classification at fair value at September 30, 2017:

 

     Fair value      Percentage  

Assets

     

Healthcare

   $ 51,141,186        73.1

Real Estate Investment Trusts (REITs)

     5,312,281        7.6

Financials

     3,911,384        5.6

Retail

     2,984,562        4.3

Telecommunication Services

     2,282,175        3.2

Utility

     2,223,759        3.2

Media/Telecommunications

     1,331,231        1.9

Energy

     653,588        0.9

Chemicals

     136,000        0.2
  

 

 

    

 

 

 

Total Assets

   $ 69,976,166        100.0
  

 

 

    

 

 

 


The following table shows the composition of the Company’s invested assets by industry classification at fair value at December 31, 2016:

 

     Fair value      Percentage  

Assets

     

Healthcare

   $ 48,076,536        61.5

Energy

     5,293,496        6.8

Technology

     5,120,935        6.5

Retail

     4,105,999        5.2

Media/Telecommunications

     4,087,500        5.2

Service

     3,791,110        4.8

Financials

     2,614,217        3.3

Real Estate Investment Trusts (REIT)

     2,200,805        2.8

Utility

     1,983,313        2.6

Telecommunication Services

     943,020        1.2

Chemicals

     73,665        0.1
  

 

 

    

 

 

 

Total assets

   $ 78,290,596        100.0
  

 

 

    

 

 

 

The following table summarizes the amortized cost and the fair value of the Company’s invested assets by class of financial asset as of September 30, 2017:

 

     Amortized Cost      Fair value      Percentage of
Portfolio

(at Fair Value)
 

Assets

 

  

Senior Secured Loans - First Lien

   $ 14,510,709      $ 14,319,966        20.5

Senior Secured Loans - Second Lien

     4,424,356        4,393,125        6.3

Senior Secured Loans - Escrow Loan

     87,816        8,750        0.0

Asset-Backed Securities

     1,968,094        1,961,079        2.8

Closed-End Mutual Funds

     14,154        15,305        0.0

Corporate Bonds

     38,068,077        37,556,876        53.7

Common Stocks

     6,960,276        7,210,081        10.3

Preferred Stocks

     3,215,965        2,330,417        3.3

Warrants

     —          2,114,916        3.0

Rights

     154,404        65,651        0.1
  

 

 

    

 

 

    

 

 

 

Total Assets

   $ 69,403,851      $ 69,976,166        100.0
  

 

 

    

 

 

    

 

 

 


The following table summarizes the amortized cost and the fair value of the Company’s invested assets by class of financial asset as of December 31, 2016:

 

     Amortized
cost
     Fair value      Percentage of
portfolio

(at fair value)
 

Assets

        

Senior Secured Loans - First Lien

   $ 27,394,540      $ 28,864,108        36.9

Senior Secured Loans - Second Lien

     12,790,248        12,673,072        16.2

Senior Secured Loans - Escrow Loan

     87,816        17,500        0.0

Asset-Backed Securities

     2,576,709        2,614,217        3.3

Convertible Bonds

     569,431        700,625        0.9

Corporate Bonds

     28,847,813        28,113,471        35.9

Common Stocks

     6,170,708        4,532,375        5.8

Rights

     154,404        96,288        0.1

Warrants

     —          678,940        0.9
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 78,591,669      $ 78,290,596        100.0
  

 

 

    

 

 

    

 

 

 

The following table summarizes the amortized cost and the fair value of the Company’s invested assets as of September 30, 2017 to include, on a look-through basis, the investments underlying the TRS, as disclosed in Note 7. The investments underlying the TRS had a notional amount and market value of $38,185,770 and $37,463,810, respectively, as of September 30, 2017. The TRS was not in place as of December 31, 2016.

     Amortized
cost
     Fair value      Percentage of
portfolio (at
fair value)
 

Assets

        

Senior Secured Loans - First Lien

   $ 43,179,442      $ 42,494,389        39.5

Senior Secured Loans - Second Lien

     13,941,393        13,682,512        12.7

Senior Secured Loans - Escrow Loan

     87,816        8,750        0.0

Asset-Backed Securities

     1,968,094        1,961,079        1.8

Closed-End Mutual Funds

     14,154        15,305        0.0

Corporate Bonds

     38,068,077        37,556,876        35.0

Common Stocks

     6,960,276        7,210,081        6.7

Preferred Stocks

     3,215,965        2,330,417        2.2

Warrants

     —          2,114,916        2.0

Rights

     154,404        65,651        0.1
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 107,589,621      $ 107,439,976        100.0
  

 

 

    

 

 

    

 

 

 

The following table shows the composition of the Company’s invested assets by geographic classification at September 30, 2017:

 

Geography

   Fair value      Percentage  

Assets

 

Cayman Islands(1)

   $ 1,961,079        2.8

Luxembourg(1)

     2,282,175        3.3

United States

     65,732,912        93.9
  

 

 

    

 

 

 

Total Assets

   $ 69,976,166        100.0
  

 

 

    

 

 

 

 

(1) Investment denominated in USD


The following table shows the composition of the Company’s invested assets by geographic classification at December 31, 2016:

 

Geography

   Fair value      Percentage  

Assets

     

Cayman Islands(1)

   $ 2,123,342        2.7

Luxembourg(1)

     2,950,489        3.8

United States

     73,216,765        93.5
  

 

 

    

 

 

 

Total assets

   $ 78,290,596        100.0
  

 

 

    

 

 

 

 

(1) Investment denominated in USD

Note 4 — Related Party Transactions and Arrangements

Investment Advisory Fee

Payments for investment advisory services under the Company’s investment advisory agreement (the “Investment Advisory Agreement”) and administrative services agreement (the “Administration Agreement”) are equal to (a) a base management fee calculated at an annual rate of 2.0% of the average value of the Company’s gross assets at the end of the two most recently completed calendar quarters and (b) an incentive fee based on the Company’s performance. Effective June 5, 2017, the Investment Advisory Agreement and the Administration Agreement were amended to exclude cash and cash equivalents from the calculation of gross assets for the purpose of calculating advisory and administration fees.

For the three and nine months ended September 30, 2017, the Company incurred investment advisory fees payable to the Adviser of $305,288 and $1,106,346, respectively, which were voluntarily waived. For the three and nine months ended September 30, 2016, the Company incurred investment advisory fees payable to the Adviser of $363,595 and $797,215, respectively, which were voluntarily waived. Amounts waived for management fees or administrative services expenses pertaining to periods prior to June 10, 2016 are not recoupable, but amounts waived for management fees or administrative services expenses pertaining to periods from and after June 10, 2016 are subject to recoupment by the Adviser within three years from the date that such fees were otherwise payable, provided that the recoupment will be limited to the amount of such voluntarily waived fees from and after June 10, 2016 and will not cause the sum of the Company’s advisory fees, administration fees, Other Expenses (as defined under “Expense Limits and Reimbursements” below), and any recoupment to exceed the annual rate of 3.40% of average gross assets.

Incentive Fee

The incentive fee consists of two parts. The first part, which is referred to as the subordinated incentive fee on income, is calculated and payable quarterly in arrears, and equals 20.0% of “pre-incentive fee net investment income” for the immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on the Company’s net assets, as defined in the Investment Advisory Agreement, equal to 1.875% per quarter. As a result, the Adviser will not earn this incentive fee for any quarter until the Company’s pre-incentive fee net investment income for such quarter exceeds the hurdle rate of 1.875%. Once the Company’s pre-incentive fee net investment income in any quarter exceeds the hurdle rate, the Adviser will be entitled to a “catch-up” fee equal to the amount of the pre-incentive fee net investment income in excess of the hurdle rate, until the Company’s pre-incentive fee net investment income for such quarter equals 2.34375% of the Company’s net assets at the end of such quarter. This “catch-up” feature allows the Adviser to recoup the fees foregone as a result of the existence of the hurdle rate in that quarter. Thereafter, the Adviser will receive 20.0% of the Company’s pre-incentive fee net investment income from the quarter.

The second part of the incentive fee, which is referred to as the incentive fee on capital gains, is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement). This fee equals 20.0% of the Company’s incentive fee capital gains, which will equal the Company’s realized capital gains on a cumulative basis from formation, calculated as of the end of the applicable period, computed net of all realized capital losses (proceeds less amortized cost) and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gains incentive fees. The Company will accrue for the capital gains incentive fee, which, if earned, will be paid annually. The Company will accrue for the capital gains incentive fee based on net realized and unrealized gains; however, under the terms of the Investment Advisory Agreement, the fee payable to the Adviser will be based on realized gains and no such fee will be payable with respect to unrealized gains unless and until such gains are actually realized.


For the three and nine months ended September 30, 2017, the Company recognized reductions of $(315,928) and $(111,488) to its incentive fees on capital gains, respectively. For the three and nine months ended September 30, 2016, the Company accrued $313,850 and $313,850 of incentive fees on capital gains, respectively. Since inception, the Company has accrued $64,079 of incentive fees on capital gains in aggregate, all of which was voluntarily waived.

Administration Fee

Pursuant to the Administration Agreement with the Adviser, the Company also reimburses the Adviser for expenses necessary for its performance of services related to the Company’s administration and operations. The amount of the reimbursement will be the lesser of (1) the Company’s allocable portion of overhead and other expenses incurred by the Adviser in performing its obligations under the Administration Agreement and (2) 0.40% of the Company’s average gross assets, (excluding cash and cash equivalents). The Adviser is required to allocate the cost of such services to the Company based on objective factors such as assets, revenues, time allocations and/or other reasonable metrics. The Board assesses the reasonableness of such reimbursements based on the breadth, depth and quality of such services as compared to the estimated cost to the Company of obtaining similar services from third-party service providers known to be available. In addition, the Board will consider whether any single third-party service provider would be capable of providing all such services at comparable cost and quality. Finally, the Board will compare the total amount paid to the Adviser for such services as a percentage of the Company’s net assets to the same ratio as reported by other comparable BDCs.

For the three and nine months ended September 30, 2017, the Company incurred administration fees payable to the Adviser of $69,308 and $229,520, respectively, which were voluntarily waived. For the three and nine months ended September 30, 2016, the Company incurred administration fees payable to the Adviser of $72,719 and $159,441, respectively, which were voluntarily waived. Amounts waived for management fees or administrative services expenses pertaining to periods prior to June 10, 2016 are not recoupable, but amounts waived for management fees or administrative services, expenses pertaining to periods from and after June 10, 2016 are subject to recoupment by the Adviser within three years from the date that such fees were otherwise payable, provided that the recoupment will be limited to the amount of such voluntarily waived fees from and after June 10, 2016 and will not cause the sum of the Company’s advisory fees, administration fees, Other Expenses, and any recoupment to exceed the annual rate of 3.40% of average gross assets.

Investment Advisory and Administration Fees Table

Amounts waived and subject to recoupment pertaining to advisory and administrator fees are shown below.

 

Period ended

   Advisory fees waived and
subject to recoupment(1)
     Administration fees waived
and subject to  recoupment(1)
     Recoupment eligibility
expiration
 

September 30, 2017

   $ 305,288      $ 69,308        September 30, 2020  

June 30, 2017

     389,733        77,947        June 30, 2020  

March 31, 2017

     390,969        78,194        March 31, 2020  

December 31, 2016

     366,861        73,372        December 31, 2019  

September 30, 2016

     343,320        68,664        September 30, 2019  

June 30, 2016

     74,421        14,884        June 30, 2019  
  

 

 

    

 

 

    

Total

   $ 1,870,592      $ 382,369     

 

(1) The Advisor has permanently waived the recoupment of any advisory fees or administration fees calculated on the portion of gross assets attributable to the receivable from Adviser balance on the Statements of Assets and Liabilities. The amounts shown have been reduced by this waiver.


In addition, cumulatively since inception through to June 10, 2016, the Company has voluntarily waived $930,143 and $186,042 of advisory fees and administration fees, respectively, all of which are not recoupable.

Organization and Offering Costs

Organization costs include the cost of incorporating, such as the cost of legal services and other fees pertaining to our organization and are paid by the Adviser, are expensed as we raise proceeds and become payable to the Adviser. For the three and nine months ended September 30, 2017 and for the three and nine months ended September 30, 2016, the Adviser did not incur or pay organization costs on our behalf.

Offering costs include legal fees, promotional costs and other costs pertaining to the public offering of our shares of common stock, and are capitalized and amortized to expense over one year. For the three and nine months ended September 30, 2017, the Adviser incurred offering costs of $167,797 and $898,423, respectively, on our behalf. For the three and nine months ended September 30, 2016, the Adviser incurred offering costs of $275,719 and $732,086, respectively, on our behalf. For the three and nine months ended September 30, 2017, the Company capitalized $41,632 and $213,880 of offering costs, respectively. For the three and nine months ended September 30, 2016, the Company capitalized $117,192 and $317,141 of offering costs, respectively. Of the capitalized offering costs, $91,937 and $308,713 were amortized to expense during the three and nine months ended September 30, 2017, respectively. Of the capitalized offering costs, $64,887 and $104,135 were amortized to expense during the three and nine months ended September 30, 2016, respectively. As of September 30, 2017 and September 30, 2016, $133,722 and $213,006 remained on the Statements of Assets and Liabilities, respectively.

Organization costs and offering costs are limited to 1% of total gross proceeds raised in this offering and are not due and payable to the Adviser to the extent they exceed that amount. Currently, the cumulative aggregate amount of $5,032,664 of organization and offering costs exceeds 1% of total proceeds raised. To the extent the Company is unable to raise sufficient capital such that the expenses paid by the Adviser on behalf of the Company are more than 1% of total proceeds at the end of the Offering, the Adviser will forfeit the right to reimbursement of the remaining $4,139,919 of these costs.

Fees Paid to Officers and Directors

Each director who is not an “interested person” of the Company as defined in the 1940 Act (the “Independent Directors”) receives an annual retainer of $150,000 payable in quarterly installments and allocated among each portfolio in the Highland Fund Complex based on relative net assets. The “Highland Fund Complex” consists of all of the registered investment companies advised by the Adviser and any affiliates as of the period covered by this report. The Company pays no compensation to any of its officers, all of whom are employees of an affiliate of the Adviser. Although the Company believes that Mr. Powell is technically no longer an “interested person” of the Company, in light of his previous employment with affiliates of the Adviser, as well as the possibility that he may provide consulting services to affiliates of the Adviser, it is possible that the SEC might in the future determine Mr. Powell to be an “interested person” of the Company. Therefore, the Company intends to treat Mr. Powell as an “interested person” of the Company for all purposes other than compensation and the code of ethics (Mr. Powell will be compensated at the same rate as the Independent Directors) from December 16, 2015 until December 4, 2017 (the second anniversary of his resignation from an affiliate of the Adviser).

For the three and nine months ended September 30, 2017, the Company recorded an expense relating to director fees of $4,526 and $11,129, respectively. For the three and nine months ended September 30, 2016, the Company recorded an expense relating to director fees of $1,442 and $5,903, respectively, which represents the allocation of the director fees to the Company. As of September 30, 2017, there was no expense payable relating to director fees.


Expense Limits and Reimbursements

Pursuant to an expense limitation agreement, the Adviser is contractually obligated to waive fees and, if necessary, pay or reimburse certain other expenses to limit the ordinary “Other Expenses” to 1.0% of the quarter-end value of the Company’s gross assets through the one year anniversary of the effective date of the registration statement (the “Expense Limitation Agreement”). Under the Expense Limitation Agreement, “Other Expenses” are all expenses with the exception of advisor and administration fees, organization and offering costs and the following: (i) interest, taxes, dividends tied to short sales, brokerage commissions, and other expenditures which are capitalized in accordance with U.S. GAAP; (ii) expenses incurred indirectly as a result of investments in other investment companies and pooled investment vehicles; (iii) other expenses attributable to, and incurred as a result of, our investments; (iv) expenses payable to the Adviser, as administrator, for providing significant managerial assistance to our portfolio companies; and (v) other extraordinary expenses (including litigation expenses) not incurred in the ordinary course of our business. The obligation will automatically renew for one-year terms unless it is terminated by the Company or the Adviser upon written notice within 120 days of the end of the current term or upon termination of the Investment Advisory Agreement. The Expense Limitation Agreement will continue through at least April 30, 2018.

Any expenses waived or reimbursed by the Adviser pursuant to the Expense Limitation Agreement are subject to possible recoupment by the Adviser within three years from the date of the waiver or reimbursement. The recoupment by the Adviser will be limited to the amount of previously waived or reimbursed expenses and cannot cause the Company’s expenses to exceed any expense limitation in place at the time of recoupment or waiver.

Reimbursable Expenses Table

The cumulative total of fees waived by the Adviser under the Expense Limitation Agreement, which are recoupable as of September 30, 2017 is $2,332,396. This balance, and the balances in the tables below, only include amounts pertaining to the Expense Limitation Agreement, and do not include waived advisory and administration fees subject to recoupment discussed earlier in Note 4. The following table reflects the fee waivers and expense reimbursements due from the Adviser as of September 30, 2017, June 30, 2017 and March 31, 2017, which may become subject to recoupment by the Adviser.

 

Period ended

   Yearly cumulative
other expense
     Yearly expense
limitation
     Yearly cumulative
expense
reimbursement
     Quarterly
recoupable
amount
     Recoupment eligibility
expiration
 

September 30, 2017

   $ 983,110      $ 531,679      $ 451,431      $ 252,935        September 30, 2020  

June 30, 2017

     631,906        433,428        198,478        50,913        June 30, 2020  

March 31, 2017

     329,791        182,226        147,565        147,565        March 31, 2020  

The following table reflects the fee waivers and expense reimbursements due from the Adviser as of December 31, 2016, September 30, 2016, June 30, 2016 and March 31, 2016, which may become subject to recoupment by the Adviser.

 

Period ended

   Yearly cumulative
other expense
     Yearly expense
limitation
     Yearly cumulative
expense
reimbursement
     Quarterly
recoupable
amount
     Recoupment eligibility
expiration
 

December 31, 2016

   $ 1,263,735      $ 835,904      $ 427,831      $ 147,943        December 31, 2019  

September 30, 2016

     803,909        524,021        279,888        32,663        September 30, 2019  

June 30, 2016

     567,248        320,023        247,225        90,124        June 30, 2019  

March 31, 2016

     259,420        102,319        157,101        157,101        March 31, 2019  

The following table reflects the fee waivers and expense reimbursements due from the Adviser as of December 31, 2015, September 30, 2015, June 30, 2015 and March 31, 2015, which may become subject to recoupment by the Adviser.


Period ended

   Yearly cumulative
other expense
     Yearly expense
limitation
     Yearly cumulative
expense
reimbursement
     Quarterly
recoupable
amount
     Recoupment eligibility
expiration
 

December 31, 2015

   $ 1,440,686      $ 309,265      $ 1,131,421      $ 23,484        December 31, 2018  

September 30, 2015

     1,272,439        164,502        1,107,937        434,917        September 30, 2018  

June 30, 2015

     771,350        98,330        673,020        414,551        June 30, 2018  

March 31, 2015

     353,760        95,291        258,469        258,469        March 31, 2018  

The following table reflects the fee waivers and expense reimbursements due from the Adviser as of December 31, 2014 and September 30, 2014, which may become subject to recoupment by the Adviser.

 

Period ended

   Yearly cumulative
other expense
     Yearly expense
limitation
     Yearly cumulative
expense
reimbursement
     Quarterly
recoupable
amount
     Recoupment eligibility
expiration
 

December 31, 2014

   $ 463,303      $ 56,948      $ 406,355      $ 321,713        December 31, 2017  

September 30, 2014

     98,723        14,081        84,642        —          Expired  

During the three and nine months ended September 30, 2017, $84,642 of expense reimbursements that were eligible for recoupment by the Adviser expired.

There can be no assurance that the Expense Limitation Agreement will remain in effect or that the Adviser will reimburse any portion of the Company’s expenses in future quarters not covered by the Expense Limitation Agreement. Amounts shown do not include the amounts committed by the Adviser to voluntarily reimburse the Company for unrealized losses, all of which are not recoupable.

Net Increase from Amounts Committed by Affiliates

For the nine months ended September 30, 2017 and September 30, 2016, the Adviser committed $0 and $872,000, respectively, to the Company to voluntarily reimburse the Company for unrealized losses sustained. Cumulatively since inception, the Adviser has committed $2,275,000 to voluntarily reimburse the Company for such losses. Had these commitments not been made, the net asset value (“NAV”) as of September 30, 2017 would have been lower by approximately this amount. These commitments are shown in the Statements of Operations as net increase from amounts committed by affiliates and are not recoupable.

Amounts committed and paid by the Adviser to reimburse for unrealized losses are nonrecurring, and investors should not expect the Adviser to make similar commitments or payments in the future.

Receivable from Adviser / Payable to Adviser

As of September 30, 2017, there were no amounts owed from the Adviser to the Company. On May 11, 2017, the Adviser paid in full the outstanding balance of $4,177,196 payable to the Company as of March 31, 2017, together with interest of $56,480. As of December 31, 2016, the Receivable from Adviser balance shown on the Statements of Assets and Liabilities was made up of the amounts shown in the table below.

 

Description

  December 31, 2016  

Amounts committed by affiliates

  $ 2,275,000  

Fees waived under the Expense Limitation Agreement

    1,965,606  

Organization and offering costs paid directly by the Company, to be reimbursed by Adviser

    405,913  

Commissions paid in excess of maximum, reimbursed by Adviser

    128,793  

Payable to Adviser for reimbursement of organization and offering costs

    (678,865
 

 

 

 

Totals

  $ 4,096,447  
 

 

 

 

As of September 30, 2017, the Company owed $20,092 to the Adviser.


Indemnification

Under the Company’s organizational documents, the officers and Directors have been granted certain indemnification rights against certain liabilities that may arise out of performance of their duties to the Company. Additionally, in the normal course of business, the Company may enter into contracts with service providers that contain a variety of indemnification clauses. The Company’s maximum exposure under these arrangements is dependent on future claims that may be made against the Company and, therefore, cannot be estimated.

Note 5 — U.S. Federal Income Tax Information

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

The character of income and capital gains to be distributed is determined in accordance with the Code, U.S. Treasury regulations, and other applicable authority, which may differ from U.S. GAAP. These differences include (but are not limited to) investments organized as partnerships for tax purposes, defaulted bonds, losses deferred to off-setting positions, and losses deferred due to wash sale transactions. Reclassifications are made to the Company’s capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under the Code, U.S. Treasury regulations, and other applicable authority. These reclassifications have no impact on net investment income, realized gains or losses, or net asset value of the Company. The calculation of net investment income per share in the Financial Highlights table excludes these adjustments.

Uncertainty in Income Taxes

The Company will evaluate its tax positions to determine if the tax positions taken meet the minimum recognition threshold in connection with accounting for uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing tax benefits or liabilities in the financial statements. Recognition of a tax benefit or liability with respect to an uncertain tax position is required only when the position is “more likely than not” to be sustained assuming examination by taxing authorities. The Company’s tax returns are subject to examination by the Internal Revenue Service for a period of three fiscal years after they are filed. The Company recognizes interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in the Statements of Operations. During the nine months ended September 30, 2017 and the nine months ended September 30, 2016, the Company did not incur any interest or penalties. Furthermore, the company is not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly change in the next 12 months.

Note 6 — Share Repurchase Program

On a quarterly basis, the Company intends to offer to repurchase shares of common stock on such terms as may be determined by the Board in its complete and absolute discretion unless, in the judgment of the Independent Directors of the Board, such repurchases would not be in the best interests of the Company’s stockholders or would violate applicable law. The Company will


conduct such repurchase offers in accordance with the requirements of Rule 13e-4 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the 1940 Act. In months in which the Company repurchases shares of common stock, it will conduct repurchases on the same date that it holds its first weekly closing for the sale of shares of common stock in its public offering. Any offer to repurchase shares of common stock will be conducted solely through tender offer materials mailed to each stockholder.

The Company currently intends to limit the number of shares of common stock to be repurchased during any calendar year to the number of shares of common stock it can repurchase with the proceeds it receives from the sale of shares of common stock under its distribution reinvestment plan. At the discretion of the Board, the Company may also use cash on hand, cash available from borrowings and cash from liquidation of securities investments as of the end of the applicable period to repurchase shares of common stock. In addition, the Company will limit the number of shares of common stock to be repurchased in any calendar year to 10.0% of the weighted average number of shares of common stock outstanding in the prior calendar year, or 2.5% in each quarter, though the actual number of shares of common stock that the Company offers to repurchase may be less in light of the limitations noted above. The Company intends to offer to repurchase such shares of common stock at a price equal to 90% of the offering price in effect on each date of repurchase. The Board may amend, suspend or terminate the share repurchase program at any time, upon 30 days’ notice.

The Company conducted its quarterly tender offer from March 1, 2017, until expiration of March 31, 2017 at 5:00p.m. New York City time, during which the Company offered to purchase for cash up to 2.5% of its outstanding shares of common stock. During the first quarter tender offer, 58,893 shares of the Company were tendered for repurchase, constituting approximately 0.74% of the Company’s outstanding shares.

The Company conducted its quarterly tender offer from June 5, 2017, until expiration of June 30, 2017 at 5:00p.m. New York City time, during which the Company offered to purchase for cash up to 2.5% of its outstanding shares of common stock. During the second quarter tender offer, 23,441 shares of the Company were tendered for repurchase, constituting approximately 0.27% of the Company’s outstanding shares.

The Company conducted its quarterly tender offer from August 31, 2017, until expiration of September 29, 2017 at 5:00p.m. New York City time, during which the Company offered to purchase for cash up to 2.5% of its outstanding shares of common stock. During the second quarter tender offer, 37,284 shares of the Company were tendered for repurchase, constituting approximately 0.41% of the Company’s outstanding shares.

For the nine months ended September 30, 2017, the Company did not repurchase any shares as part of its death and disability repurchase program. For the nine months ended September 30, 2016, the Company repurchased 1,664 shares as part of its death and disability repurchase program.

Note 7 — Financing Arrangements

Credit Facility

On January 6, 2015, the Company entered into a senior, secured revolving credit facility (the “Credit Facility”) with State Street Bank and Trust Company (“State Street”), as lender and agent. Under the Credit Facility, State Street had agreed to extend credit to the Company in an aggregate principal amount of up to $25 million at a rate of L + 1.15%, subject to borrowing base availability and restrictions on the Company’s total outstanding debt.

On January 5, 2016, the Company entered into an amendment to the Credit Facility to, among other things, increase the unused commitment fee from 0.15% to 0.25% and extend the final maturity date to January 3, 2017.

On January 3, 2017, the Company entered into an amendment to the Credit Facility to extend the final maturity date to March 20, 2017. The Credit Facility was fully paid down on February 24, 2017, and expired on March 20, 2017.


For the three and nine months ended September 30, 2017 and September 30, 2016, the components of total interest expense were as follows:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2017      2016     2017     2016  

Direct interest expense

   $ —        $ 40,511     $ 42,325     $ 69,759  

Commitment fees

     —          9,758       8,054       36,478  

Amortization of financing costs

     —          —         —         —    
  

 

 

    

 

 

   

 

 

   

 

 

 

Total interest expense

   $ —        $ 50,269     $ 50,379     $ 106,237  
  

 

 

    

 

 

   

 

 

   

 

 

 

Average daily amount outstanding

     —          9,726,087       2,909,158       5,682,847  

Weighted average interest rate

     —          1.66     1.95     1.64

The Company was required to maintain 300% asset coverage with respect to amounts outstanding under the Credit Facility. Asset coverage was calculated by subtracting the Company’s total liabilities, not including any amount representing bank loans and senior securities, from the Company’s total assets and dividing the result by the principal amount of the borrowings outstanding.

BNP Paribas Total Return Swap

On June 13, 2017, the Company, entered into the TRS with BNP Paribas over one or more loans, with a maximum aggregate notional amount of the portfolio debt securities subject to the TRS of $40 million. The agreements between the Company and BNP Paribas, which collectively establish the TRS, are referred to herein as the “TRS Agreement.”

A TRS is a contract in which one party agrees to make payments to another party based on the increase, if any, in the market value of the asset(s) underlying the TRS, which may include a specified security, basket of securities or securities indices during a specified period, and the other party agrees to make payments to the first party based on the decrease, if any, in the market value of such underlying assets plus periodic payments based on a fixed or variable interest rate. A TRS effectively adds leverage to a portfolio by providing investment exposure to an underlying asset without owning or taking physical custody of the underlying asset. A TRS often offers lower financing costs than are offered through more traditional borrowing arrangements.

Each individual security subject to the TRS, and the portfolio of securities taken as a whole, must meet certain criteria described in the TRS Agreement, including a requirement that the securities underlying the TRS be rated by either Moody’s or S&P, and, if rated by Moody’s, have a rating of at least Caa3 and, if rated by S&P, have a rating of at least CCC-. Under the terms of the TRS, BNP Paribas determines whether there has been a failure to satisfy the portfolio criteria in the TRS but may, in its sole discretion, permit assets that do not meet the minimum portfolio criteria set forth in the TRS. If BNP Paribas determines that an asset has failed to meet the minimum portfolio criteria, BNP Paribas may exercise certain rights, including increasing the amount of collateral the Company is required to provide to it or terminating all or part of the TRS, subject to certain conditions. The Company receives from BNP Paribas interest and fees payable to holders of the securities included in the portfolio. The Company pays interest to BNP Paribas generally based on a percentage of the notional amount of the securities subject to the TRS. In addition, upon the termination or repayment of any security subject to the TRS, the Company will either receive from BNP Paribas the appreciation in the value of such security or pay to BNP Paribas any depreciation in the value of such security.

Under the terms of the TRS, the Company or BNP Paribas may be required to post additional collateral, on a dollar-for-dollar basis, in certain circumstances, including in the event of depreciation or appreciation in the value of the underlying loans. The limit on the additional collateral that the Company may be required to post pursuant to the TRS is equal to the difference between the full notional amount of the loans underlying the TRS and the amount of cash collateral already posted by the Company. The amount of collateral required to be posted is determined primarily on the basis of the aggregate value of the underlying securities.

The Company may terminate the TRS at any time more than one month prior to the TRS’s scheduled termination date upon providing no less than 30 days’ prior notice to BNP Paribas. Any termination prior to December 10, 2017 will result in payment of an early termination fee to BNP Paribas that is generally based on the net present value of the underutilization fee through the scheduled TRS termination date.

Included among the customary events of default and termination events in the TRS Agreement are: bankruptcy or insolvency of a party, failure to satisfy any obligations under the TRS (including payment of collateral), and misrepresentation. BNP Paribas also has the right to terminate the TRS in certain circumstances, including if the relevant loans fail to meet the agreed-upon criteria specified in the TRS Agreement or if certain credit events with respect to the “reference entity” specified with respect to a security occur, and the Company declines to provide additional collateral to BNP Paribas upon request.


Upon any termination of the TRS, the Company will be required to pay BNP Paribas the amount of any decline in the aggregate value of the securities subject to the TRS or, alternatively, will be entitled to receive the amount of any appreciation in the aggregate value of such securities. In the event that BNP Paribas chooses to exercise its termination rights, it is possible that the Company will owe more to BNP Paribas or, alternatively, will be entitled to receive less from BNP Paribas than the Company would have if it controlled the timing of such termination, due to the existence of adverse market conditions at the time of such termination.

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

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

The following is a summary of the underlying loans subject to the TRS as of September 30, 2017:

 

Underlying Loan    Industry    Interest      Base
Rate
Floor
    Maturity
Date
     Notional
Amount(1)
     Market
Value
     Unrealized
Appreciation
(Depreciation)
 

Advantage Sales & Marketing, Inc. (Second Lien Term Loan)

   Service      L + 650        1.00     7/25/2022      $ 2,853,750      $ 2,685,000      $ (168,750

Avaya, Inc. (First Lien Term Loan)

   Technology      L + 750        1.00     1/24/2018        2,212,225        2,156,050        (56,175

DJO Finance, LLC (First Lien Term Loan)

   Healthcare      L + 325        1.00     6/16/2020        4,000,000        3,990,000        (10,000

Fieldwood Energy, LLC (First Lien Term Loan)

   Energy      L + 700        1.00     8/31/2020        1,728,527        1,575,480        (153,047

Fieldwood Energy, LLC (First Lien Term Loan)

   Energy     
L +
712.5
 
 
     1.25     9/30/2020        478,369        390,361        (88,008

Granite Acquisition, Inc. (Second Lien Term Loan)

   Utility      L + 725        1.00     12/19/2022        3,736,725        3,708,864        (27,861

iHeartCommunications, Inc. (First Lien Loan)

   Media/

Telecommunications

     L + 675        —         1/30/2019        4,112,500        3,850,000        (262,500

Kindred Healthcare, Inc. (First Lien Term Loan)

   Healthcare      L + 350        1.00     4/09/2021        6,520,000        6,500,000        (20,000

Lanai Holdings II, Inc. (First Lien Term Loan)

   Healthcare      L + 475        1.00     8/28/2022        2,503,122        2,418,750        (84,372

Quorum Health Corp. (First Lien Term Loan)

   Healthcare      L + 675        1.00     4/29/2022        5,246,549        5,448,339        201,790  

SkillSoft Corp. (First Lien Term Loan)

   Technology      L + 475        1.00     4/28/2021        1,867,441        1,845,443        (21,998

SkillSoft Corp. (Second Lien Term Loan)

   Technology      L + 825        1.00     4/28/2022        1,259,895        1,220,523        (39,372

Truck Hero, Inc. (Second Lien Term Loan)

   Manufacturing      L + 825        1.00     5/10/2025        1,666,667        1,675,000        8,333  
                   

 

 

 
                Total      $ (721,960
                   

 

 

 
               
Accrued income and
lliabilities
 
 
     88,533  
                   

 

 

 
                Total TRS Fair Value      $ (633,427
                   

 

 

 

 

(1)  Notional value of the underlying securities in the TRS is calculated by multiplying par by the initial price.


As of September 30, 2017, the Company had posted $13,120,000 of cash collateral against the TRS held in an account at the Company’s custodian bank, which is shown as due from counterparty on the Statements of Assets and Liabilities.

During the nine months ended September 30, 2017, the Company recognized a net realized loss on the TRS amounting to $524,777. The Company received $194,394 in cash payments from the TRS during the period, with $719,171 being payable to BNP Paribas as of September 30, 2017.

Note 8 — Economic Dependency and Commitments and Contingencies

Under various agreements, the Company has engaged the Adviser and its affiliates to provide certain services that are essential to the Company, including asset management services, asset acquisition and disposition decisions, the sale of shares of the Company’s common stock available for issue, as well as other administrative responsibilities for the Company including accounting services and investor relations. Additionally, the Adviser pays all of the Company’s organization and offering costs subject to reimbursement to the extent organization and offering costs paid by the Adviser do not exceed 1% of gross proceeds raised.

The Company’s organization and offering costs together are limited to 1% of total proceeds raised and are not due and payable to the Adviser to the extent they exceed that amount. Currently, the cumulative aggregate amount of organization and offering costs exceeds 1% of total proceeds raised. As of September 30, 2017, $4,139,919 of organization and offering costs could become payable to the Adviser contingent upon the amount of future proceeds raised. See Note 4 for a discussion of Related Party Transactions and Arrangements, including a description of amounts waived and subject to recoupment.

As a result of these relationships, the Company is dependent upon the Adviser and its affiliates. In the event that these companies are unable to provide the Company with the respective services, the Company will be required to find alternative providers of these services.

From time to time, the Company may be involved in legal proceedings in the normal course of its business. Although the outcome of such litigation cannot be predicted with any clarity, management is of the opinion, based on the advice of legal counsel, that final dispositions of any litigation should not have a material adverse effect on the financial position of the Company as of September 30, 2017.

In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties that provide general indemnification. The Company’s maximum exposure under these agreements is unknown, as this would involve future claims that may be made against the Company that have not occurred. The Company believes the risk of material obligations under these indemnities to be low.

Note 9 — Market and Other Risk Factors

The primary risks of investing in the Company are described below in alphabetical order:

Concentration Risk

The Company is classified as a non-diversified investment company within the meaning of the 1940 Act, which means that it is not limited by the 1940 Act with respect to the proportion of the Company’s assets that it may invest in securities of a single issuer. To the extent that the Company assumes large positions in the securities of a small number of issuers, the Company’s net asset value may fluctuate to a greater extent than that of a diversified investment company as a result of changes in the financial condition or the market’s assessment of the issuer. The Company may also be more susceptible to any single economic or regulatory occurrence than a diversified investment company. Beyond the asset diversification requirements associated with the Company’s qualification as a RIC under the Code and certain contractual diversification requirements under a credit facility or other agreements, the Company does not have fixed guidelines for diversification, and its investments could be concentrated in relatively few portfolio companies. As a result, the aggregate returns the Company realizes may be significantly adversely affected if a small number of investments perform poorly or if the Company needs to write down the value of any one investment. Additionally, the Company’s investments may be concentrated in relatively few industries. As a result, a downturn in any particular industry in which the Company is invested could also significantly impact the aggregate returns realized.


Counterparty Credit Risk

Counterparty credit risk is the potential loss the Company may incur as a result of the failure of a counterparty or an issuer to make payments according to the terms of a contract. Counterparty credit risk is measured as the loss the Company would record if its counterparties failed to perform pursuant to the terms of their obligations to the Company. Because the Company may enter into over-the-counter forwards, options, swaps and other derivative financial instruments, the Company may be exposed to the credit risk of its counterparties. To limit the counterparty credit risk associated with such transactions, the Company conducts business only with financial institutions judged by the Adviser to present acceptable credit risk.

Credit Risk

Investments rated below investment grade are commonly referred to as high-yield, high risk or “junk debt.” They are regarded as predominantly speculative with respect to the issuing company’s continuing ability to meet principal and/or interest payments. Investments in high yield debt and high yield senior loans may result in greater net asset value fluctuation than if the Company did not make such investments. Corporate debt obligations, including senior loans, are subject to the risk of non-payment of scheduled interest and/or principal.

Non-payment would result in a reduction of income to the Company, a reduction in the value of the corporate debt obligation experiencing non-payment and a potential decrease in the net asset value of the Company. Some of the loans the Company makes or acquires may provide for the payment by borrowers of Payment-In-Kind (“PIK”) interest or accreted original issue discount at maturity. Such loans have the effect of deferring a borrower’s payment obligation until the end of the term of the loan, which may make it difficult for the Company to identify and address developing problems with borrowers in terms of their ability to repay debt. Particularly in a rising interest rate environment, loans containing PIK and original issue discount provisions can give rise to negative amortization on a loan, resulting in a borrower owing more at the end of the term of a loan than what it owed when the loan was originated. Any such developments may increase the risk of default on the Company’s loans by borrowers.

Because loans are not ordinarily registered with the SEC or any state securities commission or listed on any securities exchange, there is usually less publicly available information about such instruments. In addition, loans may not be considered “securities” for purposes of the anti-fraud protections of the federal securities laws and, as a result, as a purchaser of these instruments, the Company may not be entitled to the anti-fraud protections of the federal securities laws. In the course of investing in such instruments, the Company may come into possession of material nonpublic information and, because of prohibitions on trading in securities of issuers while in possession of such information, the Company may be unable to enter into a transaction in a publicly-traded security of that issuer when it would otherwise be advantageous for us to do so. Alternatively, the Company may choose not to receive material nonpublic information about an issuer of such loans, with the result that the Company may have less information about such issuers than other investors who transact in such assets.

Foreign Securities Risk

Investments in foreign securities involve certain factors not typically associated with investing in U.S. securities, such as risks relating to (i) currency exchange matters, including fluctuations in the rate of exchange between the U.S. dollar (the currency in which the books of the Company are maintained) and the various foreign currencies in which the Company’s portfolio securities will be denominated and costs associated with conversion of investment principal and income from one currency into another; (ii) differences between the U.S. and foreign securities markets, including the absence of uniform accounting, auditing and financial reporting standards and practices and disclosure requirements, and less government supervision and regulation; (iii) political, social or economic instability; and (iv) the extension of credit, especially in the case of sovereign debt.


Illiquid Securities Risk

The Company will generally make investments in private companies. Substantially all of these investments will be subject to legal and other restrictions on resale or will otherwise be less liquid than publicly traded securities. The illiquidity of the Company’s investments may make it difficult for the Company to sell such investments if the need arises. In addition, if it is required to liquidate all or a portion of its portfolio quickly, the Company may realize significantly less than the value at which it has previously recorded its investments. In addition, it may face other restrictions on its ability to liquidate an investment in a portfolio company to the extent that it has material non-public information regarding such portfolio company or if an investment is held by one of its subsidiaries and is subject to contractual limitations on sale, such as the limitations on transfer of assets under certain circumstances under a credit facility.

Because loan transactions often take longer to settle than transactions in other securities, the Company may not receive the proceeds from the sale of a loan for a significant period of time. As a result, the Company may maintain higher levels of cash and short-term investments than funds that invest in securities with shorter settlement cycles and/or may use the Credit Facility to permit the Company to meet its obligations pending settlement of the sale of portfolio securities, each of which may adversely affect the Company’s performance.

The company seeks to address its short-term liquidity needs by carefully managing the settlements of its portfolio transactions, including transactions in loans, by maintaining short-term liquid assets sufficient to meet reasonably anticipated obligations, and by maintaining the Credit Facility.

Investments in Foreign Markets Risk

Investments in foreign markets involve special risks and considerations not typically associated with investing in the United States. These risks include revaluation of currencies, high rates of inflation, restrictions on repatriation of income and capital, and adverse political and economic developments. Moreover, securities issued in these markets may be less liquid, subject to government ownership controls, tariffs and taxes, subject to delays in settlements, and their prices may be more volatile. The Company may be subject to capital gains and repatriation taxes imposed by certain countries in which they invest. Such taxes are generally based on income and/or capital gains earned or repatriated. Taxes are accrued based upon net investment income, net realized gains and net unrealized appreciation as income and/or capital gains are earned.

Leverage Risk

The Company may use leverage in its investment program, including the use of borrowed funds and investments in certain types of options, such as puts, calls and warrants, which may be purchased for a fraction of the price of the underlying securities. While such strategies and techniques increase the opportunity to achieve higher returns on the amounts invested, they also increase the risk of loss. To the extent the Company purchases securities with borrowed funds, its net assets will tend to increase or decrease at a greater rate than if borrowed funds are not used. If the interest expense on borrowings were to exceed the net return on the portfolio securities purchased with borrowed funds, the Company’s use of leverage would result in a lower rate of return than if the Company were not leveraged.

Options Risk

There are several risks associated with transactions in options on securities. For example, there are significant differences between the securities and options markets that could result in an imperfect correlation between these markets, causing a given transaction not to achieve its objectives. A transaction in options or securities may be unsuccessful to some degree because of market behavior or unexpected events.

When the Company writes a covered call option, the Company forgoes, during the option’s life, the opportunity to profit from increases in the market value of the security covering the call option above the sum of the premium and the strike price of the call, but retains the risk of loss should the price of the underlying security decline. The writer of an option has no control over the time when it may be required to fulfill its obligation and once an option writer has received an exercise notice, it must deliver the underlying security in exchange for the strike price.


When the Company writes a covered put option, the Company bears the risk of loss if the value of the underlying stock declines below the exercise price minus the put premium. If the option is exercised, the Company could incur a loss if it is required to purchase the stock underlying the put option at a price greater than the market price of the stock at the time of exercise plus the put premium the Company received when it wrote the option. While the Company’s potential gain in writing a covered put option is limited to distributions earned on the liquid assets securing the put option plus the premium received from the purchaser of the put option, the Company risks a loss equal to the entire exercise price of the option minus the put premium.

Short-Selling Risk

Short sales by the Company that are not made where there is an offsetting long position in the asset that it is being sold short theoretically involve unlimited loss potential since the market price of securities sold short may continuously increase. Short selling allows the Company to profit from declines in market prices to the extent such decline exceeds the transaction costs and costs of borrowing the securities. However, since the borrowed securities must be replaced by purchases at market prices in order to close out the short position, any appreciation in the price of the borrowed securities would result in a loss. Purchasing securities to close out the short position can itself cause the price of securities to rise further, thereby exacerbating the loss. The Company may mitigate such losses by replacing the securities sold short before the market price has increased significantly. Under adverse market conditions, the Company might have difficulty purchasing securities to meet margin calls on its short sale delivery obligations, and might have to sell portfolio securities to raise the capital necessary to meet its short sale obligations at a time when fundamental investment considerations would not favor such sales.

Total Return Swap Risk

The TRS with BNP Paribas enables us to obtain the economic benefit of owning the securities subject to the TRS without actually owning such securities, in return for making periodic interest-type payments to BNP Paribas plus an amount equal to the depreciation in value of the securities. The TRS is subject to market risk, liquidity risk and risk of imperfect correlation between the value of the TRS and the securities underlying the TRS. In addition, we may incur certain costs in connection with the TRS, including an underutilization fee in the event that we utilize less than 80% of the amount of the TRS. Costs associated with the TRS could, in the aggregate, be significant. Because this arrangement is not an acquisition of the underlying securities, we have no right to enforce contractual provisions that stem from ownership in the securities and have no voting or other rights of ownership. In the event of insolvency of BNP Paribas, we expect that we would be treated as a general creditor of BNP Paribas and would have no claim of title with respect to the underlying securities.

A TRS is also subject to the risk that a counterparty will default on its payment obligations thereunder or that we will not be able to meet our obligations to the counterparty. In the case of the TRS with BNP Paribas, we are required to post collateral to secure our obligations to BNP Paribas under the TRS. BNP Paribas, however, is not required to collateralize any of its obligations to us under the TRS. We bear the risk of depreciation with respect to the value of the securities underlying the TRS and are required under the terms of the TRS to post additional collateral on a dollar-for-dollar basis in the event of depreciation in the value of the underlying securities after such value decreases below a specified amount. The amount of collateral required to be posted by us is determined primarily on the basis of the aggregate value of the underlying securities.

In addition, because a TRS is a form of leverage, such arrangements are subject to risks similar to those associated with the use of leverage.

Note 10 — Affiliated Investments

Under Section 2(a)(3) of the Investment Company Act of 1940, as amended, a portfolio company is defined as “affiliated” if a fund owns five percent or more of its outstanding voting securities or if the portfolio company is under common control. The table below shows affiliated issuers of the Company as of September 30, 2017:


Affiliated investments   

Fair value

as of

January 1,
2017

     Purchases      Sales      Realized
gains
(losses)
    

Change in

unrealized

gains
(losses)

    

Fair value

as of

September 30,
2017

    

Dividend

income

 

NexPoint Credit Strategies Fund

   $ —        $ 14,154      $ —        $ —        $ 1,151      $ 15,305      $ 551  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Affiliated investments

   $ —        $ 14,154      $ —        $ —        $ 1,151      $ 15,305      $ 551  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of September 30, 2016, the Company did not have any affiliated investments.

Note 11 — Financial Highlights

Selected data for a share outstanding throughout the nine months ended September 30, 2017 and September 30, 2016 is as follows:


    For the Nine Months
Ended
    For the Nine Months
Ended
 
    September 30, 2017
(Unaudited)
    September 30, 2016
(Unaudited)
 

Common shares per share operating performance:

   

Net asset value, beginning of period

  $ 9.47     $ 8.02  

Income from investment operations:

   

Net investment income(1)

    0.63       0.52  

Net realized and unrealized gain (loss)

    (0.02     1.34  

Commitments by affiliates

    —         0.21  
 

 

 

   

 

 

 

Total from investment operations

    0.61       2.07  
 

 

 

   

 

 

 

Less distribution declared to common shareholders:

   

From net investment income

    (0.54     (0.49

From net realized gains

    —         (0.04
 

 

 

   

 

 

 

Total distributions declared to common shareholders

    (0.54     (0.53
 

 

 

   

 

 

 

Capital share transactions

   

Issuance of common stock(2)

    0.02       0.03  

Shares tendered(1)

    0.00 (3)      0.00 (3) 

Net asset value, end of period

  $ 9.56     $ 9.59  

Net asset value total return(4)(6)

    6.68     26.77 %(5) 

Ratio and supplemental data:

   

Net assets, end of period (in 000’s)

  $ 87,510     $ 57,784  

Shares outstanding, end of period

    9,156,755       6,023,972  

Common share information at end of period:

   

Ratios based on weighted average net assets of common shares:

   

Gross operating expenses(7)

    4.35     8.18

Fees and expenses waived or reimbursed(7)

    (2.79 )%      (5.38 )% 

Net operating expenses(7)

    1.56     2.79

Net investment income (loss) before fees waived or reimbursed(7)

    5.93     2.25

Net investment income (loss) after fees waived or reimbursed(7)

    8.72     7.63

Ratio of interest and credit facility expenses to average net assets

    0.08     0.37

Ratio of incentive fees to average net assets(7)(8)

    (0.19 )%      1.09

Portfolio turnover rate(6)

    91     66

Asset coverage ratio

    449     684

 

 

(1)  Per share data was calculated using weighted average shares outstanding during the period.
(2)  The continuous issuance of common stock may cause an incremental increase in net asset value per share due to the sale of shares at the then prevailing public offering price and the receipt of net proceeds per share by the Company in excess of net asset value per share on each subscription closing date. The per share data was derived by computing (i) the sum of (A) the number of shares issued in connection with subscriptions and/or distribution reinvestment on each share transaction date times (B) the differences between the net proceeds per share and the net asset value per share on each share transaction date, divided by (ii) the total shares outstanding at the end of the period.
(3)  Amount rounds to less than $0.005 per share.
(4)  Total returns are historical and assume changes in share price and reinvestment of dividends and capital gains distributions, and assume no sales charge. Distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the Company’s Dividend Reinvestment Plan. Had the Adviser not absorbed a portion of expenses, total returns would have been lower.
(5)  For the nine months ended September 30, 2016, 1.91% of the fund’s total return consists of a voluntary reimbursement by the adviser for unrealized investment losses, and is included in Net realized and unrealized gain (loss). Excluding this item, total return would have been 24.86%.
(6)  Not annualized.
(7)  Annualized.
(8)  All incentive fees were waived for the nine months ended September 30, 2017 and September 30, 2016.


Note 12 — Subsequent Events

The Company has evaluated subsequent events through the date on which these financial statements were issued.

On September 15, 2017 the Board declared a cash distribution of $0.013846 per share of the Company’s common stock, par value $0.001 per share, paid on November 1, 2017, to the stockholders of record on October 2, 2017, October 9, 2017, October 16, 2017, October 23, 2017, and October 30, 2017.

On October 12, 2017, the Board declared a cash distribution of $0.013846 per share of the Company’s common stock, par value $0.001 per share, to be paid on November 29, 2017, to the stockholders of record on November 6, 2017, November 13, 2017, November 20, 2017, and November 27, 2017.

On October 19, 2017, the Company entered into a financing arrangement (the “Financing Arrangement”) with BNP Paribas Prime Brokerage International, Ltd., BNP Prime Brokerage, Inc., and BNP Paribas (together, the “BNPP Entities”). Under the Financing Agreement, the BNPP Entities may make margin loans to the Company at a rate of one-month LIBOR + 1.60%. The BNPP Entities have the right to cap the amount of margin loans with prior notice to the Company. The Financing Arrangement may be terminated by either the Company or the BNPP Entities with 179 days’ notice.


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

The information contained in this section should be read in conjunction with our unaudited financial statements and related notes thereto included elsewhere in this quarterly report on Form 10-Q. In this report, “we,” “us” and “our” refer to NexPoint Capital, Inc.

Forward-Looking Statements

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

 

    our future operating results;

 

    changes in healthcare technologies, finance and regulations adversely affecting our portfolio companies or financing model;

 

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

 

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

 

    the impact of the investments that we expect to make;

 

    the impact of increased competition;

 

    our contractual arrangements and relationships with third parties;

 

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

 

    the ability of our portfolio companies to achieve their objectives;

 

    our current and expected financings and investments;

 

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

 

    the timing and amount of cash flows, distributions and dividends, if any, from our portfolio companies;

 

    our use of financial leverage;

 

    the ability of the Adviser, to locate suitable investments for us and to monitor and administer our investments;

 

    the ability of the Adviser or its affiliates to attract and retain highly talented professionals;

 

    our ability to maintain our qualification as a regulated investment company, or RIC, and as a business development company, or BDC;

 

    the impact on our business of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations issued thereunder;

 

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

 

    the tax status of the enterprises in which we may invest.

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. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth elsewhere in this quarterly report on Form 10-Q and as “Risk Factors” in the prospectus relating to the continuous public offering of our common stock.

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. Except as required by the federal securities laws, we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise. Stockholders are advised to consult any additional disclosures that we may make directly to stockholders or through reports that we may file in the future with the U.S. Securities and Exchange Commission, or the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The forward-looking statements and projections contained in this quarterly report on Form 10-Q are excluded from the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This quarterly report on Form 10-Q may contain statistics and other data that have been obtained from or compiled from information made available by third-party service providers. We have not independently verified such statistics or data.


Overview

We were formed in Delaware on September 30, 2013 and formally commenced operations on September 2, 2014. We are an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development company (a “BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, for U.S. federal income tax purposes, we have elected to be treated as a RIC under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”) with retroactive effect to the date we elected to be treated as a BDC. As a BDC, we are also subject to certain constraints, including limitations imposed by the 1940 Act and the Code.

Our investment activities are managed by NexPoint Advisors, L.P. (our “Adviser”) and supervised by our board of directors (the “Board”) a majority of the members of which are independent of us.

Our investment objective is to generate high current income and long-term capital appreciation. We seek to achieve our objective by using the experience of the healthcare, credit and structured products teams of Highland Capital Management, L.P. (“Highland”) to source, evaluate and structure investments, identify attractive investment opportunities that are primarily debt investments that generate high income without creating undue risk for the portfolio, make equity investments where we believe there will be attractive risk-adjusted returns that compensate for the lack of current income, and make investments in debt and equity tranches of collateralized loan obligations, or CLOs, that deliver income and high relative value. We will focus on companies that are stable, have positive cash flow and the ability to grow their business model.

Our investment policy is to invest, under normal circumstances, at least 80% of our total assets in debt and equity of middle-market companies, with an emphasis on healthcare companies, syndicated floating rate debt of large public and nonpublic companies and mezzanine and equity tranches of CLOs. Middle-market companies include companies with annual revenues between $50,000,000 and $2,500,000,000 and syndicated floating rate debt refers to loans and other instruments originated by a bank to a corporation that are sold off, or syndicated, to investors in pieces. We consider a healthcare company to be a company that is engaged in the design, development, production, sale, management or distribution of products, services or facilities used for or in connection with the healthcare industry. Additionally, we consider companies that are materially impacted by the healthcare industry (such as a contractor that derives significant revenue or profit from the construction of hospitals) as being engaged in the healthcare industry. We may invest without limit in companies that are not in the healthcare sector.

We will leverage the expertise of Highland with regard to distressed investing and restructuring to make opportunistic investments in distressed companies. We will utilize the Highland credit underwriting capability to identify the types of companies we believe will provide high current income and/or long-term capital appreciation. In addition to the investments in the healthcare industry, we may invest a portion of our capital in other opportunistic investments in which the Adviser has expertise and where we believe an opportunity exists to achieve above average risk adjusted yields and returns. These types of opportunities may include: (1) direct lending or origination investments, (2) investments in stressed or distressed situations, (3) structured product investments, (4) equity investments and (5) other investment opportunities not typically available in other BDCs. Opportunistic investments may range from broadly syndicated deals to direct lending deals in both private and public companies and may include foreign investments. We believe this is the best approach to achieving our dual mandate of attempting to generate a high yield while also attempting to produce capital appreciation.

We seek to invest primarily in securities deemed by the Adviser to be high income generating debt investments and income generating equity securities of privately held companies in the United States. We expect the portfolio will be concentrated primarily in senior floating rate debt securities, although we may invest without limit in securities which rank lower than senior secured instruments and may invest without limit in investments with a fixed rate of interest. We will buy syndicated loans, various tranches of CLOs and other debt instruments in the secondary market as well as originate debt so we can tailor the investment parameters more precisely to our needs. We also intend to invest a portion of the portfolio in equity securities that are non-income producing, when doing so will help us achieve our objective of long-term capital appreciation. We expect the size of our positions will range from $2,000,000 to $25,000,000, although investments may be larger as our asset base increases. We may selectively make investments in amounts larger than $25,000,000 in some of our portfolio companies. While our asset base increases, we may make smaller investments.

We expect that many of the securities in which we invest will be rated below investment grade by independent rating agencies or would be rated below investment grade if they were rated. These securities, which may be referred to as “junk,” have predominantly speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal. In addition, we expect that many of our debt investments will include floating interest rates that reset on a periodic basis and typically will not require the borrowers to pay down the outstanding principal of such debt prior to maturity.


Public Offering

We are offering on a continuous basis up to $1.6 billion of our common stock, inclusive of shares already sold, based on an offering price of $10.40 as of September 30, 2017, and a par value of $0.001 per share, pursuant to a registration statement on Form N-2 filed with the U.S. Securities and Exchange Commission (the “SEC”) under the Securities Act. The SEC declared our registration statement effective on May 12, 2017, as supplemented. We are also authorized to issue 25,000,000 shares of preferred stock, par value $0.001 per share. However, we currently do not anticipate issuing any preferred stock.

As a result of a series of private placements to the Adviser, we successfully satisfied the minimum offering requirement and officially commenced operations on September 2, 2014. In connection with the satisfaction of the minimum offering requirement and the commencement of our operations, the Investment Advisory Agreement became effective and the base management fee and any incentive fees, as applicable, payable to the Adviser under the Investment Advisory Agreement began to accrue. In aggregate through September 30, 2017 the Adviser controls 2,117,895 shares, including reinvestment of dividends, for a net total of approximately $20.2 million.

The Dealer Manager, an entity under common ownership with the Adviser, serves as the dealer manager of our continuous public offering. The shares are being offered on a “best efforts” basis, which means generally that the Dealer Manager is required to use only its best efforts to sell the shares and it has no firm commitment or obligation to purchase any of the shares. The Adviser and the Dealer Manager are related parties and will receive fees, distributions and other compensation for services related to our public offering and the management of our assets.

We, Highland and the Adviser have obtained an exemptive order dated April 19, 2016 from the SEC to permit co-investments among the Company and certain other accounts managed by the Adviser or its affiliates, subject to certain conditions.

On August 28, 2015, the Company filed its application with the SEC pursuant to Section 6(c) of the 1940 Act, requesting exemptions from Sections 18(c), 18(i) and 61(a) of the 1940 Act and pursuant to Sections 17(d) and 57(i) of the 1940 Act and Rule 17d-1 under the 1940 Act, to permit the Company to offer investors multiple classes of shares, interests or units, as the case may be, with varying sales loads and asset-based service and/or distribution fees (the “Multi-Class Application”). The Company may revise the Multi-Class Application in response to comments from the SEC staff.

Revenues

We generate a significant portion of our total revenue in the form of interest on the debt securities that we hold. We expect that the senior debt we invest in will generally have stated terms of 3 to 5 years and that the subordinated debt we invest in will generally have stated terms of 5 to 7 years. Our senior and subordinated debt investments bear interest at a fixed or floating rate. Interest on debt securities is generally payable monthly, quarterly or semiannually. In addition, some of our investments provide for deferred interest payments or payment-in-kind, or PIK, interest. We may also generate revenues in the form of dividends and other distributions on the equity or other securities we may hold. In addition, we may generate revenues in the form of commitment, closing, origination, structuring or diligence fees, monitoring fees, fees for providing managerial assistance, consulting fees, prepayment fees and performance-based fees. Any such fees generated in connection with our investments will be recognized as earned.

Expenses

We expect that our primary operating expenses will include the payment of fees to the Adviser under the Investment Advisory Agreement, our allocable portion of overhead expenses under the Administration Agreement and other operating costs described below. However, at this time our Adviser is waiving most fees, subject to possible recoupment for expenses pertaining to periods from and after June 10, 2016. We bear all out-of-pocket costs and expenses of our operations and transactions, including:

 

    our organization (expenses initially paid by the Adviser until sufficient equity proceeds are raised);

 

    calculating our net asset value and net asset value per share (including the costs and expenses of independent valuation firms);


    fees and expenses, including travel expenses, incurred by the Adviser or payable to third parties in performing due diligence on prospective portfolio companies, monitoring our investments and, if necessary, enforcing our rights;

 

    interest payable on debt, if any, incurred to finance our investments;

 

    the costs of this and all future offerings of common shares and other securities, and other incurrence of debt;

 

    the base management fee and any incentive fee;

 

    distributions on our shares;

 

    administration fees payable to the Adviser under the Administration Agreement;

 

    transfer agent and custody fees and expenses;

the actual costs incurred by the Adviser as our administrator in providing managerial assistance to those portfolio companies that request it;

 

    amounts payable to third parties relating to, or associated with, evaluating, making and disposing of investments;

 

    brokerage fees and commissions;

 

    registration fees;

 

    listing fees;

 

    taxes;

 

    independent director fees and expenses;

 

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

 

    the costs of any reports, proxy statements or other notices to our stockholders, including printing costs;

 

    costs of holding stockholder meetings;

 

    our fidelity bond;

 

    directors and officers/errors and omissions liability insurance, and any other insurance premiums;

 

    litigation, indemnification and other non-recurring or extraordinary expenses;

 

    direct costs and expenses of administration and operation, including audit and legal costs;

 

    fees and expenses associated with marketing efforts, including deal sourcing fees and marketing to financial sponsors;

 

    dues, fees and charges of any trade association of which we are a member; and

 

    all other expenses reasonably incurred by us or the Adviser in connection with administering our business.

During periods of asset growth, we expect our general and administrative expenses to be relatively stable or decline as a percentage of total assets and increase during periods of asset declines.

Expense Limitation

Pursuant to an expense limitation agreement (the “Expense Limitation Agreement”), the Adviser is contractually obligated to waive fees and, if necessary, pay or reimburse certain other expenses to limit ordinary “Other Expenses” to 1.0% of the quarter-end value of the Company’s gross assets through the one year anniversary of the effective date of the registration statement. Under the Expense Limitation Agreement, “Other Expenses” are all expenses with the exception of advisor and administration fees, organization and offering costs and the following: (i) interest, taxes, dividends tied to short sales, brokerage commissions, and other expenditures which are capitalized in accordance with U.S. GAAP; (ii) expenses incurred indirectly as a result of investments in other investment companies and pooled investment vehicles; (iii) other expenses attributable to, and incurred as a result of, our investments; (iv) expenses payable to the Adviser, as administrator, for providing significant managerial assistance to our portfolio companies; and (v) other extraordinary expenses (including litigation expenses) not incurred in the ordinary course of our business. The obligation will automatically renew for one-year terms unless it is terminated by the Company or the Adviser upon written notice within 120 days of the end of the current term or upon termination of the Investment Advisory Agreement. The Expense Limitation Agreement will continue through at least April 30, 2018.

Any expenses waived or reimbursed by the Adviser pursuant to the Expense Limitation Agreement are subject to possible recoupment by the Adviser within three years from the date of the waiver or reimbursement. The recoupment by the Adviser will be limited to the amount of previously waived or reimbursed expenses and cannot cause the Company’s expenses to exceed any expense limitation in place at the time of recoupment or waiver.


Reimbursable Expenses Table

The cumulative total of fees waived by the Adviser under the Expense Limitation Agreement which are recoupable as of September 30, 2017 are $2,332,396. This balance, and the balances in the tables below, only include amounts pertaining to the Expense Limitation Agreement, and do not include waived advisory and administration fees subject to recoupment discussed elsewhere herein.

The following table reflects the 2017 quarterly fee waivers and expense reimbursements due from the Adviser as of September 30, 2017, June 30, 2017 and March 31, 2017, which are subject to recoupment by the Adviser.

 

Period Ended

   Yearly Cumulative
Other Expenses
     Yearly
Expense
Limitation
     Yearly
Cumulative
Expense
Limitation
     Quarterly
Recoupable
Amount
     Recoupment Eligibility
Expiration
 

September 30, 2017

   $ 983,110        531,679        451,431        252,953        September 30, 2020  

June 30, 2017

     631,906        433,428        198,478        50,913        June 30, 2020  

March 31, 2017

     329,791        182,226        147,565        147,565        March 31, 2020  

The following table reflects the 2016 quarterly fee waivers and expense reimbursements due from the Adviser as of December 31, 2016, September 30, 2016, June 30, 2016 and March 31, 2016, which are subject to recoupment by the Adviser.

 

Quarter Ended

   Yearly Cumulative
Other Expenses
     Yearly
Expense
Limitation
     Yearly
Cumulative
Expense
Reimbursement
     Quarterly
Recoupable
Amount
     Recoupment Eligibility
Expiration
 

December 31, 2016

   $ 1,263,735      $ 835,904      $ 427,831      $ 147,943        December 31, 2019  

September 30, 2016

     803,909        524,021        279,888        32,663        September 30, 2019  

June 30, 2016

     567,248        320,023        247,225        90,124        June 30, 2019  

March 31, 2016

     259,420        102,319        157,101        157,101        March 31,2019  

The following table reflects the 2015 quarterly fee waivers and expense reimbursements due from the Adviser as of December 31, 2015, September 30, 2015, June 30, 2015, and March 31, 2015, which are subject to recoupment by the Adviser.

 

Quarter Ended

   Yearly Cumulative
Other Expenses
     Yearly
Expense
Limitation
     Yearly
Cumulative
Expense
Reimbursement
     Quarterly
Recoupable
Amount
     Recoupment Eligibility
Expiration
 

December 31, 2015

   $ 1,440,686      $ 309,265      $ 1,131,421      $ 23,484        December 31, 2018  

September 30, 2015

     1,272,439        164,502        1,107,937        434,917        September 30, 2018  

June 30, 2015

     771,350        98,330        673,020        414,551        June 30, 2018  

March 31, 2015

     353,760        95,291        258,469        258,469        March 31,2018  

The following table reflects the 2014 quarterly fee waivers and expense reimbursements due from the Adviser as of December 31, 2014 and September 30, 2014, which are subject to recoupment by the Adviser.


Quarter Ended

   Yearly Cumulative
Other Expenses
     Yearly
Expense
Limitation
     Yearly
Cumulative
Expense
Reimbursement
     Quarterly
Recoupable
Amount
     Recoupment Eligibility
Expiration
 

December 31, 2014

   $ 463,303      $ 56,948      $ 406,355      $ 321,713        December 31, 2017  

September 30, 2014

     98,723        14,081        84,642        —          Expired  

During the three and nine months ended September 30, 2017, $84,642 of expense reimbursements that were eligible for recoupment by the Adviser expired.

There can be no assurance that the Expense Limitation Agreement will remain in effect beyond April 30, 2018 or that the Adviser will reimburse any portion of our expenses in future quarters not covered by the Expense Limitation Agreement. Amounts shown do not include the amounts committed by the Adviser to voluntarily reimburse the Company for unrealized losses, all of which are not recoupable.

Portfolio Investment Activity for the three and nine months ended September 30, 2017 and September 30, 2016.

During the nine months ended September 30, 2017, we made long investments in portfolio companies and other investments totaling $62,241,424. During the same period, we generated proceeds from sales and principal repayments on long investments of $72,746,045. As of September 30, 2017, our investment portfolio, with a total fair value of $69,976,166, consisted of 40 interests in portfolio companies (calculated as a percentage of total invested assets: 20.5% in first lien senior secured loans, 6.3% in second lien senior secured loans, 0.0% in escrow loans, 53.7% in corporate bonds, 2.8% in asset-backed securities, 0.0% in closed-end mutual funds, 3.0% in warrants, 10.3% in common stock, 3.3% in preferred stock, and 0.1% in rights). As of September 30, 2017, including investments underlying the TRS on a look-through basis, the investments in our portfolio were purchased at a weighted average price of 87.51% of par or stated value, as applicable, and our estimated gross annual portfolio yield (which represents the expected yield to be generated by us on our investment portfolio based on the composition of our portfolio as of such date), prior to leverage, was 8.49% based upon the amortized cost of our investments. The portfolio yield does not represent an actual investment return to stockholders and does not include income from CLO equity.

During the nine months ended September 30, 2016, we made investments in portfolio companies and other investments totaling $63,279,264. During the same period, we sold investments for proceeds of $27,907,573. As of September 30, 2016 our investment portfolio, with a total fair value of $62,927,137, consisted of interests in 38 portfolio companies (33.2% in first lien senior secured loans, 20.4% in second lien senior secured loans, 33.3% in corporate bonds, 6.3% in common stocks, 4.8% in asset-backed securities and 2.0% in warrants). As of September 30, 2016, the investments in our portfolio were purchased at a weighted average price of 86.43% of par or stated value, as applicable, and our estimated gross annual portfolio yield (which represents the expected yield to be generated by us on our investment portfolio based on the composition of our portfolio as of such date), prior to leverage, was 7.63% based upon the amortized cost of our investments. The portfolio yield does not represent an actual investment return to stockholders and does not include income from CLO equity.

Total Portfolio Activity

The following table’s present selected information regarding our portfolio investment activity for the three and nine months ended September 30, 2017 and September 30, 2016:

 

Net Investment Activity

  For the Three Months Ended
September 30, 2017
    For the Nine Months Ended
September 30, 2017
 

Purchases

    8,886,781       62,241,424  

Proceeds from Securities Sold Short

    —         —    

Purchases of Securities Sold Short

    —         —    

Sales and Principal Repayments

    (2,004,759     (72,746,045
 

 

 

   

 

 

 

Net Portfolio Activity

    6,882,022       (10,504,621
 

 

 

   

 

 

 


Net Investment Activity

   For the Three Months Ended
September 30, 2016
     For the Nine Months Ended
September 30, 2016
 

Purchases

   $ 10,450,173      $ 63,279,264  

Proceeds from Securities Sold Short

     (176,203      (939,022

Purchases of Securities Sold Short

     134,935        503,860  

Sales and Principal Repayments

     (8,034,499      (27,907,573
  

 

 

    

 

 

 

Net Portfolio Activity

   $ 2,374,406      $ 34,936,529  

 

     For the Three Months Ended
September 30, 2017
    For the Nine Months Ended
September 30, 2017
 

New Investment Activity by Asset Class

   Purchases      Percentage     Purchases      Percentage  

Senior Secured Loans—First Lien

   $ 3,214,502        36.2   $ 18,641,026        30.0

Senior Secured Loans—Second Lien

     —          0.0     1,641,667        2.6

Corporate Bonds – Senior Unsecured

     5,252,588        59.1     30,686,814        49.3

Closed-End Mutual Funds

     —          0.0     14,154        0.0

Preferred Stock

     419,691        4.7     3,215,965        5.2

Equities

     —          0.0     8,041,798        12.9
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Investment Activity

   $ 8,886,781        100.0   $ 62,241,424        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

    For the Three Months Ended
September 30, 2016
          For the Nine months ended
September 30, 2016
       

New Investment Activity by Asset Class

  Purchases     Percentage     Purchases     Percentage  

Senior Secured Loans — First Lien

  $ 1,517,324       14.5     19,915,931       31.4

Senior Secured Loans — Second Lien

    1,744,786       16.7     2,506,786       4.0

Corporate Bonds — Senior Unsecured

    3,965,051       38.0     18,165,766       28.7

Convertible Bonds — Senior Unsecured

    —         0.0     560,000       0.9

Foreign Sovereign Bonds — Senior Unsecured

    1,018,750       9.8     10,998,389       17.4

Asset-Backed Securities

    —         0.0     2,460,000       3.9

Purchased Call Options

    109,718       1.0     377,991       0.6

Equities(1)

    2,094,543       20.0     8,294,401       13.1
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Investment Activity

  $ 10,450,172       100.0   $ 63,279,264       100.0

 

(1) In addition to the purchase amount shown here, the Company also sold short for proceeds of $176,203 during the three months ended September 30, 2016 and $939,022 during the nine months ended September 30, 2016. The Company did not execute any short sales during the three and nine months ended September 30, 2017.


The following table summarizes the amortized cost and the fair value of the Company’s invested assets as of September 30, 2017:

 

Portfolio Composition by Investment Type

   Amortized
Cost(1)
     Fair Value      Percentage of
Portfolio

(at fair value)
 

Senior Secured Loans — First Lien

   $ 14,510,709      $ 14,319,966        20.5

Senior Secured Loans — Second Lien

     4,424,356        4,393,125        6.3

Senior Secured Loans — Escrow Loan

     87,816        8,750        0.0

Asset-Backed Securities

     1,968,094        1,961,079        2.8

Closed-End Mutual Funds

     14,154        15,305        0.0

Corporate Bonds

     38,068,077        37,556,876        53.7

Common Stocks

     6,960,276        7,210,081        10.3

Preferred Stock

     3,215,965        2,330,417        3.3

Rights

     154,404        65,651        0.1

Warrants

     —          2,114,916        3.0
  

 

 

    

 

 

    

 

 

 

Total Invested Assets

   $ 69,403,851      $ 69,976,166        100.0
  

 

 

    

 

 

    

 

 

 

 

(1) Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on investments.

The following table summarizes the amortized cost and the fair value of the Company’s invested assets by class of financial asset as of September 30, 2017 to include, on a look-through basis, the investments underlying the TRS, as disclosed in Note 7 of the financial statements included herein. The investments underlying the TRS had a notional amount and market value of $38,185,770 and $37,463,810, respectively, as of September 30, 2017. The TRS was not in place as of December 31, 2016.

 

Portfolio Composition by Investment Type

   Amortized
Cost(1)
     Fair Value      Percentage of
Portfolio

(at fair value)
 

Senior Secured Loans — First Lien

   $ 43,179,442      $ 42,494,389        39.5

Senior Secured Loans — Second Lien

     13,941,393        13,682,512        12.7

Senior Secured Loans — Escrow Loan

     87,816        8,750        0.0

Asset-Backed Securities

     1,968,094        1,961,079        1.8

Closed-End Mutual Funds

     14,154        15,305        0.0

Corporate Bonds

     38,068,077        37,556,876        35.0

Common Stocks

     6,960,276        7,210,081        6.7

Preferred Stock

     3,215,965        2,330,417        2.2

Rights

     154,404        65,651        0.1

Warrants

     —          2,114,916        2.0
  

 

 

    

 

 

    

 

 

 

Total Invested Assets

   $ 107,589,621      $ 107,439,976        100.0
  

 

 

    

 

 

    

 

 

 

 

(1) Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on investments.

The following tables summarize the composition of our invested assets by class of financial asset at amortized cost and fair value as of December 31, 2016:


     December 31, 2016  

Portfolio Composition by Investment Type

   Amortized
Cost(1)
     Fair Value      Percentage of
Portfolio

(at fair value)
 

Senior Secured Loans — First Lien

   $ 27,394,540      $ 28,864,108        36.9

Senior Secured Loans — Second Lien

     12,790,248        12,673,072        16.2

Senior Secured Loans — Escrow Loan

     87,816        17,500        0.0

Asset-Backed Securities

     2,576,709        2,614,217        3.3

Convertible Bonds

     569,431        700,625        0.9

Corporate Bonds

     28,847,813        28,113,471        35.9

Common Stocks

     6,170,708        4,532,375        5.8

Rights

     154,404        96,288        0.1

Warrants

     —          678,940        0.9
  

 

 

    

 

 

    

 

 

 

Total Invested Assets

   $ 78,591,669      $ 78,290,596        100.0
  

 

 

    

 

 

    

 

 

 

 

(1) Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on investments.

The following table presents certain selected information regarding the composition of our invested assets as of September 30, 2017 and December 31, 2016:

 

    September
30, 2017
    December
31, 2016
 

Number of Investments

    40       42  

% Variable Rate (based on fair value)

    54 %(1)      53

% Non-Income Producing Equity or Other Investments (based on fair value)

    5 %(1)      3

Weighted Average Purchase Price of Investments (as a % of par or stated value)

    87.51 %(1)      87.40

Weighted Average Credit Rating of Investments that were Rated

    Caa1 (1)      Caa1  

% of Fixed Income Investments on Non-Accrual (based on fair value)

    0 %(1)(2)      0 %(2) 

 

(1) Includes positions underlying the TRS.
(2) Represents less than 0.5%.


Portfolio Composition by Strategy and Industry

 

     September 30, 2017     December 31, 2016  

Portfolio Composition by Strategy

   Fair Value      Percentage
of Portfolio
    Fair Value      Percentage
of Portfolio
 

Broadly Syndicated — Private

   $ 2,223,759        3.2   $ 3,639,776        4.7

Broadly Syndicated – Public

     8,836,231        12.6     8,548,645        10.9

Middle-Market

     56,955,097        81.4     63,487,958        81.1

Opportunistic/Other

     1,961,079        2.8     2,614,217        3.3
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Invested Assets

   $ 69,976,166        100.0   $ 78,290,596        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Broadly, syndicated debt refers to loans and other instruments originated by a bank to a large corporation (both private and public) that are sold off, or syndicated, to investors in pieces. Middle-Market companies include companies with annual revenues between $50 million and $2.5 billion.

The table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets in such industries as of September 30, 2017 and December 31, 2016:

 

     September 30, 2017     December 31, 2016  

Industry Classifications

   Fair Value      Percentage
of Portfolio
    Fair Value      Percentage
of Portfolio
 

Chemicals

   $ 136,000        0.2   $ 73,665        0.1

Energy

     653,588        0.9     5,293,496        6.8

Financial

     3,911,384        5.6     2,614,217        3.3

Healthcare

     51,141,186