NexPoint Capital, Inc. - FORM 10-Q

NexPoint Capital, Inc. - FORM 10-Q - August 9, 2018

Attached files

Attached files

file	filename
EX-32.1 - EX-32.1 - NexPoint Capital, Inc.	d598643dex321.htm
EX-31.2 - EX-31.2 - NexPoint Capital, Inc.	d598643dex312.htm
EX-31.1 - EX-31.1 - NexPoint Capital, Inc.	d598643dex311.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 JUNE 30, 2018

☐	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		(I.R.S. Employer
incorporation or organization)		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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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 June 30, 2018, the Registrant had 10,367,005 shares of common stock, $0.001 par value, outstanding.

NexPoint Capital, Inc.

Statements of Assets and Liabilities


	June 30, 2018 (Unaudited)		December 31, 2017
Assets
Unaffiliated investments, at fair value (cost of $89,740,024 and $92,014,872, respectively)	$	94,828,622	$	93,985,519
Affiliated investments, at fair value (cost of $4,922,705 and $14,154, respectively)⁽¹⁾		2,610,503		16,793
Cash and cash equivalents		2,749,156		11,044,982
Due from counterparty⁽²⁾		19,140,000		13,820,000
Receivable for investments sold		1,975,000		2,768,395
Receivable for common stock sold		—		5,635
Receivable due on total return swaps⁽²⁾		190,813		183,515
Dividends and interest receivable		943,666		1,262,162
Prepaid expenses		40,350		90,548
Capitalized offering costs		70,447		128,830

Total assets		122,548,557		123,306,379

Liabilities
Credit facility and notes payable⁽³⁾		16,555,110		24,400,000
Payable for investments purchased		1,547,778		1,953,152
Unrealized depreciation on total return swap⁽²⁾		48,588		563,823
Common stock repurchased		1,381,840		103,004
Payable to Adviser⁽⁴⁾		626,783		296,092
Incentive fee payable		1,191,310		594,306
Interest expense and commitment fees payable		4,369		52,856
Accrued expenses and other liabilities		331,549		483,189

Total liabilities		21,687,327		28,446,422

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, 10,367,005 and 9,804,321 shares issued and outstanding, respectively)		10,367		9,804
Paid-in capital in excess of par		93,207,592		87,656,780
Accumulated net realized gain		2,124,428		457,746
Undistributed net investment income		516,035		3,051,164
Net unrealized appreciation on investments and total return swaps (including net increase from amounts committed by affiliates of $2,275,000 and $2,275,000, respectively)		5,002,808		3,684,463

Total net assets	$	100,861,230	$	94,859,957

Net asset value per share of common stock	$	9.73	$	9.68

⁽¹⁾See Note 10 for a discussion of affiliated investments.

⁽²⁾See Note 7 for a discussion of total return swaps.

⁽³⁾See Note 7 for a discussion of credit facility.

⁽⁴⁾See Note 4 for a discussion of related party transactions and arrangements.

⁽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 June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Investment income:
Interest	$	1,550,043		$	2,065,908		$	3,377,188			4,309,642
Interest paid in kind		121,173			—			238,248			91,795
Dividend income from unaffiliated investments		141,810			102,863			323,867			181,140
Dividend income from affiliated investments⁽¹⁾		17,450			153			17,848			153
Other fee income		—			8,164			9,930			8,164

Total investment income		1,830,476			2,177,088			3,967,081			4,590,894

Expenses:
Investment advisory fees⁽²⁾		566,814			389,733			1,027,311			801,058
Capital gains incentive fees⁽²⁾		(34,891	)		108,655			597,005			204,440
Interest expense and commitment fees⁽³⁾		155,891			—			356,623			50,379
Administration fees⁽²⁾		104,171			77,947			205,462			160,212
Custodian and accounting service fees		79,004			77,408			156,164			154,294
Stock transfer fee		43,806			89,461			149,134			169,372
Amortized offering costs		51,691			107,047			119,845			216,776
Audit and tax fees		54,034			51,858			110,253			103,145
Legal fees		38,311			19,620			88,184			80,524
Reports to stockholders		11,379			48,208			23,462			95,887
Directors’ fees⁽²⁾		4,903			3,736			9,346			6,603
Other expenses		40,490			14,035			79,049			61,430

Total expenses		1,115,603			987,708			2,921,838			2,104,120
Expenses waived or reimbursed by the Adviser⁽²⁾		(44,203	)		(627,248	)		(124,349	)		(1,364,188	)

Net expenses		1,071,400			360,460			2,797,489			739,932

Net investment income		759,076			1,816,628			1,169,592			3,850,962

Net realized and unrealized gains (losses) on investments:
Net realized gain/(loss) on:
Unaffiliated investments and securities sold short		1,596,602			(1,260,435	)		1,398,260			(413,810	)
Affiliated investments⁽¹⁾		—			—			—			—
Total return swaps⁽⁴⁾		268,706			—			268,422			—
Net change in unrealized appreciation (depreciation) on:
Unaffiliated investments and securities sold short		(1,400,599	)		2,015,427			3,117,951			1,647,730
Affiliated investments⁽¹⁾		(280,613	)		308			(2,314,841	)		308
Total return swaps⁽⁴⁾		(358,549	)		(212,026	)		515,235			(212,026	)

Net realized and unrealized gains (losses)		(174,453	)		543,274			2,985,027			1,022,202

Net increase in net assets resulting from operations		584,623			2,359,902			4,154,619			4,873,164
Per share information - basic and diluted per common share
Net investment income:	$	0.07		$	0.22		$	0.11		$	0.48
Earnings per share:	$	0.06		$	0.28		$	0.40		$	0.61
Weighted average shares outstanding:		10,425,752			8,377,895			10,294,061			7,942,362
Distributions declared per share:	$	0.18		$	0.18		$	0.36		$	0.36

⁽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)


	Six Months Ended June 30,
	2018			2017
Increase (decrease) in net assets resulting from operations:
Net investment income	$	1,169,592		$	3,850,962
Net realized gain (loss) on investments and securities sold short		1,398,260			(413,810	)
Net realized gain (loss) on total return swaps⁽¹⁾		268,422			—
Net change in unrealized appreciation (depreciation) on investments and securities sold short		803,110			1,648,038
Net change in unrealized appreciation (depreciation) on total return swaps⁽¹⁾		515,235			(212,026	)

Net increase in net assets resulting from operations		4,154,619			4,873,164

Distributions to stockholders:
Net investment income		(3,704,721	)		(2,856,568	)

Total distributions to stockholders		(3,704,721	)		(2,856,568	)

Capital share transactions:
Issuance of common stock		5,315,483			14,962,730
Issuance of common shares pursuant to distribution reinvestment plan		2,383,675			1,896,621
Repurchase of common stock		(2,147,783	)		(789,819	)

Net increase in net assets resulting from capital transactions		5,551,375			16,069,532

Total increase in net assets		6,001,273			18,086,128
Net assets at beginning of period		94,859,957			67,292,954

Net assets at end of period	$	100,861,230		$	85,379,082

Undistributed net investment income	$	516,035		$	1,122,553

Changes in common shares
Issuance of common stock		538,995			1,539,933
Reinvestment of common stock		243,782			194,796
Repurchase of common stock		(220,093	)		(82,334	)

Net increase in common shares		562,684			1,652,395

⁽¹⁾See Note 7 for a discussion of total return swaps.

See Notes to Financial Statements

NexPoint Capital, Inc.

Statements of Cash Flows

(Unaudited)


	Six Months Ended June 30,
	2018			2017
Cash flows used in operating activities
Net increase in net assets resulting from operations	$	4,154,619		$	4,873,164

Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities:
Purchases of investment securities		(43,276,875	)		(53,354,643	)
Payment-in-kind investments		(238,248	)		(91,795	)
Proceeds from sales and principal repayments of investment securities		42,734,541			70,741,286
Net realized (gain) loss on investments		(1,398,260	)		413,810
Net change in unrealized (appreciation) depreciation on investments		(803,110	)		(1,648,038	)
Net change in unrealized depreciation on total return swaps		(515,235	)		212,026
Amortization of premium/discount, net		(454,861	)		(1,271,604	)
Amortization of capitalized offering costs		119,845			216,776
Increase (decrease) in operating assets and liabilities:
(Increase) decrease in receivable for investments sold		793,395			(22,734,001	)
(Increase) decrease in dividends and interest receivable		318,496			(247,553	)
(Increase) decrease in receivable from Adviser		—			4,096,447
(Increase) decrease in prepaid expenses		50,198			(66,687	)
(Increase) decrease in due from counterparty		(5,320,000	)		(9,060,000	)
(Increase) decrease in receivable due on total return swap		(7,298	)		—
Increase (decrease) in payable for investments purchased		(405,374	)		5,038,588
Increase (decrease) in payable to Adviser		330,691			14,042
Increase (decrease) in incentive fees payable		597,004			—
Increase (decrease) in interest expense and commitment fees payable		(48,487	)		(21,583	)
Increase (decrease) in accrued expenses and other liabilities		(151,640	)		(8,600	)

Net cash flow (used in) operating activities		(3,520,599	)		(2,898,365	)

Cash flows provided by financing activities
Proceeds from issuance of common stock, net of receivable for common stock sold		5,321,118			14,981,270
Repurchase of common stock, net of payable		(868,947	)		(603,548	)
Distributions paid in cash		(1,321,046	)		(959,947	)
Offering costs paid, net of due to Adviser		(61,462	)		(172,248	)
Net increase (decrease) in credit facilities and notes payable		(7,844,890	)		(11,200,000	)

Net cash flow provided by (used in) financing activities		(4,775,227	)		2,045,527

Net decrease in cash and cash equivalents		(8,295,826	)		(852,838	)

Cash and cash equivalents
Beginning of the period		11,044,982			3,948,113

End of the period	$	2,749,156		$	3,095,275

Supplemental disclosure and non-cash financing activities
Paid-in-kind interest income	$	238,248		$	91,795
Cash paid during the period for interest	$	405,110		$	54,473
Reinvestment of distributions paid	$	2,383,675		$	1,896,621
Local and excise taxes paid	$	138,104		$	—

See Notes to Financial Statements

NexPoint Capital, Inc.

Schedule of Investments

As of June 30, 2018

(Unaudited)


Portfolio Company⁽¹⁾⁽²⁾	Interest Rate		Base Rate Floor			Maturity Date		Principal Amount		Amortized Cost⁽³⁾		Fair Value
Senior Secured Loans – 19.8%⁽⁴⁾
Energy – 2.3%
Fieldwood Energy, LLC (First Lien Term Loan)⁽⁵⁾		L + 525		1.00	%		4/11/2022	$	1,800,549	$	1,794,983	$	1,807,067
Fieldwood Energy, LLC (Second Lien Term Loan)⁽⁵⁾		L + 725		1.00	%		4/11/2023		567,797		547,941		552,654

													2,359,721

Healthcare – 8.9%
BioClinica, Inc. (First Lien Term Loan)⁽⁶⁾		L + 425		1.00	%		10/20/2023		1,982,418		1,955,138		1,890,731
Sound Inpatient Physicians (Second Lien Term Loan)⁽⁶⁾⁽⁷⁾		L + 675		0.00	%		6/26/2026		1,555,556		1,547,778		1,563,333
U.S. Renal Care, Inc. (Second Lien Term Loan)⁽⁶⁾		L + 800		1.00	%		12/31/2023		4,500,000		4,431,246		4,505,625
Valeant Pharmaceuticals International, Inc. (First Lien Term Loan)⁽⁵⁾⁽⁸⁾		L + 300		0.00	%		5/30/2025		1,000,090		999,117		998,010

													8,957,699

Media/Telecommunications – 3.8%
iHeartCommunications, Inc. (First Lien Term Loan)⁽⁹⁾									5,000,000		4,051,750		3,826,875

Retail – 3.1%
Toys ‘R’ Us-Delaware, Inc. (First Lien Term Loan)⁽⁹⁾									2,446,815		1,590,430		1,240,878
Toys ‘R’ Us-Delaware, Inc. DIP Loan (First Lien Term Loan)⁽⁵⁾		L + 875		1.00	%		1/18/2019		1,850,498		1,797,506		1,874,786

													3,115,664

Service – 1.7%
Weight Watchers International, Inc. (First Lien Term Loan)^{(5)(6)(8)(10)}		L + 475		0.75	%		11/29/2024		1,657,500		1,626,540		1,679,777

Utility – 0.0%
Texas Competitive Electric Holdings Company LLC (TXU) (Escrow Loan)⁽¹¹⁾									3,500,000		87,816		7,000

Total Senior Secured Loans													19,946,736

Unsecured Loans – 3.5%
Materials – 3.5%
OmniMax International, Inc.^(12)(13)		14% PIK, 2% Cash					2/6/2021		3,583,255		3,116,275		3,540,255
Total Unsecured Loans													3,540,255

Asset-Backed Securities – 1.6%
Financials – 1.6%
Grayson Investor Corp.^{(8)(14)(15)(16)}							11/1/2021		800		456,000		322,000
Highland Park CDO I Ltd. 2006 1A A2^{(6)(8)(14)(16)}		L + 40					11/25/2051		1,130,294		936,587		1,096,385
PAMCO CLO 1997-1A B^{(8)(9)(12)(13)(14)(16)}									374,239		215,187		189,964

													1,608,349

Total Asset-Backed Securities													1,608,349


								Shares
Closed-End Mutual Funds – 1.4%
Financials – 1.4%
NexPoint Strategic Opportunities Fund^(8)(17)(18)									65,078		1,444,020		1,428,462

Total Closed-End Mutual Funds													1,428,462

See Notes to Financial Statements.

NexPoint Capital, Inc.

Schedule of Investments (continued)

As of June 30, 2018

(Unaudited)


Portfolio Company⁽¹⁾⁽²⁾	Interest Rate			Base Rate Floor	Maturity Date		Principal Amount		Amortized Cost⁽³⁾		Fair Value
Corporate Bonds – 45.9%⁽¹⁸⁾
Financials – 6.7%
ASP AMC Merger Sub, Inc.⁽¹⁴⁾		8.000	%			5/15/2025		6,325,000		6,056,274		5,281,375
Freedom Mortgage Corp.⁽¹⁴⁾		8.250	%			4/15/2025		1,500,000		1,500,000		1,473,750

												6,755,125

Healthcare – 39.2%
DJO Finance LLC / DJO Finance Corp.⁽¹⁴⁾		8.125	%			6/15/2021	$	6,500,000	$	6,229,187	$	6,611,800
Endo Finance LLC / Endo Finco Inc.⁽¹⁴⁾		6.000	%			7/15/2023		6,500,000		5,570,555		5,378,750
Ortho-Clinical Diagnostics⁽¹⁴⁾		6.625	%			5/15/2022		7,217,000		6,781,124		7,090,703
Quorum Health Corp.⁽¹⁴⁾		11.625	%			4/15/2023		3,459,000		3,155,214		3,476,295
Surgery Center Holdings^(8)(14)		6.750	%			7/1/2025		8,358,000		7,800,179		7,971,442
Tenet Healthcare Corp.⁽⁸⁾		8.125	%			4/1/2022		1,000,000		975,247		1,049,270
Valeant Pharmaceuticals International, Inc.^(8)(14)		5.875	%			5/15/2023		4,000,000		3,435,900		3,772,500
Valeant Pharmaceuticals International, Inc.^(8)(14)		6.125	%			4/15/2025		4,500,000		3,822,982		4,162,500

												39,513,260

Total Corporate Bonds												46,268,385


							Shares
Common Stocks – 22.3%
Chemicals – 0.3%
MPM Holdings, Inc.^(8)(19)								8,500		250,750		286,875

Energy – 6.0%
Enterprise Products Partners L.P.^(8)(18)								170,000		4,144,041		4,703,900
Energy Transfer Equity L.P.^(8)(18)								75,000		1,438,740		1,293,750

												5,997,650

Healthcare – 3.8%
Acadia Healthcare Co., Inc.^(8)(19)								20,000		792,077		818,200
Heron Therapeutics, Inc.^(8)(18)(19)								19,232		500,032		747,163
Quorum Health Corp.^(18)(19)								408,514		2,184,093		2,042,570
SteadyMed Ltd.^(8)(19)								54,749		326,441		246,371

												3,854,304

Materials – 2.2%
OmniMax International, Inc.^(12)(13)(19)								6,698		663,115		2,259,886

Media/Telecommunications – 1.2%
Gambier Bay, LLC^{(12)(13)(17)(19)}								9,180,900		3,478,685		1,182,041

Real Estate Investment Trust (REIT) – 2.5%
Independence Realty Trust, Inc.^(8)(18)								246,727		2,216,203		2,543,755

Telecommunication Services – 3.6%
TerreStar Corp.^(12)(13)(19)								14,035		1,599,990		3,674,784

Utility – 2.7%
Vistra Energy Corp.^(18)(19)								115,000		1,776,757		2,720,900

Total Common Stocks												22,520,195


	Preferred Dividend Rate
Preferred Stocks – 1.1%
Real Estate Investment Trust (REIT) – 1.1%
RAIT Financial Trust⁽¹⁸⁾		8.875	%					148,057		3,215,965		1,070,452

Total Preferred Stocks												1,070,452

Rights – 0.0%
Utility – 0.0%
Texas Competitive Electric Holdings Company, LLC (TXU)⁽¹⁹⁾								58,356		150,864		33,992

Total Rights												33,992

Warrants – 1.0%
Healthcare – 0.9%
Galena Biopharma, Inc.^(13)(19)						1/12/2021		1,500,054		—		120
Gemphire Therapeutics, Inc.^(13)(19)						3/15/2022		118,796		—		736,082
SCYNEXIS, Inc.^(13)(19)						6/21/2021		195,000		—		106,080
SteadyMed Ltd.^(8)(13)(19)						4/25/2022		62,895		—		110,066

												952,348

Materials – 0.1%
OmniMax International, Inc.^(12)(13)(19)						8/6/2025		207		—		69,951

Total Warrants												1,022,299

Total Investments- 96.6%									$	94,662,729	$	97,439,125

Cash Equivalents –2.0%⁽²⁰⁾											$	1,975,165
Other Assets & Liabilities, net- 1.4%											$	1,446,940

Net Assets- 100.0%											$	100,861,230

See Notes to Financial Statements.

NexPoint Capital, Inc.

Schedule of Investments (continued)

As of June 30, 2018

(Unaudited)


	Notional Amount⁽²⁰⁾		Unrealized Depreciation
Total Return Swap – 0.0%
BNP Paribas TRS Facility (Note 7)	$	55,535,815	$	(48,588	)

⁽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.

⁽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 June 30, 2018. 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 June 30, 2018 was 2.09%. 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 June 30, 2018 was 2.34%. 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⁾All or a portion of this position has not settled. Full contract rates do not take effect until settlement date.

⁽⁸⁾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 27.3% of the Company’s total assets as of June 30, 2018.

⁽⁹⁾The issuer is in default of its payment obligation, or is in danger of default. In some cases, partial payments are still being paid to the lenders.

⁽¹⁰⁾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 $10,637,476 and 10.5%.

⁽¹¹⁾The investment represents value held in escrow pending future events. No interest is being accrued.

⁽¹²⁾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.

⁽¹³⁾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 $11,869,229 or 11.8% of net assets were fair valued under the Company’s valuation procedures as of June 30, 2018.

⁽¹⁴⁾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 June 30, 2018, these securities amounted to $46,827,464, or 46.4% of net assets.

⁽¹⁵⁾The investment is considered to be the equity tranche of the issuer.

⁽¹⁶⁾Securities of collateralized loan obligations where an affiliate of the Adviser serves as collateral manager.

⁽¹⁷⁾Represents an affiliated issuer. Assets with a total aggregate market value of $2,610,503, or 2.6% of net assets, were affiliated with the Company as of June 30, 2018 (see Note 10).

⁽¹⁸⁾All or part of this security is pledged as collateral for margin/facility borrowings. The market value of the securities pledged as collateral was $61,438,634.

⁽¹⁹⁾Non-income producing security.

⁽²⁰⁾State Street U.S. Government Money Market Fund.

⁽²¹⁾Notional value of the underlying securities in the Total Return Swap is calculated by multiplying par by the initial price.

Glossary

^ADRAmerican Depositary Receipt

^PIKPayment-in-Kind

See Notes to Financial Statements.

NexPoint Capital, Inc.

Schedule of Investments

As of December 31, 2017


Portfolio Company⁽¹⁾⁽²⁾	Interest Rate			Base Rate Floor			Maturity Date		Principal Amount		Amortized Cost⁽³⁾		Fair Value
Senior Secured Loans – 20.4%⁽⁴⁾
Healthcare – 14.8%
BioClinica, Inc. (First Lien Term Loan)⁽⁵⁾		L + 425			1.00	%		10/20/2023	$	992,481	$	978,415	$	972,632
Quorum Health Corporation (First Lien Term Loan)^(6) (7)		L + 675			1.00	%		4/29/2022		1,953,152		1,950,971		1,977,566
U.S. Renal Care, Inc. (First Lien Term Loan)⁽⁵⁾		L + 425			1.00	%		12/31/2022		3,969,620		3,862,685		3,920,000
U.S. Renal Care, Inc. (Second Lien Term Loan)⁽⁵⁾		L + 800			1.00	%		12/31/2023		4,500,000		4,426,629		4,432,500
Valeant Pharmaceuticals International, Inc. (First Lien Term Loan)^{(7) (8)}		L + 350			0.75	%		4/1/2022		2,663,050		2,704,626		2,704,047

														14,006,745

Retail – 3.8%
Toys ‘R’ Us-Delaware, Inc. (First Lien Term Loan)⁽⁹⁾										2,446,815		1,590,430		1,211,173
Toys ‘R’ Us-Delaware, Inc. DIP Loan (First Lien Term Loan)⁽⁷⁾		L + 875			1.00	%		1/18/2019		2,379,212		2,317,512		2,443,451

														3,654,624

Service – 1.8%
Weight Watchers International, Inc. (First Lien Term Loan)^{(7) (10)}		L + 475			0.75	%		11/29/2024		1,700,000		1,665,653		1,713,464

Utility – 0.0%
Texas Competitive Electric Holdings Company LLC (TXU) (Escrow Loan)⁽¹¹⁾										3,500,000		87,816		9,100

Total Senior Secured Loans														19,383,933

Unsecured Loans – 3.5%
Materials – 3.5%
OmniMax International, Inc. ^{(12) (13)}		14% PIK, 2% Cash						2/6/2021		3,346,263		2,799,878		3,326,186
Total Unsecured Loans														3,326,186

Asset-Backed Securities – 2.1%
Financials – 2.1%
Grayson Investor Corp. ^{(8) (14) (15) (16)}								11/1/2021		800		456,000		326,000
Highland Park CDO I Ltd. 2006 1A A2 ^{(5) (8) (14) (16)}		L + 40						11/25/2051		1,394,442		1,152,909		1,345,636
PAMCO CLO 1997-1A B ^{(8) (9) (12) (13) (14) (16)}										559,644		321,795		294,541

														1,966,177

Total Asset-Backed Securities														1,966,177

Closed-End Mutual Funds – 0.0%

									Shares
Financials – 0.0%
NexPoint Credit Strategies Fund ^(8) (17)										664		14,154		16,793

Total Closed-End Mutual Funds														16,793

Portfolio Company⁽¹⁾⁽²⁾	Interest Rate			Base Rate Floor			Maturity Date		Principal Amount		Amortized Cost⁽³⁾		Fair Value
Corporate Bonds – 55.4%
Financials – 3.5%
ASP AMC Merger Sub, Inc.⁽¹⁴⁾		8.000	%					5/15/2025	$	3,400,000		3,279,556		3,281,000

Healthcare – 48.8%
CHS/Community Health Systems, Inc. ⁽⁸⁾		8.000	%					11/15/2019		6,000,000		5,600,220		5,085,000
DJO Finance LLC / DJO Finance Corp. ⁽¹⁴⁾		8.125	%					6/15/2021		6,500,000		6,190,694		6,110,000
Endo Finance LLC / Endo Finco Inc. ⁽¹⁴⁾		6.000	%					7/15/2023		4,000,000		3,470,061		3,160,000
Ortho-Clinical Diagnostics ⁽¹⁴⁾		6.625	%					5/15/2022		7,717,000		6,932,359		7,794,170
Quorum Health Corp.		11.625	%					4/15/2023		7,459,000		6,406,992		7,319,143
Surgery Center Holdings ^{(8) (14)}		6.750	%					7/1/2025		8,358,000		7,771,045		7,940,100
Tenet Healthcare Corp. ⁽⁸⁾		8.125	%					4/1/2022		1,000,000		972,538		1,021,250
Valeant Pharmaceuticals International, Inc. ^(8) (14)		5.875	%					5/15/2023		4,000,000		3,391,404		3,720,000

See Notes to Financial Statements.

NexPoint Capital, Inc.

Schedule of Investments (continued)

As of December 31, 2017


Portfolio Company⁽¹⁾⁽²⁾	Interest Rate			Base Rate Floor	Maturity Date		Principal Amount		Amortized Cost⁽³⁾		Fair Value
Valeant Pharmaceuticals International, Inc. ^(8) (14)		6.125	%			4/15/2025	$	4,500,000	$	3,788,231	$	4,134,375

												46,284,038

Media/Telecommunications – 0.8%
iHeartCommunications, Inc. ⁽⁹⁾								9,180,900		3,478,685		803,329

Telecommunication Services – 2.3%
Intelsat Jackson Holdings S.A. ^(8) (14)		9.750	%			7/15/2025		2,254,000		2,263,975		2,175,110

Total Corporate Bonds												52,543,477


							Shares
Common Stocks – 14.6%
Chemicals – 0.2%
MPM Holdings, Inc. ^{(8) (18)}								8,500		250,750		170,000

Energy – 4.3%
Enterprise Products Partners L.P.								155,000		3,714,862		4,109,050

Healthcare – 2.6%
Quorum Health Corp. ⁽¹⁸⁾								350,000		1,792,620		2,184,000
SteadyMed Ltd. ^{(8) (18)}								62,500		372,656		231,250

											2,415,250

Materials – 2.7%
OmniMax International, Inc. ^{(12) (13) (18)}								6,698		663,116		2,566,191

Real Estate Investment Trust (REIT) – 2.6%
Independence Realty Trust, Inc. ⁽⁸⁾								246,727		2,216,203		2,489,476

Utility – 2.2%
Vistra Energy Corp. ⁽¹⁸⁾								115,000		1,776,757		2,106,808

Total Common Stocks												13,856,775


	Preferred Dividend Rate
Preferred Stocks – 2.1%
Real Estate Investment Trust (REIT) – 2.1%
RAIT Financial Trust		8.875	%			—		148,057		3,215,965		1,960,275

Total Preferred Stocks												1,960,275

Rights – 0.1%
Utility – 0.1%
Texas Competitive Electric Holdings Company, LLC (TXU) ⁽¹⁸⁾								58,356		150,864		56,897

Total Rights												56,897

Warrants – 0.9%
Healthcare – 0.8%
Galena Biopharma, Inc. ^{(13) (18)}						1/12/2021		1,500,054		—		18
Gemphire Therapeutics, Inc. ^{(13) (18)}						3/15/2022		118,796		—		493,218
Kadmon Holdings, Inc. ^{(13) (18)}						4/13/2018		119,047		—		22,727
SCYNEXIS, Inc. ^{(13) (18)}						6/21/2021		195,000		—		200,511
SteadyMed Ltd. ^{(8) (13) (18)}						4/25/2022		62,895		—		95,893

												812,367

Materials – 0.1%
OmniMax International, Inc. ^{(12) (13) (18)}						8/6/2025		207		—		79,432

Total Warrants												891,799

Total Investments – 99.1%									$	92,029,026	$	94,002,312

Cash Equivalents – 11.4%⁽¹⁹⁾											$	10,852,235

Other Assets & Liabilities, net – (10.5%)											$	(9,994,590	)

Net Assets – 100.0%											$	94,859,957

See Notes to Financial Statements.

NexPoint Capital, Inc.

Schedule of Investments (continued)

As of December 31, 2017


	Notional Amount⁽²⁰⁾		Unrealized Depreciation
Total Return Swap – (0.6%)
BNP Paribas TRS Facility⁽¹⁶⁾ (Note 7)	$	35,960,921	$	(563,823	)

⁽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.

⁽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, 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 December 31, 2017 was 1.69%. 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⁾	The interest rate on these investments is subject to a base rate of 1-Month LIBOR, which at December 31, 2017 was 1.56%. 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.

⁽⁸⁾

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 25.7% of the Company’s total assets as of December 31, 2017.

⁽⁹⁾	The issuer is in default of its payment obligation, or is in danger of default. In some cases, partial payments are still being paid to the lenders.

⁽¹⁰⁾	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 $15,720,209.

⁽¹¹⁾	The investment represents value held in escrow pending future events. No interest is being accrued.

⁽¹²⁾	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.

⁽¹³⁾

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 $7,078,717, or 7.5% of net assets were fair valued under the Company’s valuation procedures as of December 31, 2017.

⁽¹⁴⁾	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, 2017, these securities amounted to $40,280,932, or 42.5% of net assets.

⁽¹⁵⁾	The investment is considered to be the equity tranche of the issuer.

⁽¹⁶⁾	Securities of collateralized loan obligations where an affiliate of the Adviser serves as collateral manager.

⁽¹⁷⁾	Represents an affiliated issuer. Assets with a total aggregate market value of $16,793, or 0.0% of net assets, were affiliated with the Company as of December 31, 2017 (see Note 10).

⁽¹⁸⁾	Non-income producing security.

⁽¹⁹⁾	State Street U.S. Government Money Market Fund.

⁽²⁰⁾	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.

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 as of June 30, 2018, the Adviser controls 2,238,359 total shares, including reinvestment of dividends, for a net amount of approximately $21.8 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, served as the dealer manager of the Company’s continuous public offering prior to the termination of the offering. The Adviser and Dealer Manager are related parties and receive fees and other compensation for services related to the investment and management of the Company’s assets and the continuous public offering. The Company’s continuous public offering ended on February 14, 2018.

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, 2018. The interim financial data as of June 30, 2018, and for the three and six months ended June 30, 2018 and June 30, 2017 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 June 30, 2018 and December 31, 2017, the Company had cash and cash equivalents of $2,749,156 and $11,044,982, respectively. As of June 30, 2018 and December 31, 2017, $1,975,165 and $10,852,235 was held in the State Street U.S. Government Money Market Fund, and $773,991 and $192,747 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 June 30, 2018 and December 31, 2017, 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 six months ended June 30, 2018, the Company recognized $0 and $9,930 of fee income, respectively. For the three and six months ended June 30, 2017, the Company recognized $8,164 and $8,164 of fee income, respectively.

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 June 30, 2018, 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	$	189,964
Gambier Bay, LLC	Common Stock		1,182,041
OmniMax International, Inc.	Common Stock		2,259,886
TerreStar Corp.	Common Stock		3,674,784
OmniMax International, Inc.	Unsecured Loans		3,540,255
Galena Biopharma, Inc.	Warrant		120
Gemphire Therapeutics, Inc.	Warrant		736,082
OmniMax International, Inc.	Warrant		69,951
SCYNEXIS, Inc.	Warrant		106,080
SteadyMed Ltd.	Warrant		110,066

As of December 31, 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	$	294,541
OmniMax International, Inc.	Common Stock		2,566,191
OmniMax International, Inc	Unsecured Loans		3,326,186
Galena Biopharma, Inc.	Warrant		18
Gemphire Therapeutics, Inc.	Warrant		493,218
Kadmon Holdings, Inc.	Warrant		22,727
OmniMax International, Inc.	Warrant		79,432
SCYNEXIS, Inc.	Warrant		200,511
SteadyMed Ltd.	Warrant		95,893

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 June 30, 2018, the Company’s investments consisted of senior secured loans, unsecured loans, bonds, asset-backed securities, common stocks, preferred stock, a closed-end mutual fund, 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 June 30, 2018 and December 31, 2017:


	June 30, 2018
Investments	Level 1		Level 2		Level 3			Total
Assets
Senior Secured Loans	$	—	$	19,946,736	$	—		$	19,946,736
Unsecured Loans		—		—		3,540,255			3,540,255
Asset-Backed Securities		—		1,418,385		189,964			1,608,349
Closed-End Mutual Funds		1,428,462		—		—			1,428,462
Corporate Bonds		—		46,268,385		—			46,268,385
Common Stocks
Chemicals		286,875		—		—			286,875
Energy		5,997,650		—		—			5,997,650
Healthcare		3,854,304		—		—			3,854,304
Materials		—		—		2,259,886			2,259,886
Media/Telecommunications		—		—		1,182,041			1,182,041
Real Estate Investment Trusts (REITs)		2,543,755		—		—			2,543,755
Telecommunication Services		—		—		3,674,784			3,674,784
Utility		2,720,900		—		—			2,720,900
Preferred Stocks		1,070,452		—		—			1,070,452
Rights		—		33,992		—			33,992
Warrants
Healthcare		—		952,348		—			952,348
Materials		—		—		69,951			69,951

Total Assets	$	17,902,398	$	68,619,846	$	10,916,881		$	97,439,125

Liabilities
Derivatives
Total Return Swap Contracts	$	—	$	—	$	(48,588	)	$	(48,588	)

Total Liabilities	$	—	$	—	$	(48,588	)	$	(48,588	)

Total Investments net of Swap Contracts	$	17,902,398	$	68,619,846	$	10,868,293		$	97,390,537


	December 31, 2017
Investments	Level 1		Level 2		Level 3			Total
Assets
Senior Secured Loans
Healthcare	$	—	$	14,006,745	$	—		$	14,006,745
Retail		—		3,654,624		—			3,654,624
Service		—		1,713,464		—			1,713,464
Utility		—		9,100		—			9,100
Unsecured Loans		—		—		3,326,186			3,326,186
Asset-Backed Securities		—		1,671,636		294,541			1,966,177
Closed-End Mutual Funds		16,793		—		—			16,793
Corporate Bonds		—		52,543,477		—			52,543,477
Common Stocks
Chemicals		170,000		—		—			170,000
Energy		4,109,050		—		—			4,109,050
Healthcare		2,415,250		—		—			2,415,250
Materials		—		—		2,566,191			2,566,191
Real Estate Investment Trusts (REITs)		2,489,476		—		—			2,489,476
Utility		2,106,808		—		—			2,106,808
Preferred Stocks		1,960,275		—		—			1,960,275
Rights		—		56,897		—			56,897
Warrants
Healthcare		—		812,367		—			812,367
Materials		—		—		79,432			79,432

Total Assets	$	13,267,652	$	74,468,310	$	6,266,350		$	94,002,312

Liabilities
Derivatives
Total Return Swap Contracts	$	—	$	—	$	(563,823	)	$	(563,823	)

Total Liabilities	$	—	$	—	$	(563,823	)	$	(563,823	)

Total Investments Net of Swap Contracts	$	13,267,652	$	74,468,310	$	5,702,527		$	93,438,489

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 six months ended June 30, 2018.


Investments:	Balance as of December 31, 2017			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/PIK		(Sales and redemptions)			Balance as of June 30, 2018			Change in unrealized gain/(loss) on Level 3 securities still held at period end
Assets
Unsecured Loans
Materials	$	3,326,186		$	—	$	—	$	79,193	$	213	$	(102,327	)	$	238,248	$	(1,258	)	$	3,540,255		$	(102,327	)
Asset-Backed Securities
Financials		294,541			—		—		—		78,797		2,031			—		(185,405	)		189,964			2,031
Common Stocks Materials		2,566,191			—		—		—		—		(306,305	)		—		—			2,259,886			(306,305	)
Media/Telecommunications		—			1,182,041		—		—		—		—			—		—			1,182,041			—
Telecommunication Services		—			—		—		—		—		2,074,794			1,599,990		—			3,674,784			2,074,794
Warrants Materials		79,432			—		—		—		—		(9,481	)		—		—			69,951			(9,481	)

Total	$	6,266,350		$	1,182,041	$	—	$	79,193	$	79,010	$	1,658,712		$	1,838,238	$	(186,663	)	$	10,916,881		$	1,658,712

Liabilities
Total Return Swaps⁽¹⁾	$	(563,823	)	$	—	$	—	$	—	$	—	$	515,235		$	—	$	—		$	(48,588	)	$	515,235

⁽¹⁾During the six months ended June 30, 2018, the Company recognized a net realized gain on the TRS amounting to $268,422. The Company received $367,942 in cash payments from the TRS during the period and paid $106,818, with an increase of $7,298 in receivable from BNP Paribas for the six months ended June 30, 2018.

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 six months ended June 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 June 30, 2017			Change in unrealized gain/(loss) on Level 3 securities still held at period end
Assets
Senior Secured Loans
Healthcare	$	4,005,000	$	—	$	—		$	4,326	$	—	$	248,799		$	—	$	—	$	4,258,125		$	248,799

Asset-Backed Securities
Financials		275,625		—		—			—		—		28,262			—		—		303,887			28,262
Common Stocks
Chemicals		73,665		—		(126,650	)		—		—		52,985			—		—		—			—
Warrants
Healthcare		23,851		—		(6,726	)		—		—		(17,125	)		—		—		—			—

Total	$	4,378,141	$	—	$	(133,376	)	$	4,326	$	—	$	312,921		$	—	$	—	$	4,562,012		$	277,061

Liabilities
Total Return Swaps⁽¹⁾	$	—	$	—	$	—		$	—	$	—	$	(212,026	)	$	—	$	—	$	(212,026	)	$	(212,026	)

⁽¹⁾During the six months ended June 30, 2017, the Company did not recognize a net realized gain on the TRS.

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 2 to Level 3 are due to a decrease in market activity (e.g. frequency of trades), which resulted in a decrease of available market inputs to determine price. For the six months ended June 30, 2018, $1,182,041 was transferred from Level 2 to Level 3. 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 six months ended June 30, 2017, $6,726 was transferred from Level 3 to Level 2, $1,930,857 was transferred from Level 2 to Level 1, and $126,650 was transferred from Level 3 to Level 1.

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 June 30, 2018 and December 31, 2017:


Investment	Fair value at June 30, 2018			Valuation technique	Unobservable inputs	Range of input value(s) (weighted average)
Unsecured Loans	$	3,540,255		Discounted Cash Flow	Discount Rate Spread Adjustment	16.50% 0.50%
Common Equity		7,116,711		Discounted Cash Flow Multiples Analysis Transaction Analysis Pricing Feed	Discount Rate Terminal Multiple Multiple of EBITDA Price/MHz-PoP Risk Discount N/A	11.00% - 12.00% 6.75x 6.75x - 8.00x $0.09 - $0.55 27.50% N/A

Warrants		69,951		Discounted Cash Flow Multiples Analysis	Discount Rate Terminal Multiple Multiple of EBITDA	12.00% 6.75x 6.75x - 8.00x
Asset-Backed Securities		189,964		Discounted Cash Flow	Discount Rate	20.88%

Total	$	10,916,881

Total Return Swaps	$	(48,588	)	Third Party Pricing Vendor	N/A	N/A


Investment	Fair value at December 31, 2017			Valuation technique	Unobservable inputs	Range of input value(s) (weighted average)
Senior Secured Loans	$	3,326,186		Discounted Cash Flow	Discount Rate Spread Adjustment	16.20% 0.20%
Common Equity				Discounted Cash Flow Multiples Analysis	Discount Rate Minority Discount Terminal Multiple Multiple of EBITDA	12.00% 20.00% 7.0x 7.75x - 8.25x
		2,566,191		Discount for Lack of Marketability		15.00%
Warrants		79,432		Discounted Cash Flow Multiples Analysis Discount for Lack of Marketability	Discount Rate Minority Discount Terminal Multiple Multiple of EBITDA	12.00% 20.00% 7.0x 7.75x - 8.25x 15.00%
Asset-Backed Securities		294,541		Discounted Cash Flow	Discount Rate	20.85%

Total	$	6,266,350

Total Return Swaps	$	(563,823	)	Third Party Pricing Vendor	N/A	N/A

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 six months ended June 30, 2018 and June 30, 2017, the Company did not hold options.

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.

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. Prior to the termination of the offering, as we raised proceeds, these organization and offering costs were expensed and became 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 six months ended June 30, 2018 and June 30, 2017. Selling commissions and fees of $413,024 and $1,234,643 were paid for the six months ended June 30, 2018 and June 30, 2017, 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 June 30,				Six Months Ended June 30,
Basic and diluted	2018		2017		2018		2017
Net increase in net assets from operations	$	584,623	$	2,359,902	$	4,154,619	$	4,873,164
Weighted average common shares outstanding		10,425,752		8,377,895		10,294,061		7,942,362
Earnings per common share-basic and diluted	$	0.06	$	0.28	$	0.40	$	0.61

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 generally 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 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, restricted cash and 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.

In February 2018, the FASB issued Accounting Standards Update 2018-03, Technical Corrections and Improvements to Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this update provide a variety of technical corrections and improvements to how entities should account for financial instruments. shorten the amortization period for certain callable debt securities held at premium. For public entities this update will be effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years beginning after June 15, 2018. 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 June 30, 2018:


	Fair value		Percentage
Assets
Healthcare	$	53,277,611		54.7	%
Financials		9,791,936		10.0	%
Energy		8,357,371		8.6	%
Materials		5,870,092		6.0	%
Media/Telecommunications		5,008,916		5.2	%
Telecommunication Services		3,674,784		3.8	%
Real Estate Investment Trusts (REITs)		3,614,207		3.7	%
Retail		3,115,664		3.2	%
Utility		2,761,892		2.8	%
Service		1,679,777		1.7	%
Chemicals		286,875		0.3	%

Total Assets	$	97,439,125		100.0	%

The following table shows the composition of the Company’s invested assets by industry classification at fair value at December 31, 2017:


	Fair value		Percentage
Assets
Healthcare	$	63,518,400		67.5	%
Materials		5,971,809		6.4	%
Financials		5,263,970		5.6	%
Real Estate Investment Trusts (REITs)		4,449,751		4.7	%
Energy		4,109,050		4.4	%
Retail		3,654,624		3.9	%
Telecommunication Services		2,175,110		2.3	%
Utility		2,172,805		2.3	%
Service		1,713,464		1.8	%
Media/Telecommunications		803,329		0.9	%
Chemicals		170,000		0.2	%

Total Assets	$	94,002,312		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 June 30, 2018:


	Amortized Cost		Fair value		Percentage of Portfolio (at Fair Value)
Assets
Senior Secured Loans - First Lien	$	13,815,464	$	13,318,124		13.7	%
Senior Secured Loans - Second Lien		6,526,965		6,621,612		6.8	%
Senior Secured Loans - Escrow Loan		87,816		7,000		0.0	%
Unsecured Loans		3,116,275		3,540,255		3.6	%
Asset-Backed Securities		1,607,774		1,608,349		1.7	%
Closed-End Mutual Funds		1,444,020		1,428,462		1.5	%
Corporate Bonds		45,326,662		46,268,385		47.5	%
Common Stocks		19,370,924		22,520,195		23.1	%
Preferred Stocks		3,215,965		1,070,452		1.1	%
Rights		150,864		33,992		0.0	%
Warrants		—		1,022,299		1.0	%

Total Assets	$	94,662,729	$	97,439,125		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, 2017:


	Amortized cost		Fair value		Percentage of portfolio (at fair value)
Assets
Senior Secured Loans – First Lien	$	15,070,292	$	14,942,333		15.9	%
Senior Secured Loans – Second Lien		4,426,629		4,432,500		4.7	%
Senior Secured Loans – Escrow Loan		87,816		9,100		0.0	%
Unsecured Loans		2,799,878		3,326,186		3.5	%
Asset-Backed Securities		1,930,704		1,966,177		2.1	%
Closed-End Mutual Funds		14,154		16,793		0.0	%
Corporate Bonds		53,545,760		52,543,477		56.0	%
Common Stocks		10,786,964		13,856,775		14.7	%
Preferred Stocks		3,215,965		1,960,275		2.1	%
Warrants		—		891,799		0.9	%
Rights		150,864		56,897		0.1	%

Total Assets	$	92,029,026	$	94,002,312		100.0	%

The following table summarizes the amortized cost and the fair value of the Company’s invested assets as of June 30, 2018 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 $55,535,815 and $55,199,774, respectively, as of June 30, 2018.


	Amortized cost		Fair value		Percentage of portfolio (at fair value)
Assets
Senior Secured Loans - First Lien	$	59,154,700	$	58,478,788		38.3	%
Senior Secured Loans - Second Lien		16,723,544		16,660,722		10.9	%
Senior Secured Loans - Escrow Loan		87,816		7,000		0.0	%
Unsecured Loans		3,116,275		3,540,255		2.3	%
Asset-Backed Securities		1,607,774		1,608,349		1.1	%
Closed-End Mutual Funds		1,444,020		1,428,462		0.9	%
Corporate Bonds		45,326,662		46,268,385		30.3	%
Common Stocks		19,370,924		22,520,195		14.8	%
Preferred Stocks		3,215,965		1,070,452		0.7	%
Rights		150,864		33,992		0.0	%
Warrants		—		1,022,299		0.7	%

Total Assets	$	150,198,544	$	152,638,899		100.0	%

The following table summarizes the amortized cost and the fair value of the Company’s invested assets as of December 31, 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 $35,960,921 and $35,231,901, respectively, as of December 31, 2017.


	Amortized cost		Fair value		Percentage of portfolio (at fair value)
Assets
Senior Secured Loans - First Lien	$	41,514,176	$	40,683,792		31.5	%
Senior Secured Loans - Second Lien		13,943,666		13,922,942		10.8	%
Senior Secured Loans - Escrow Loan		87,816		9,100		0.0	%
Unsecured Loans		2,799,878		3,326,186		2.6	%
Asset-Backed Securities		1,930,704		1,966,177		1.5	%
Closed-End Mutual Funds		14,154		16,793		0.0	%
Corporate Bonds		53,545,760		52,543,477		40.7	%
Common Stocks		10,786,964		13,856,775		10.7	%
Preferred Stocks		3,215,965		1,960,275		1.5	%
Warrants		—		891,799		0.7	%
Rights		150,864		56,897		0.0	%

Total Assets	$	127,989,947	$	129,234,213		100.0	%

The following table shows the composition of the Company’s invested assets by geographic classification at June 30, 2018:


Geography	Fair value		Percentage
Assets
Cayman Islands⁽¹⁾		1,608,349		1.7	%
United States		95,830,776		98.3	%

Total Assets	$	97,439,125		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, 2017:


Geography	Fair value		Percentage
Assets
Cayman Islands⁽¹⁾	$	1,966,177		2.1	%
Luxembourg⁽¹⁾		2,175,110		2.3	%
United States		89,861,025		95.6	%

Total Assets	$	94,002,312		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 six months ended June 30, 2018, the Company incurred investment advisory fees payable to the Adviser of $566,814 and $1,027,311. For the three and six months ended June 30, 2017, the Company incurred investment advisory fees payable to the Adviser of $389,733 and $801,058, 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. Effective December 20, 2017, the Adviser ended its voluntary waiver of advisory fees.

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 six months ended June 30, 2018, the Company incurred $(34,891) and $597,005 of incentive fees on capital gains, respectively. For the three and six months ended June 30, 2017, the Company incurred $108,655 and $204,440 of incentive fees on capital gains, respectively, all of which was voluntarily waived. Since inception, the Company has accrued $1,191,310 of incentive fees on capital gains in aggregate. Effective December 20, 2017, the Adviser ended its voluntary waiver of incentive fees. No such fees have been paid with respect to realized gains to the Adviser as of June 30, 2018.

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 six months ended June 30, 2018, the Company incurred administration fees payable to the Adviser of $104,171 and $205,462, respectively. For the three and six months ended June 30, 2017, the Company incurred administration fees payable to the Adviser of $77,947 and $160,212, 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. Effective December 20, 2017, the Adviser ended its voluntary waiver of administration fees.

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
December 31, 2017	$	413,916	$	75,906		December 31, 2020
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	$	2,284,508	$	458,275

⁽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. For the three and six months ended June 30, 2018 and the three and six months ended June 30, 2017, 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 six months ended June 30, 2018, the Adviser incurred and paid offering costs of $0 and $238,568, respectively, on our behalf. For the three and six months ended June 30, 2017, the Adviser incurred and paid offering costs of $433,665 and $730,626, respectively, on our behalf. For the three and six months ended June 30, 2018, the Company capitalized $0 and $61,462 of offering costs, respectively. For the three and six months ended June 30, 2017, the Company capitalized $80,432 and $172,248 of offering costs, respectively. Of the capitalized offering costs, $51,691 and $119,845 were amortized to expense during the three and six months ended June 30, 2018, respectively. Of the capitalized offering costs, $107,047 and $216,776 were amortized to expense during the three and six months ended June 30, 2017, respectively. As of June 30, 2018 and June 30, 2017, $70,447 and $184,027 remained on the Statements of Assets and Liabilities, respectively.

Organization costs and offering costs are limited to 1% of total gross proceeds raised in the offering and are not due and payable to the Adviser to the extent they exceed that amount. As of June 30, 2018, the cumulative aggregate amount of $5,327,574 of organization and offering costs exceeds 1% of total proceeds raised. Subsequent to the termination of the offering, the Adviser forfeited the right to reimbursement of the remaining $4,305,091 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. Prior to December 8, 2017, Mr. Powell was treated as an “interested person” of the Company for all purposes other than compensation and the Company’s code of ethics.

For the three and six months ended June 30, 2018, the Company recorded an expense relating to director fees of $4,903 and $9,346, respectively. For the three and six months ended June 30, 2017, the Company recorded an expense relating to director fees of $3,736 and $6,603, respectively, which represents the allocation of the director fees to the Company. As of June 30, 2018, there was $0 of expenses 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, 2019.

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 June 30, 2018 is $1,339,877. 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 June 30, 2018 and March 31, 2018, 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
June 30, 2018	$	613,809	$	489,460	$	124,349	$	44,203		June 30, 2021
March 31, 2018		341,882		261,736		80,146		80,146		March 31, 2021

The following table reflects the fee waivers and expense reimbursements due from the Adviser as of December 31, 2017, 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/(recouped) amount			Recoupment eligibility expiration
December 31, 2017	$	1,304,585	$	975,289	$	329,296	$	(122,135	)		December 31, 2020
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 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		—	Expired
March 31, 2015		353,760		95,921		258,469		—	Expired

During the three and six months ended June 30, 2018, $414,551 and $673,020, respectively, 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 six months ended June 30, 2018 and June 30, 2017, the Adviser did not voluntarily reimburse the Company for unrealized losses sustained. Cumulatively since inception, the Adviser has paid $2,275,000 to voluntarily reimburse the Company for such losses. Had these payments not been made, the net asset value (“NAV”) as of June 30, 2018 would have been lower by approximately this amount.

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

Receivable from Adviser / Payable to Adviser

As of June 30, 2018 and December 31, 2017, there were no amounts owed from the Adviser to the Company.

As of June 30, 2018 and December 31, 2017, the Company owed $626,783 and $296,092, respectively, to the Adviser, largely related to advisory fees, administration fees, and the expense limitation agreement.

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 six months ended June 30, 2018 and June 30, 2017, the Company did not incur any interest or penalties. Furthermore, management of the Company is also 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 2, 2018, until expiration of March 30, 2018 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, 73,736 shares of the Company were tendered for repurchase, constituting approximately 0.71% of the Company’s outstanding shares.

The Company conducted its quarterly tender offer from June 1, 2018, until expiration of June 28, 2018 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, 142,605 shares of the Company were tendered for repurchase, constituting approximately 1.38% of the Company’s outstanding shares.

For the six months ended June 30, 2018, the Company repurchased 3,752 shares as part of its death and disability repurchase program.

Note 7 — Credit Facility and Leverage Facilities

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.

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 + 1.30%. 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. At June 30, 2018, current outstanding and fair value amounts were $16,555,110 and $16,624,636, respectively.

For the three and six months ended June 30, 2018 and June 30, 2017, the components of total interest expense were as follows:


	Three Months Ended June 30,					Six Months Ended June 30,
	2018			2017		2018			2017
Direct interest expense	$	155,891		$	—	$	356,623		$	42,325
Commitment fees		—			—		—			8,054
Amortization of financing costs		—			—		—			—

Total interest expense	$	155,891		$	—	$	356,623		$	50,379

Average daily amount outstanding		19,044,611			—		22,203,489			4,387,845
Weighted average interest rate		3.22	%		—		3.05	%		1.95	%

The Company is required to maintain 200% asset coverage with respect to its borrowings outstanding. Asset coverage is 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. As of the dates indicated below, the Company’s borrowings outstanding and asset coverage was as follows:


Six months ended	Total amount outstanding		% of asset coverage
06/30/2018	$	52,950,925		290	%
12/31/2017		46,540,921		304	%

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.”

On April 2, 2018, the Company amended and restated the TRS agreement with BNP Paribas. The amended and restated TRS Agreement, effective April 10, 2018 increases the maximum aggregate notional amount of the portfolio debt securities subject to the TRS to $60 million.

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.

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 June 30, 2018:


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	$	2,726,250	$	(127,500	)
DJO Finance, LLC (First Lien Term Loan)		Healthcare		L + 325		1.00	%		6/16/2020		3,969,388		3,964,426		(4,962	)
Employbridge, LLC (First Lien Term Loan)		Service		L + 500		1.00	%		4/10/2025		972,708		966,719		(5,989	)
Granite Acquisition, Inc. (Second Lien Term Loan)		Utility		L + 725		1.00	%		12/19/2022		3,736,725		3,713,506		(23,219	)
Jordan Health Products, Inc. (First Lien Term Loan)		Healthcare		L + 500		0.00	%		5/15/2025		4,606,481		4,560,185		(46,296	)
Kindred Healthcare, Inc. (First Lien Term Loan)		Healthcare		L + 350		1.00	%		4/09/2021		6,469,630		6,465,909		(3,721	)
Lanai Holdings II, Inc. (First Lien Term Loan)		Healthcare		L + 475		1.00	%		8/28/2022		2,488,238		2,360,875		(127,363	)
NN, Inc. (First Lien Term Loan)		Industrials		L + 800		1.00	%		4/19/2023		1,975,000		1,980,000		5,000
Quorum Health Corp. (First Lien Term Loan)		Healthcare		L + 675		1.00	%		4/29/2022		7,177,942		7,260,883		82,941
SkillSoft Corp. (First Lien Term Loan)		Technology		L + 475		1.00	%		4/28/2021		1,867,441		1,845,443		(21,998	)
Truck Hero, Inc. (Second Lien Term Loan)		Manufacturing		L + 825		1.00	%		5/10/2025		1,666,667		1,679,167		12,500
U.S Renal Care, Inc. (First Lien Term Loan)		Healthcare		L + 425		1.00	%		12/31/2022		4,874,801		4,759,886		(114,915	)
U.S Renal Care, Inc. (Second Lien Term Loan)		Healthcare		L + 800		1.00	%		12/31/2023		1,939,437		1,920,187		(19,250	)
Valeant Pharmaceuticals International, Inc. (First Lien Term Loan)		Healthcare		L + 300		—			05/19/2025		2,000,000		1,995,000		(5,000	)
Vyaire Medical, Inc. (First Lien Term Loan)		Healthcare		L + 475		1.00	%		04/11/2025		4,867,607		4,956,338		88,731
Weight Watchers International, Inc. (First Lien Term Loan)		Service		L + 475		0.75	%		11/29/2024		4,070,000		4,045,000		(25,000	)

											Total			$	(336,041	)

											Accrued income and liabilities				287,453

											Total TRS Fair Value			$	(48,588	)

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

The following is a summary of the underlying loans subject to the TRS as of December 31, 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	$	2,775,000	$	(78,750	)
DJO Finance, LLC (First Lien Term Loan)		Healthcare		L + 325		1.00	%		6/16/2020		3,989,796		3,934,936		(54,860	)
Fieldwood Energy, LLC (First Lien Term Loan)		Energy		L + 700		1.00	%		8/31/2020		1,728,527		1,620,494		(108,033	)
Fieldwood Energy, LLC (First Lien Term Loan)		Energy		L + 712.5		1.25	%		9/30/2020		478,369		389,889		(88,480	)
Granite Acquisition, Inc. (Second Lien Term Loan)		Utility		L + 725		1.00	%		12/19/2022		3,736,725		3,717,219		(19,506	)
iHeartCommunications, Inc. (First Lien Loan)		Media/ Telecommunications		L + 675		—			1/30/2019		4,112,500		3,737,500		(375,000	)
Kindred Healthcare, Inc. (First Lien Term Loan)		Healthcare		L + 350		1.00	%		4/09/2021		6,503,210		6,499,470		(3,740	)
Lanai Holdings II, Inc. (First Lien Term Loan)		Healthcare		L + 475		1.00	%		8/28/2022		2,503,122		2,375,000		(128,122	)
Quorum Health Corp. (First Lien Term Loan)		Healthcare		L + 675		1.00	%		4/29/2022		5,260,919		5,306,952		46,033
SkillSoft Corp. (First Lien Term Loan)		Technology		L + 475		1.00	%		4/28/2021		1,867,441		1,877,218		9,777
SkillSoft Corp. (Second Lien Term Loan)		Technology		L + 825		1.00	%		4/28/2022		1,259,895		1,327,389		67,494
Truck Hero, Inc. (Second Lien Term Loan)		Manufacturing		L + 825		1.00	%		5/10/2025		1,666,667		1,670,834		4,167

											Total			$	(729,020	)

											Accrued income and liabilities				165,197

											Total TRS Fair Value			$	(563,823	)

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

As of June 30, 2018 and December 31, 2017, the Company had posted $19,140,000 and $13,820,000, respectively, 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 six months ended June 30, 2018, the Company recognized a net realized gain on the TRS amounting to $268,422. The Company received $367,942 in cash payments from the TRS during the period and paid $106,818, with an increase of $7,298 in receivable from BNP Paribas for the six months ended June 30, 2018. During the six months ended June 30, 2017, the Company did not recognize a net realized gain on the TRS.

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, prior to the termination of the offering, the Adviser paid all of the Company’s organization and offering costs subject to reimbursement to the extent organization and offering costs paid by the Adviser did not exceed 1% of gross proceeds raised. Please see Note 4 for additional details on organization and offering costs.

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 June 30, 2018.

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. See also Note 12 regarding the end of the offering period.

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 June 30, 2018:


Affiliated investments	Fair value as of December 31, 2017		Purchases		Sales		Realized gains (losses)		Change in unrealized gains (losses)			Fair value as of June 30, 2018		Dividend income
Gambier Bay, LLC⁽¹⁾	$	803,329	$	—	$	—	$	—	$	378,712		$	1,182,041	$	—

NexPoint Strategies Opportunities Fund		16,793		1,429,866		—		—		(18,197	)		1,428,462		17,848

Total affiliated investments	$	820,122	$	1,429,866	$	—	$	—	$	360,515		$	2,610,503	$	17,848

⁽¹⁾Includes the value of iHeart Communications, Inc. bonds as of December 31, 2017 and subsequent activity.

Note 11 — Financial Highlights

Selected data for a share outstanding throughout the six months ended June 30, 2018 and June 30, 2017 is as follows:


	For the Six Months Ended			For the Six Months Ended
	June 30, 2018 (Unaudited)			June 30, 2017 (Unaudited)
Common shares per share operating performance:
Net asset value, beginning of period	$	9.68		$	9.47
Income from investment operations:
Net investment income⁽¹⁾		0.11			0.48
Net realized and unrealized gain (loss)		0.29			0.15

Total from investment operations		0.40			0.63

Less distribution declared to common shareholders:
From net investment income		(0.36	)		(0.36	)
From net realized gains		—			—

Total distributions declared to common shareholders		(0.36	)		(0.36	)


Capital share transactions
Issuance of common stock⁽²⁾		0.01			0.01
Shares tendered⁽¹⁾		0.00	⁽³⁾		0.00	⁽³⁾

Net asset value, end of period	$	9.73		$	9.75
Net asset value total return⁽⁴⁾⁽⁵⁾		4.27	%		6.79	%

Ratio and supplemental data:
Net assets, end of period (in 000’s)	$	100,861		$	85,379
Shares outstanding, end of period		10,367,005			8,754,621
Common share information at end of period:
Ratios based on weighted average net assets of common shares:
Gross operating expenses⁽⁶⁾		5.85	%		5.53	%
Fees and expenses waived or reimbursed⁽⁶⁾		(0.25	)%		(3.59	)%
Net operating expenses⁽⁶⁾		5.60	%		1.94	%
Net investment income (loss) before fees waived or reimbursed⁽⁶⁾		2.09	%		6.53	%
Net investment income (loss) after fees waived or reimbursed⁽⁶⁾		2.34	%		10.12	%
Ratio of interest and credit facility expenses to average net assets⁽⁶⁾		0.71	%		0.13	%
Ratio of incentive fees to average net assets⁽⁶⁾		1.20	%		0.54	%⁽⁷⁾
Portfolio turnover rate⁽⁵⁾		44	%		77	%
Asset coverage ratio		290	%		607	%
Weighted average commission rate paid⁽⁸⁾	$	0.0372		$	0.0221

⁽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⁾Not annualized.

⁽⁶⁾Annualized.

⁽⁷⁾All incentive fees were waived for the six months ended June 30, 2017.

⁽⁸⁾Represents the total dollar amount of commissions paid on portfolio transactions divided by total number of portfolio shares purchased and sold for which commissions were charged.

Note 12 — Subsequent Events

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

On June 8, 2018, 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 August 1, 2018, to the stockholders of record on July 2, 2018, July 9, 2018, July 16, 2018, July 23, 2018, and July 30, 2018. The Board also 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 August 29, 2018, to the stockholders of record on August 6, 2018, August 13, 2018, August 20, 2018, and August 27, 2018.

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 impact on the industries in which we may invest;

•

the ability of our portfolio companies to achieve their objectives;

•

the relative and absolute performance of our investment adviser;

•

our current and expected financings and investments;

•

our ability to make distributions to our stockholders;

•

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 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 less than $1,000,000 to $20,000,000, although investments may be larger as our asset base increases. We may selectively make investments in amounts larger than $20,000,000 in some of our portfolio companies. While our asset base increases, we may make smaller investments. We may invest up to 15% of our net assets in entities that are excluded from registration under the 1940 Act by virtue of section 3(c)(1) and 3(c)(7) of the 1940 Act (such as private equity funds or hedge funds). This limitation does not apply to any CLOs, certain of which may rely on Section 3(c)(1) or 3(c)(7) of the 1940 Act.

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.

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.

Public Offering

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 as of June 30, 2018 the Adviser controls 2,238,359 total shares, including reinvestment of dividends, for a net amount of approximately $21.8 million. In February 2018, we closed our continuous public offering of shares of common stock.

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. Prior to December 20, 2017, the Adviser was waiving most fees, subject to possible recoupment for expenses pertaining to periods from and after June 10, 2016. Effective December 20, 2017, the Adviser ended its voluntary waiver of advisory and administration fees. We bear all out-of-pocket costs and expenses of our operations and transactions, including:

•

our organization;

•

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, monit

Large accelerated filer

Accelerated filer

Non-accelerated filer

☒ (Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company