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EX-32.2 - EXHIBIT 32.2 - Runway Growth Credit Fund Inc.tv500256_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - Runway Growth Credit Fund Inc.tv500256_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Runway Growth Credit Fund Inc.tv500256_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Runway Growth Credit Fund Inc.tv500256_ex31-1.htm

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

(Mark One)    
x   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

 

COMMISSION FILE NUMBER: 814-01180

 

 

 

Runway Growth Credit Fund Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   47-5049745
(State of incorporation)   (I.R.S. Employer Identification No.)

 

205 N. Michigan Ave., Suite 4200    
Chicago, IL   60601
(Address of principal executive offices)   (Zip Code)

 

(312) 281-6270

(Registrant’s telephone number, including area code)

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.

 

Large accelerated filer ¨   Accelerated filer ¨
Non-accelerated filer x Smaller reporting company ¨
(do not check if a smaller reporting company)  
Emerging growth company x  

 

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 x

 

The issuer had 8,738,897 shares of common stock, $0.01 par value per share, outstanding as of August 9, 2018.

 

 

 

 

 

 

RUNWAY GROWTH CREDIT FUND INC.

 

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2018

 

Table of Contents

 

    INDEX   PAGE
NO.
       
PART I.   FINANCIAL INFORMATION    
       
Item 1.   Financial Statements   1
       
    Statements of Assets and Liabilities as of June 30, 2018 (unaudited) and December 31, 2017   1
       
    Statements of Operations for the three and six months ended June 30, 2018 and 2017 (unaudited)   2
       
    Statements of Changes in Net Assets for the six months ended June 30, 2018 and 2017 (unaudited)   3
         
    Statements of Cash Flows for the six months ended June 30, 2018 and 2017 (unaudited)   4
         
    Schedule of Investments as of June 30, 2018 (unaudited)   5
         
    Schedule of Investments as of December 31, 2017   10
       
    Notes to Financial Statements (unaudited)   14
       
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   31
       
Item 3.   Quantitative and Qualitative Disclosures About Market Risk   45
       
Item 4.   Controls and Procedures   46
       
PART II.   OTHER INFORMATION   47
       
Item 1.   Legal Proceedings   47
       
Item 1A.   Risk Factors   47
       
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   47
       
Item 3.   Defaults Upon Senior Securities   48
       
Item 4.   Mine Safety Disclosures   48
       
Item 5.   Other Information   48
       
Item 6.   Exhibits   48
     
SIGNATURES    49

 

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements 

 

RUNWAY GROWTH CREDIT FUND INC.

 

Statements of Assets and Liabilities

 

   June 30, 2018   December 31, 2017 
   (Unaudited)     
Assets          
Investments at fair value:          
Non-control/non-affiliate investments at fair value (cost of $136,380,243 and $67,811,669, respectively)  $135,990,207   $68,216,859 
Investment in U.S. Treasury Bills at fair value (cost of $69,990,200 and $72,504,649, respectively)   69,990,200    72,504,649 
Total investments at fair value (cost of $206,370,443 and $140,316,318, respectively)   205,980,407    140,721,508 
Cash and cash equivalents   1,947,614    8,141,670 
Accrued interest receivable   602,730    330,926 
Deferred credit facility fees (net of accumulated amortization of $2,867 and $0, respectively)   155,133    - 
Other accounts receivable   34,327    25,154 
Prepaid expenses   44,455    96,449 
Total assets   208,764,666    149,315,707 
           
Liabilities          
Payable for securities purchased   62,978,367    18,995,710 
Credit facilities   15,000,000    - 
Due to portfolio company   -    3,000,000 
Due to affiliate   20,267    11,954 
Accrued expenses and other liabilities   387,817    267,666 
Total liabilities   78,386,451    22,275,330 
           
Commitments and contingencies (Note 3)          
           
Net assets          
Common stock, $0.01 par value; 100,000,000 shares authorized; 8,738,897 and 8,668,334 shares issued and outstanding, respectively   87,389    86,683 
Dividend distributions   (1,300,250)   - 
Additional paid-in capital   129,265,383    126,920,269 
Accumulated undistributed net investment income (loss)   2,720,285    (307,417)
Accumulated undistributed net realized loss   (4,556)   (64,348)
Accumulated net unrealized gain (loss)   (390,036)   405,190 
Total net assets  $130,378,215   $127,040,377 
           
Net asset value per share  $14.92   $14.66 

 

See notes to financial statements.

 

 1 

 

 

RUNWAY GROWTH CREDIT FUND INC.

 

Statements of Operations

(Unaudited)

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2018   2017   2018   2017 
Investment income                    
From non-control/non-affiliate:                    
Interest income  $3,639,078   $113,366   $6,567,459   $113,366 
Dividend income   -    13    -    13 
Other income   54,146    1,823    69,146    1,823 
End-of-term payments and other termination fees   543,750    -    843,751    - 
Interest income from U.S. Treasury Bills   20,804    4,695    60,144    4,785 
Other income from non-investment sources   151,264    8,107    239,113    11,395 
Total investment income   4,409,042    128,004    7,779,613    131,382 
                     
Operating expenses                    
Management fees   1,203,125    968,753    2,406,250    1,483,843 
Administration fee   41,158    31,250    98,303    62,500 
Professional fees   215,529    115,481    344,086    270,915 
Overhead allocation expense   91,953    -    210,067    - 
General and administrative expenses   22,831    14,842    62,161    93,076 
Directors’ fees   49,500    52,000    99,000    102,500 
Consulting fees   12,000    12,237    25,000    24,657 
Insurance expense   23,970    22,200    47,940    44,400 
Interest expense   44,486    -    66,120    - 
Other expenses   56,262    151,640    92,734    172,262 
Total operating expenses   1,760,814    1,368,403    3,451,661    2,254,153 
Net investment income (loss)   2,648,228    (1,240,399)   4,327,952    (2,122,771)
                     
Realized and unrealized gain (loss) on investments                    
Realized gain on non-control/non-affiliate investments   -    -    59,792    - 
Net change in unrealized appreciation (depreciation) on non-control/non-affiliate investments   (459,019)   -    (795,226)   - 
Net change in unrealized appreciation (depreciation) on U.S. Treasury Bills   -    1,823    -    1,897 
Net realized and unrealized gain (loss) on investments   (459,019)   1,823    (735,434)   1,897 
                     

Net increase (decrease) in net assets resulting from operations

  $2,189,209   $(1,238,576)  $3,592,518   $(2,120,874)
                     
Net increase (decrease) in net assets resulting from operations per common share  $0.25   $(1.01)  $0.41   $(2.70)
Net investment income (loss) per common share  $0.30   $(1.01)  $0.50   $(2.70)
Weighted-average shares outstanding   8,692,372    1,228,773    8,680,419    784,355 

 

See notes to financial statements.

 

 2 

 

 

RUNWAY GROWTH CREDIT FUND INC.

 

Statements of Changes in Net Assets

(Unaudited)

 

   Six Months Ended
June 30, 2018
   Six Months Ended
June 30, 2017
 
         
Net increase (decrease) in net assets from operations          
Net investment income (loss)  $4,327,952   $(2,122,771)
Realized gain on investments   59,792    - 
Net change in unrealized appreciation (depreciation) on investments   (795,226)   1,897 
Net increase (decrease) in net assets resulting from operations   3,592,518    (2,120,874)
           
Distributions to shareholders from:          
Dividends paid to shareholders   (1,300,250)   - 
Total distributions to shareholders   (1,300,250)   - 
           
Capital share transactions          
Issuance of common stock   -    40,000,000 
Issuance of common stock under dividend reinvestment plan   1,045,570    - 
Net increase in net assets from capital share transactions   1,045,570    40,000,000 
           
Total increase in net assets   3,337,838    37,879,126 
           
Net assets at beginning of period   127,040,377    3,476,672 
           
Net assets at end of period  $130,378,215   $41,355,798 
           
Capital share activity          
Shares issued   70,563    2,666,667 
Shares outstanding at beginning of period   8,668,334    335,000 
Shares outstanding at end of period   8,738,897    3,001,667 

 

See notes to financial statements.

 

 3 

 

 

RUNWAY GROWTH CREDIT FUND INC.

 

Statements of Cash Flows

(Unaudited)

 

   Six Months Ended
June 30, 2018
   Six Months Ended
June 30, 2017
 
         
Cash flows from operating activities          
Net increase (decrease) in net assets resulting from operations  $3,592,518   $(2,120,874)
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash used in operating activities:          
Purchase of investments   (76,121,498)   (11,363,786)
Purchase of U.S. Treasury Bills   (138,972,584)   (46,485,628)
Sale or maturity of investments   9,593,353    - 
Sale or maturity of U.S. Treasury Bills   141,513,028    24,500,000 
Realized gain on non-control/non-affiliate investments   (59,792)   - 
Net change in unrealized (appreciation) depreciation on non-control/non-affiliate investments   795,226    - 
Net change in unrealized (appreciation) depreciation on U.S. Treasury Bills   -    (1,897)
Amortization of fixed income premiums or discounts   (2,006,632)   (27,998)
Amortization of deferred credit facility fees   (2,867)   - 
Changes in operating assets and liabilities:          
Accrued interest receivable   (271,804)   (34,188)
Other accounts receivable   (9,173)   - 
Prepaid expenses   51,994    44,399 
Due to portfolio company   (3,000,000)   - 
Payable for securities purchased   43,982,657    - 
Due to affiliate   8,313    (618,678)
Accrued expenses and other liabilities   120,151    168,536 
Net cash used in operating activities   (20,787,110)   (35,940,114)
           
Cash flows from financing activities          
Deferred credit facility fees   (152,266)   - 
Borrowings under credit facilities   15,000,000    - 
Dividends paid to shareholders   (254,680)   - 
Cash received from common stock issued, net of change in capital contributions receivable   -    39,884,346 
Net cash provided by financing activities   14,593,054    39,884,346 
           
Net (decrease) increase in cash   (6,194,056)   3,944,232 
Cash and cash equivalents at beginning of period   8,141,670    1,039,931 
Cash and cash equivalents at end of period  $1,947,614   $4,984,163 
           
Supplemental Disclosure of Cash Flow Information          
Taxes paid  $-   $48,492 
Interest paid  $8,435   $- 
           
Supplemental Disclosure of Non-Cash Financing Activities          
Issuance of shares of common stock under dividend reinvestment plan  $1,045,570   $- 

 

See notes to financial statements.

 

 4 

 

 

RUNWAY GROWTH CREDIT FUND INC.

 

Schedule of Investments (Unaudited)

 

June 30, 2018

 

Portfolio Companies  Sub-Industry  Investment Description (1),(5),(6) 

Acquisition
Date

  Principal   Cost   Fair Value (2)   % of Net
Assets
 
                              
Non-control/non-affiliate investments                       
                              
Senior Secured Term Loans                       
Aginity, Inc.  Application Software  LIBOR+9.5%, 11.5% floor, 5% ETP, due 5/25/2022  5/25/2018  $7,000,000   $6,708,771   $6,708,771    5.15%
                              
AllClear ID, Inc.  Specialized Consumer Services  LIBOR+10.75%, 12.25% floor, 5% ETP,  due 9/1/2020  9/1/2017  $10,000,000    9,421,318    9,565,468    7.35 
                              
Aria Systems, Inc.  Application Software  LIBOR+9.0%, 11.35% floor, 4% ETP, due 12/15/2021  6/29/2018  $25,000,000    23,969,383    23,969,383    18.38 
                              
CareCloud Corporation  Healthcare Technology  Prime+7.0%, 11.75% floor, 3.5% ETP, due 6/15/2022  6/19/2018  $25,000,000    24,368,226    24,368,226    18.69 
                              
Dtex Systems, Inc.  Specialized Consumer Services  LIBOR+9.5%, 11.5% floor, 11.5% cash cap, 4% ETP, due 11/15/2021  6/1/2018  $8,000,000    7,849,791    7,849,791    6.02 
                              
eSilicon Corporation  Semiconductors  Tranche I: LIBOR+10.5%, 11.5% floor, 5% ETP, due 7/15/2020  7/31/2017  $10,000,000    9,806,971    10,199,772    7.82 
      Tranche II: LIBOR+10.5%, 11.5% floor, 5% ETP, due 7/15/2020  2/8/2018  $5,000,000    4,997,862    5,099,886    3.91 
                              
Jibe, Inc.  Application Software  LIBOR+10.0%, 12.25% floor, 5% ETP, due 6/7/2022  6/7/2018  $7,000,000    6,896,014    6,896,014    5.29 
                              
Mojix, Inc.  Application Software  Tranche I: LIBOR+10.5%, 11% floor, 12.0% cash cap, 5% ETP, due 5/15/2021 (4), (9)  5/16/2017  $6,005,220    5,833,754    5,334,580    4.09 
      Tranche II: LIBOR+10.5%, 11% floor, 12.0% cash cap, 5% ETP, due 5/15/2021 (4), (9)  8/3/2017  $2,001,740    1,955,501    1,778,194    1.36 
                              
RedSeal, Inc.  Application Software  LIBOR+9.5%, 11% floor, 5.25% ETP, due 12/15/2020  12/15/2017  $15,000,000    14,882,034    14,882,034    11.41 

 

 5 

 

 

RUNWAY GROWTH CREDIT FUND INC.

 

Schedule of Investments (Unaudited) – (continued)

June 30, 2018

 

Portfolio Companies  Sub-Industry  Investment Description (1), (5), (6) 

Acquisition
Date

 

Principal/
Shares

   Cost   Fair Value (2)   % of Net
Assets
 
                              
Non-control/non-affiliate investments (continued)                       
                              
Senior Secured Term Loans (continued)                       
                              
SendtoNews Video, Inc.  Advertising  Tranche I: LIBOR+11%, 11% floor, 4% ETP, due 6/30/2020 (3) (7)  6/30/2017  $3,500,000   $3,415,729   $3,415,729    2.62%
      Tranche II; LIBOR+11%, 11% floor, 4% ETP, due 6/30/2020 (3) (7)  10/4/2017  $1,500,000    1,500,000    1,500,000    1.15 
                              
zSpace, Inc.  Technology Hardware, Storage & Peripherals  LIBOR+10.5%, 12% floor, 5% ETP, due 12/29/2020  12/29/2017  $10,000,000    9,427,016    9,427,016    7.23 
Total Senior Secured Term Loans           131,032,370    130,994,864    100.47 
                              
Warrants (8)                             
Aginity, Inc.  Application Software  Warrant for Series C Preferred Stock, exercise price $1.949/share, expires 5/25/2028  5/25/2018   359,159    167,727    167,727    0.13 
                              
AllClear ID, Inc.  Specialized Consumer Services  Warrant for Common Stock, exercise price $0.01/share, expires 9/1/2027  9/1/2017   523,893    1,053,025    1,053,025    0.81 
                              
Aria Systems, Inc.  Application Software  Warrant for Series G Preferred Stock, exercise price $0.8638/share, expires 6/29/2028  6/29/2018   2,170,641    770,578    770,578    0.59 
                              
Aspen Group Inc.  Education Services  Warrant for Common Stock, exercise price $6.87/share, expires 7/25/2022  7/25/2017   224,174    583,301    748,000    0.57 
                              
CareCloud Corporation  Healthcare Technology  Warrant for Series C Preferred Stock, exercise price $1.2035/share, expires 6/19/2025  6/19/2018   1,557,956    394,163    394,163    0.30 
                              
Dtex Systems, Inc.  Specialized Consumer Services  Warrant for Series C Preferred Stock, exercise price $0.600/share, expires 6/1/2025  6/1/2018   500,000    59,000    59,000    0.05 
                              
eSilicon Corporation  Semiconductors  Warrant for Series H Preferred Stock, exercise price $1.01/share, expires 7/31/2027  7/31/2017   1,485,149    543,564    518,317    0.40 
                              
Jibe, Inc.  Application Software  Warrant for Series C Preferred Stock, exercise price $2.265/share, expires 6/7/2028  6/7/2018   247,242    40,795    40,795    0.03 

 

 6 

 

 

RUNWAY GROWTH CREDIT FUND INC.

 

Schedule of Investments (Unaudited) – (continued)

June 30, 2018

 

Portfolio Companies  Sub-Industry  Investment Description (1), (5), (6) 

Acquisition
Date

 

Principal/
Shares

   Cost   Fair Value (2)   % of Net
Assets
 
                              
Non-control/non-affiliate investments (continued)                       
                              
Warrants (continued)                       
                              
Mojix, Inc.  Application Software  Warrants for Series E Preferred Stock, exercise price $0.1064/share, expires 5/16/2027 (9), (10)  5/16/2017   16,442,732   $417,645   $-    -%
                              
RedSeal, Inc.  Application Software  Warrant for Series C-Prime Preferred Stock, exercise price $0.27318/share, expires 12/15/2027  12/15/2017   3,569,075    364,046    331,924    0.25 
                              
SendtoNews Video, Inc.  Advertising  Warrant for Class B Non-Voting Stock, exercise price $0.67/share, expires 6/30/2027 (3) (7)  6/30/2017   574,502    246,461    232,700    0.18 
                              
zSpace, Inc.  Technology Hardware, Storage & Peripherals  Warrant for Series E Preferred Stock, exercise price $0.90/share, expires 12/29/2027  12/29/2017   1,896,966    707,568    679,114    0.52 
Total Warrants                 5,347,873    4,995,343    3.83 
                              
Total non-control/non-affiliate investments           136,380,243    135,990,207    104.30 
                              
U.S. Treasury     U.S. Treasury Bill, 0%, due 7/5/2018     $70,000,000    69,990,200    69,990,200    53.69 
                              
Total Investments                $206,370,443   $205,980,407    157.99%

 

See notes to financial statements.

 

 7 

 

 

RUNWAY GROWTH CREDIT FUND INC.

 

Schedule of Investments (Unaudited) – (continued)

June 30, 2018

 

(1)Disclosures of interest rates on notes include cash interest rates, payment-in-kind (“PIK”) interest rates and end-of-term-payment (“ETP”) interest rates, as applicable. Unless otherwise indicated, all of the Company’s variable rate debt investments bear interest at a rate that is determined by reference to the 3-Month London Interbank Offered Rate (“LIBOR”) or the U.S. Prime Rate. At June 30, 2018, the 3-Month LIBOR was 2.33% and the U.S. Prime Rate was 5.00%.

 

(2)All investments in portfolio companies, which as of June 30, 2018 represented 104.3% of the Company’s net assets, are restricted as to resale and were valued at fair value as determined in good faith by the Company’s Board of Directors.

 

(3)Investment is not a qualifying investment as defined under Section 55(a) of the Investment Company Act of 1940, as amended. Non-qualifying assets represent 2.50% of total investments at fair value as of June 30, 2018. Qualifying assets must represent at least 70% of total assets at the time of acquisition of any additional non-qualifying assets. If at any time qualifying assets do not represent at least 70% of the Company's total assets, the Company will be precluded from acquiring any additional non-qualifying asset until such time as it complies with the requirements of Section 55(a).

 

(4)Represents a PIK security. If the interest rate goes above the cap of 12.00%, PIK interest will be accrued on the excess amount and paid at maturity.

 

(5)All investments are valued using unobservable inputs, except the U.S. Treasury Bill which is valued using observable inputs.

 

(6)All investments are domiciled in the United States, unless otherwise noted.

 

(7)Investment is domiciled in Canada.

 

(8)Investments are non-income producing.

 

(9)As of June 29, 2018, the Mojix, Inc. (“Mojix”) loan and security agreement was amended to: (a) increase the LIBOR spread from 10.0% to 10.5%; (b) require existing shareholders to invest additional amounts of equity in Mojix; (c) grant the Company a warrant to purchase, at nominal cost, $2,000,000 worth of shares of Mojix preferred stock being issued in conjunction with the required equity financing; and, (d) make certain adjustments to the length and timing of interest-only periods based on the accomplishment of performance milestones. In exchange, the Company has agreed to provide forbearance on certain covenant defaults and make available, upon certain additional equity investment by the shareholders, the remaining $2,000,000 under the original loan commitment. On July 6, 2018, the Company funded a third tranche in the amount of $500,000.

 

(10)In connection with the June 29, 2018 amended loan and security agreement, Mojix has agreed to grant the Company a warrant to purchase, at nominal cost, $2,000,000 worth of shares of Mojix preferred stock. The warrant to be granted in conjunction with the amended loan terms will be recorded at fair value when issued.

 

 8 

 

 

RUNWAY GROWTH CREDIT FUND INC.

 

Schedule of Investments (Unaudited) – (continued)

 

June 30, 2018

 

The following tables show the fair value of our portfolio of investments (excluding any U.S. Treasury Bills held) by geographic region and industry as of June 30, 2018:

 

   June 30, 2018 
Geographic Region  Investments at
Fair Value
   Percentage
of Net
Assets
 
         
Western United States  $81,647,589    62.62%
Southeastern United States   24,762,389    18.99 
South Central United States   10,618,493    8.15 
Midwestern United States   6,876,498    5.27 
Northeastern United States   6,936,809    5.32 
Canada   5,148,429    3.95 
Total  $135,990,207    104.30%

 

   June 30, 2018 
Industry  Investments at
Fair Value
   Percentage
of Net
Assets
 
         
Application Software  $60,880,000    46.69%
Healthcare Technology   24,762,389    19.00 
Specialized Consumer Services   18,527,284    14.21 
Semiconductors   15,817,975    12.13 
Technology Hardware, Storage & Peripherals   10,106,130    7.75 
Advertising   5,148,429    3.95 
Education Services   748,000    0.57 
Total  $135,990,207    104.30%

 

See notes to financial statements.

 

 9 

 

 

RUNWAY GROWTH CREDIT FUND INC.

 

Schedule of Investments

 

December 31, 2017

 

Portfolio Companies  Sub-Industry  Investment Description (1),(5),(6) 

Acquisition
Date

  Principal   Cost   Fair Value (2)   % of Net
Assets
 
                          
Non-control/non-affiliate investments                       
                              
Senior Secured Term Loans                       
AllClear ID, Inc.  Specialized Consumer Services  LIBOR+10.75%, 12.25% floor, 5% ETP, due 9/1/2020  9/1/2017  $10,000,000   $9,068,668   $9,068,668    7.14%
                              
Aspen Group Inc.  Education Services  Tranche I: LIBOR+10%, 10% floor, 3.25% ETP, due 7/25/2021 (4)  7/25/2017  $5,000,000    4,467,483    4,467,483    3.52 
      Tranche II: LIBOR+10%, 10% floor, 3.25% ETP, due 7/25/2021 (4)  12/4/2017  $2,500,000    2,495,740    2,495,740    1.96 
                              
eSilicon Corporation  Semiconductors  LIBOR+10.5%, 11.5% floor, 5% ETP, due 7/15/2020  7/31/2017  $10,000,000    9,555,024    9,555,024    7.52 
                              
Mojix, Inc.  Application Software 

Tranche I: LIBOR+10%, 11% floor, 5% ETP, due 5/15/2021 (4)

  5/16/2017  $6,000,000    5,802,549    5,802,549    4.57 
     

Tranche II: LIBOR+10%, 11% floor, 5% ETP, due 5/15/2021 (4)

  8/3/2017  $2,000,000    1,948,989    1,948,989    1.53 
                              
Placecast, Inc.  Internet Software & Services  LIBOR+10.75%, 11.75% floor, 5% ETP, due 6/15/2020  6/21/2017  $2,000,000    1,981,236    1,981,236    1.56 
                              
RedSeal, Inc.  Application Software  LIBOR+9.5%, 11% floor, 5.25% ETP,
due 12/15/2020
  12/15/2017  $15,000,000    14,656,171    14,656,171    11.54 
                              
SendtoNews Video, Inc.  Advertising 

Tranche I: LIBOR+11%, 11% floor, 4% ETP, due 6/30/2020 (3) (7)

  6/30/2017  $3,500,000    3,305,812    3,305,812    2.60 
     

Tranche II; LIBOR+11%, 11% floor, 4% ETP, due 6/30/2020 (3) (7)

  10/4/2017  $1,500,000    1,500,000    1,500,000    1.18 
                              
zSpace, Inc.  Application Software  LIBOR+10.5%, 12% floor, 5% ETP, due 12/29/2020  12/29/2017  $10,000,000    9,196,084    9,196,084    7.24 
                              
Total Senior Secured Term Loans                $63,977,756   $63,977,756    50.36%

 

 10 

 

  

RUNWAY GROWTH CREDIT FUND INC.

 

Schedule of Investments – (continued)

 

December 31, 2017

 

Portfolio Companies  Sub-Industry  Investment Description (5), (6) 

Acquisition
Date

 

Principal/
Shares

   Cost   Fair Value (2)   % of Net
Assets
 
                          
Non-control/non-affiliate investments (continued)                       
                              
Warrants (8)                             
AllClear ID, Inc.  Specialized Consumer Services  Warrant for Common Stock,exercise price $0.01/share, expires 9/1/2027  9/1/2017   523,893   $1,053,025   $1,053,025    0.83%
                              
Aspen Group Inc.  Education Services  Warrant for Common Stock,exercise price $6.87/share, expires 7/25/2022  7/25/2017   224,174    583,301    1,018,000    0.80 
                              
eSilicon Corporation  Semiconductors  Warrant for Series H Preferred Stock,exercise price $1.01/share, expires 7/31/2027  7/31/2017   1,485,149    543,564    543,564    0.43 
                              
Mojix, Inc.  Application Software  Warrants for Series E Preferred Stock, exercise price $0.1064/share, expires 5/16/2027  5/16/2017   11,744,808    303,016    281,900    0.22 
                              
Placecast, Inc.  Internet Software & Services  Warrant for Series C Preferred Stock, exercise price $1.5669/share, expires 6/21/2027  6/21/2017   127,643    32,932    31,400    0.02 
                              
RedSeal, Inc.  Application Software  Warrant for Series C-Prime Preferred Stock, exercise price $0.27318/share, expires 12/15/2027  12/15/2017   3,569,075    364,046    364,046    0.29 
                              
SendtoNews Video, Inc.  Advertising 

Warrant for Class B Non-Voting Stock, exercise price $0.67/share, expires 6/30/2027 (3) (7)

  6/30/2017   574,502    246,461    239,600    0.19 
                              
zSpace, Inc.  Application Software  Warrant for Series E Preferred Stock, exercise price $0.90/share, expires 12/29/2027  12/29/2017   1,896,966    707,568    707,568    0.56 
Total Warrants                 3,833,913    4,239,103    3.34 
                              
Total non-control/non-affiliate investments           67,811,669    68,216,859    53.70 
                              
U.S. Treasury     U.S. Treasury Bill, 0%, due 1/4/2018     $72,509,000    72,504,649    72,504,649    57.07 
                              
Total Investments                $140,316,318   $140,721,508    110.77%

 

See notes to financial statements.

 

 11 

 

 

RUNWAY GROWTH CREDIT FUND INC.

 

Schedule of Investments – (continued)

December 31, 2017

 

(1)Disclosures of interest rates on notes include cash interest rates, payment-in-kind (“PIK”) interest rates and end-of-term-payment (“ETP”) interest rates, as applicable. Unless otherwise indicated, all of the Company’s variable rate debt investments bear interest at a rate that is determined by reference to the 3-Month London Interbank Offered Rate (“LIBOR”). At December 31, 2017, the 3-Month LIBOR was 1.69%.

 

(2)All investments in portfolio companies are restricted as to resale and were valued at fair value as determined in good faith by the Company’s Board of Directors.

 

(3)Investment is not a qualifying investment as defined under Section 55(a) of the Investment Company Act of 1940, as amended. Non-qualifying assets represent 3.59% of total investments at fair value as of December 31, 2017. Qualifying assets must represent at least 70% of total assets at the time of acquisition of any additional non-qualifying assets. If at any time qualifying assets do not represent at least 70% of the Company's total assets, the Company will be precluded from acquiring any additional non-qualifying asset until such time as it complies with the requirements of Section 55(a).

 

(4)Represents a PIK security. If the interest rate goes above the cap of 12.00%, PIK interest will be accrued on the excess amount and paid at maturity.

 

(5)All investments are valued using unobservable inputs, except the U.S. Treasury Bill which is valued using observable inputs.

 

(6)All investments are domiciled in the United States, unless otherwise noted.

 

(7)Investment is domiciled in Canada.

 

(8)Investments are non-income producing.

 

 12 

 

 

RUNWAY GROWTH CREDIT FUND INC.

 

Schedule of Investments – (continued)

 

December 31, 2017

 

The following tables show the fair value of our portfolio of investments (excluding any U.S. Treasury Bills held) by geographic region and industry as of December 31, 2017:

 

   December 31, 2017 
Geographic Region  Investments at
Fair Value
   Percentage
of Net
Assets
 
         
Canada  $5,045,412    3.97%
Midwestern United States   10,121,693    7.97 
Western United States   53,049,754    41.76 
Total  $68,216,859    53.70%

 

   December 31, 2017 
Industry  Investments at
Fair Value
   Percentage
of Net
Assets
 
         
Advertising  $5,045,412    3.97%
Application Software   32,957,307    25.95 
Education Services   7,981,223    6.28 
Internet Software and Services   2,012,636    1.58 
Semiconductors   10,098,588    7.95 
Specialized Consumer Services   10,121,693    7.97 
Total  $68,216,859    53.70%

 

See notes to financial statements.

 

 13 

 

 

RUNWAY GROWTH CREDIT FUND INC.

 

Notes to Financial Statements

 

Note 1 – Organization

 

Runway Growth Credit Fund Inc. (the “Company”) is a Maryland corporation that was formed on August 31, 2015. The Company is an externally managed, non-diversified, closed-end 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”). In addition, the Company has elected to be treated, and intends to qualify annually, as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). While the Company intends to qualify to be treated as a RIC annually, the Company anticipates that it may have difficulty satisfying the asset diversification requirements as it deploys initial capital and builds its investment portfolio.

 

The Company was formed primarily to lend to, and selectively invest in, small, fast-growing companies in the United States. The Company’s investment objective is to maximize its total return to its stockholders primarily through current income on its loan portfolio, and secondarily through capital appreciation on its warrants and other equity positions. The Company’s investment activities are managed by its external investment adviser, Runway Growth Capital LLC (“RGC”). Runway Administrator Services LLC (the “Administrator”) is a wholly owned subsidiary of RGC and provides all administrative services necessary for the Company to operate.

 

In October 2015, in connection with the Company’s formation, the Company issued and sold 1,667 shares of common stock to David Spreng, the President and Chief Executive Officer of the Company and Chairman of the Company’s Board of Directors, for an aggregate purchase price of $25,000. The sale of shares of common stock was approved by the unanimous consent of the Company’s sole director at the time. In December 2016, the Company completed the initial closing of capital commitments in its first private offering of shares of common stock to investors (the “Initial Private Offering”) in reliance on exemptions from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), and other applicable securities laws. The final closing of the Initial Private Offering occurred on December 1, 2017. As of June 30, 2018, in connection with the Initial Private Offering, the Company had closed on capital commitments of $275,000,000 and had issued 8,666,667 shares of its common stock for a total purchase price of $130,000,000.

 

Note 2 – Summary of Significant Accounting Policies

 

Basis of Presentation

 

The interim unaudited financial statements of the Company are prepared on the accrual basis of accounting in conformity with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) and pursuant to the requirements for reporting on Form 10-Q and Regulation S-X under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company is an investment company following the specialized accounting and reporting guidance specified in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 946, Financial Services — Investment Companies.

 

In the opinion of management, all adjustments, all of which were of a normal recurring nature, considered necessary for the fair presentation of financial statements for the interim period have been included. The results of operations for the current interim period are not necessarily indicative of results that ultimately may be achieved for any other interim period or for the year ending December 31, 2018. The interim unaudited financial statements and notes hereto should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s annual report on Form 10-K for the year ended December 31, 2017.

 

Use of Estimates

 

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

 

 14 

 

 

Cash and cash equivalents

 

Cash represents deposits held at financial institutions while cash equivalents are highly liquid investments held at financial institutions with an original maturity of three months or less at the date of acquisition. At June 30, 2018, cash and cash equivalents balances totaling $1,947,614 exceeded Federal Deposit Insurance Corporation protection levels of $250,000 by $1,697,614, subjecting the Company to risks related to the uninsured balance. Cash and cash equivalents are held at large, established, high credit-quality financial institutions, and management believes that risk of loss associated with any uninsured balance is remote.

 

Due to Portfolio Company

 

On December 15, 2017, the Company closed on and funded a $15,000,000 loan to a portfolio company, $3,000,000 of which represented a sinking fund to be held in a blocked bank account on which the Company is the only party authorized to approve payments. As of December 31, 2017, the bank at which the account was to be held had not fully executed the blocked account control agreement and as such, though treated contractually as advanced and earning interest, the funds remained with the Company’s custodian until all signatures were received on January 2, 2018. This $3,000,000 is included in Due to Portfolio Company on the Statements of Assets and Liabilities for the year ended December 31, 2017.

 

Deferred Credit Facility Fees

 

The fees and expenses associated with opening the Credit Facilities (as defined below) are being deferred and amortized as part of interest expense using the effective interest method over the term of the Credit Facilities in accordance with ASC 470, Debt.   Debt issuance costs associated with the Credit Facilities remain classified as an asset, regardless of whether there are any outstanding borrowings on the facility.

 

Investment Transactions and Related Investment Income

 

Security transactions, if any, are recorded on a trade-date basis. Realized gains or losses from the repayment or sale of investments are measured using the specific identification method. The amortized cost basis of investments represents the original cost adjusted for the accretion/amortization of discounts and premiums and upfront loan origination fees. The Company reports changes from the prior period in fair value of investments that are measured at fair value as a component of net change in unrealized appreciation (depreciation) on investments in the Statements of Operations.

 

Dividends are recorded on the ex-dividend date. Interest income, if any, adjusted for amortization of market premium and accretion of market discount, is recorded on an accrual basis to the extent that the Company expects to collect such amounts. Original issue discount, principally representing the estimated fair value of detachable equity or warrants obtained in conjunction with the Company’s debt investments, and market discount or premium are capitalized and accreted or amortized into interest income over the life of the respective security using the effective interest method. Loan origination fees received in connection with the closing of investments are reported as unearned income, which is included as amortized cost of the investment; the unearned income from such fees is accreted over the contractual life of the loan based on the effective interest method. Upon prepayment of a loan or debt security, any prepayment penalties, unamortized loan origination fees, and unamortized market discounts are recorded as interest income.

 

Valuation of Investments

 

The Company measures the value of its investments at fair value in accordance with ASC (as previously defined) Topic 820, Fair Value Measurements and Disclosure (“ASC Topic 820”), issued by the FASB. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

 

The audit committee of the Company’s Board of Directors (the “Audit Committee”) is responsible for assisting the Board of Directors in valuing investments that are not publicly traded or for which current market values are not readily available. Investments for which market quotations are readily available are valued using market quotations, which are generally obtained from independent pricing services, broker-dealers or market makers. With respect to portfolio investments for which market quotations are not readily available, the Company’s Board of Directors, with the assistance of the Audit Committee, RGC and its senior investment team and independent valuation agents, is responsible for determining, in good faith, the fair value in accordance with the valuation policy approved by the Board of Directors. If more than one valuation method is used to measure fair value, the results are evaluated and weighted, as appropriate, considering the reasonableness of the range indicated by those results. The Company considers a range of fair values based upon the valuation techniques utilized and selects the value within that range that was most representative of fair value based on current market conditions as well as other factors RGC’s senior investment team considers relevant.

 

 15 

 

 

The Company’s Board of Directors makes this fair value determination on a quarterly basis and any other time when a decision regarding the fair value of the portfolio investments is required. A determination of fair value involves subjective judgments and estimates and depends on the facts and circumstances. Due to the inherent uncertainty of determining the fair value of portfolio investments that do not have a readily available market value, the fair value of the investments may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material.

 

ASC Topic 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. ASC Topic 820 also provides guidance regarding a fair value hierarchy, which prioritizes information used to measure fair value and the effect of fair value measurements on earnings and provides for enhanced disclosures determined by the level within the hierarchy of information used in the valuation. In accordance with ASC Topic 820, these inputs are summarized in the three levels listed below:

 

·Level 1—Valuations are based on quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date.

 

·Level 2—Valuations are based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly and model-based valuation techniques for which all significant inputs are observable.

 

·Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models incorporating significant unobservable inputs, such as discounted cash flow models and other similar valuations techniques. The valuation of Level 3 assets and liabilities generally requires significant management judgment due to the inability to observe inputs to valuation.

 

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of observable input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment.

 

Under ASC Topic 820, the fair value measurement also assumes that the transaction to sell an asset occurs in the principal market for the asset or, in the absence of a principal market, the most advantageous market for the asset, which may be a hypothetical market, and excludes transaction costs. The principal market for any asset is the market with the greatest volume and level of activity for such asset in which the reporting entity would or could sell or transfer the asset. In determining the principal market for an asset or liability under ASC Topic 820, it is assumed that the reporting entity has access to such market as of the measurement date. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent, knowledgeable and willing and able to transact.

 

With respect to investments for which market quotations are not readily available, the Company undertakes a multi-step valuation process each quarter, as described below:

 

·The quarterly valuation process begins with each portfolio company investment being initially valued by RGC’s investment professionals that are responsible for the portfolio investment;

 

·Preliminary valuation conclusions are then documented and discussed with RGC’s senior investment team;

 

·At least once annually, the valuation for each portfolio investment is reviewed by an independent valuation firm. Certain investments, however, may not be evaluated by an independent valuation firm if the net asset value and other aspects of such investments in the aggregate do not exceed certain thresholds;

 

·The Audit Committee then reviews these preliminary valuations from RGC and the independent valuation firm, if any; and

 

 16 

 

 

·The Company’s Board of Directors then discusses valuations and determines the fair value of each investment in the Company’s portfolio, in good faith, based on the input of RGC, the independent valuation firm and the Audit Committee.

 

The Company’s investments are primarily loans made to and equity and warrants of small, fast-growing companies focused in technology, life sciences, health care information and services, business services and other high-growth industries. These investments are considered Level 3 assets under ASC Topic 820 because there is no known or accessible market or market indices for these types of debt instruments and, thus, RGC’s senior investment team must estimate the fair value of these investment securities based on models utilizing unobservable inputs.

 

Investment Valuation Techniques

 

Debt Investments: To determine the fair value of the Company’s debt investments, the Company compares the cost basis of the debt investment, which includes original issue discount, to the resulting fair value determined using a discounted cash flow model, unless another model is more appropriate based on the circumstances at the measurement date. The discounted cash flow approach entails analyzing the interest rate spreads for recently completed financing transactions which are similar in nature to the Company’s investments, in order to determine a comparable range of effective market interest rates for its investments. The range of interest rate spreads utilized is based on borrowers with similar credit profiles. All remaining expected cash flows of the investment are discounted using this range of interest rates to determine a range of fair values for the debt investment.

 

This valuation process includes, among other things, evaluating the underlying investment performance, the portfolio company’s current financial condition and ability to raise additional capital, as well as macro-economic events that may impact valuations. These events include, but are not limited to, current market yields and interest rate spreads of similar securities as of the measurement date. Significant increases or decreases in these unobservable inputs could result in a significantly higher or lower fair value measurement.

 

Under certain circumstances, the Company may use an alternative technique to value the debt investments to be acquired by the Company that better reflects the fair value of the investment, such as the price paid or realized in a recently completed transaction or a binding offer received in an arms-length transaction, the use of multiple probability-weighted cash flow models when the expected future cash flows contain elements of variability or estimates of proceeds that would be received in a liquidation scenario.

 

Warrants: Fair value of warrants is primarily determined using a Black Scholes option-pricing model. Privately held warrants and equity-related securities are valued based on an analysis of various factors including, but not limited to, the following:

 

·Underlying enterprise value of the issuer is estimated based on information available, including any information regarding the most recent rounds of issuer funding. Valuation techniques to determine enterprise value include market multiple approaches, income approaches or approaches that utilize recent rounds of financing and the portfolio company’s capital structure to determine enterprise value. Valuation techniques are also utilized to allocate the enterprise fair value of a portfolio company to the specific class of common or preferred stock exercisable in the warrant. Such techniques take into account the rights and preferences of the portfolio company’s securities, expected exit scenarios, and volatility associated with such outcomes to allocate the fair value to the specific class of stock held in the portfolio. Such techniques include Option Pricing Models, or “OPM,” including back-solve techniques, Probability Weighted Expected Return Models, or “PWERM,” and other techniques as determined to be appropriate.

 

·Volatility, or the amount of uncertainty or risk about the size of the changes in the warrant price, is based on comparable publicly traded companies within indices similar in nature to the underlying company issuing the warrant. Significant increases (decreases) in this unobservable input could result in a significantly lower (higher) fair value.

 

·The risk-free interest rates are derived from the U.S. Treasury yield curve. The risk-free interest rates are calculated based on a weighted average of the risk-free interest rates that correspond closest to the expected remaining life of the warrant. Significant increases (decreases) in this unobservable input could result in a significantly higher (lower) fair value.

 

 17 

 

 

·Other adjustments, including a marketability discount on private company warrants, are estimated based on judgment about the general industry environment. Significant increases (decreases) in this unobservable input could result in a significantly lower (higher) fair value.

 

·Historical portfolio experience on cancellations and exercises of warrants are utilized as the basis for determining the estimated life of the warrants in each financial reporting period. Warrants may be exercised in the event of acquisitions, mergers or initial public offerings, and cancelled due to events such as bankruptcies, restructuring activities or additional financings. These events cause the expected remaining life assumption to be shorter than the contractual term of the warrants. Significant increases or decreases in this unobservable input could result in a significantly higher or lower fair value.

 

Under certain circumstances, the Company may use an alternative technique to value warrants that better reflects the warrants’ fair values, such as an expected settlement of a warrant in the near term, a model that incorporates a put feature associated with the warrant, or the price paid or realized in a recently completed transaction or binding offer received in an arms-length transaction. The fair value may be determined based on the expected proceeds to be received from such settlement or based on the net present value of the expected proceeds from the put option.

 

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

 

Equity Investments. The fair value of an equity investment in a privately held company is initially the face value of the amount invested. The Company adjusts the fair value of equity investments in private companies upon the completion of a new third-party round of equity financing subsequent to the Company’s investment. The Company may make adjustments to fair value, absent a new equity financing event, based upon positive or negative changes in a portfolio company’s financial or operational performance. The Company may also reference comparable transactions and/or secondary market transactions in connection with its determination of fair value. The fair value of an equity investment in a publicly traded company is based upon the closing public share price on the date of measurement. These assets are recorded at fair value on a recurring basis. These valuation methodologies involve a significant degree of judgment. There is no single standard for determining the fair value of investments that do not have an active public market. Valuations of privately held investments are inherently uncertain, as they are based on estimates, and their values may fluctuate over time. The determination of fair value may differ materially from the values that would have been used if an active market for these investments existed. In some cases, the fair value of such investments is best expressed as a range of values derived utilizing different methodologies from which a fair value may then be determined.

 

Fair Value of Financial Instruments

 

The carrying amounts of the Company’s financial instruments, including cash and accrued liabilities, approximate fair value due to their short-term nature.

 

Investment Classification

 

The Company is a non-diversified company within the meaning of the 1940 Act. The Company classifies its investments by level of control. As defined in the 1940 Act, control investments are those where there is the ability or power to exercise a controlling influence over the management or policies of a company. Control is generally deemed to exist when a company or individual possesses or has the right to acquire within 60 days or less, a beneficial ownership of more than 25.0% of the voting securities of an investee company. Affiliated investments and affiliated companies are defined by a lesser degree of influence and are deemed to exist through the possession outright, or via the right to acquire within 60 days or less, beneficial ownership of 5.0% or more of the outstanding voting securities of a company.

 

Investments are recognized when the Company assumes an obligation to acquire a financial instrument and assumes the risks for gains or losses related to that instrument. Investments are derecognized when the Company assumes an obligation to sell a financial instrument and foregoes the risks for gains or losses related to that instrument. Specifically, the Company records all security transactions on a trade date basis. Investments in other, non-security financial instruments, such as limited partnerships or private companies, are recorded on the basis of subscription date or redemption date, as applicable. Amounts for investments recognized or derecognized but not yet settled will be reported as receivables for investments sold and payables for investments acquired, respectively, in the Statements of Assets and Liabilities.

 

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Income Taxes

 

The Company elected to be treated as a RIC under Subchapter M of the Code starting with its taxable year ended December 31, 2016 and intends to qualify annually for the tax treatment applicable to RICs. Generally, a RIC is not subject to federal income taxes on distributed income and gains so long as it meets certain source-of-income and asset diversification requirements and it distributes at least 90% of its net ordinary income and net short-term capital gains in excess of its net long-term capital losses, if any, to its stockholders. So long as the Company obtains and maintains its status as a RIC, it generally will not pay corporate-level U.S. federal income taxes on any ordinary income or capital gains that it distributes at least annually to its stockholders as dividends. Rather, any tax liability related to income earned by the Company represents obligations of the Company’s investors and will not be reflected in the financial statements of the Company. The Company intends to make sufficient distributions to maintain its RIC status each year and it does not anticipate paying any material federal income taxes in the future.

 

If the Company does not distribute (or is not deemed to have distributed) each calendar year the sum of (1) 98% of its net ordinary income for each calendar year, (2) 98.2% of its capital gain net income for the one-year period ending October 31 in that calendar year and (3) any income recognized, but not distributed, in preceding years (the “Minimum Distribution Amount”), the Company will generally be required to pay a U.S. federal excise tax equal to 4% of the amount by which the Minimum Distribution Amount exceeds the distributions for the year. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions from such taxable income, the Company accrues excise taxes, if any, on estimated excess taxable income as taxable income is earned using an annual effective excise tax rate. The annual effective U.S. federal excise tax rate is determined by dividing the estimated annual excise tax by the estimated annual taxable income.

 

If the Company is not treated as a RIC for any taxable year, the Company will be taxed as a regular corporation (a “C corporation”) under subchapter C of the Code for such taxable year. If the Company has previously qualified as a RIC but is subsequently unable to qualify for treatment as a RIC, and certain amelioration provisions are not applicable, the Company would be subject to U.S. federal income tax on all of its taxable income (including its net capital gains) at regular corporate rates. The Company would not be able to deduct distributions to stockholders, nor would it be required to make distributions. In order to requalify as a RIC, in addition to the other requirements discussed above, the Company would be required to distribute all of its previously undistributed earnings attributable to the period it failed to qualify as a RIC by the end of the first year that it intends to requalify as a RIC. If the Company fails to requalify as a RIC for a period greater than two taxable years, it may be subject to regular corporate-level U.S. federal income tax on any net built-in gains with respect to certain of its assets (i.e., the excess of the aggregate gains, including items of income, over aggregate losses that would have been realized with respect to such assets if the Company had been liquidated) that it elects to recognize on requalification or when recognized over the next five years.

 

Per Share Information

 

Basic and diluted earnings/(loss) per common share is calculated using the weighted-average number of common shares outstanding for the period presented. For the three and six months ended June 30, 2018 and 2017, basic and diluted earnings/(loss) per share were the same because there were no potentially dilutive securities outstanding. Per share data is based on the weighted-average shares outstanding.

 

 Distributions

 

The Company generally intends to distribute, out of assets legally available for distribution, substantially all of its available earnings, on a quarterly basis, subject to the discretion of the Board of Directors. For each of the three and six months ended June 30, 2018, the Company declared and paid dividends in the amount of $1,300,250 of which $254,680 was distributed in cash and the remainder distributed in shares to stockholders pursuant to the Company’s dividend reinvestment program. For each of the three and six months ended June 30, 2017, the Company did not declare or pay any dividends or distributions.

 

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Recent Accounting Pronouncements

 

 In January 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 affects accounting for equity investments and financial liabilities where the fair value option has been elected. ASU 2016-01 requires an entity to measure equity investments at fair value through net income. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017. The Company has adopted this standard, which did not have a material impact on its financial statements and to related disclosures, for the periods presented.

 

In May 2014, the FASB issued a converged standard to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability within industries, across industries, and across capital markets. The core principle of the new guidance is that an entity will recognize revenue to depict the transfer of goods or services to customers in an amount that the entity expects to be entitled to in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606) –Deferral of the Effective Date, formally amending the effective date of the new revenue recognition guidance. The amended guidance defers the effective date of the new guidance to interim reporting periods within annual reporting periods beginning after December 15, 2017. Public business entities are permitted to apply the new guidance early, but not before the original effective date (i.e., interim periods within annual periods beginning after December 15, 2016). The Company has adopted this standard, which did not have a material impact on its financial statements and to related disclosures, for the periods presented.

 

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606) –Principal versus Agent Considerations (Reporting Revenue Gross Versus Net) (“ASU 2016-08”). The amended guidance affects entities that enter into contracts with customers to transfer goods or services in exchange for consideration. Under ASU 2016-08, when another party is involved in providing goods or services to a customer, an entity must determine whether the nature of its promise is to provide the specified good or service itself (that is, the entity is a principal) or to arrange for the good or service to be provided by the other party (that is, the entity is an agent). An entity is a principal if it controls the specified good or service before that good or service is transferred to a customer. The amended guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customer. ASU 2016-08 affects the guidance in the new revenue standard issued in May 2014 and has the same effective date which is described above. The Company adopted this standard, which did not have a material impact on its financial statements and to related disclosures, for the periods presented.

 

In August 2016, the FASB issued 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues including, among other things, the classification of debt prepayment or debt extinguishment costs. ASU 2016-15 is effective for annual periods, and the interim periods within those periods, beginning after December 15, 2017. The Company adopted this standard, which did not have a material impact on its financial statements and to related disclosures, for the periods presented.

 

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”). ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and 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. ASU 2016-18 is effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those years. The Company has adopted ASU 2016-18, which did not have a material impact on its financial statements and to related disclosures, for the periods presented.

 

Note 3 – Commitments and Contingencies

 

In the normal course of business, the Company may enter into investment agreements under which it commits to make an investment in a portfolio company at some future date or over a specified period of time. At June 30, 2018, the Company had $21,000,000 in unfunded loan commitments to provide debt financing to its portfolio companies. The balance of unfunded commitments to extend financing as of June 30, 2018 was as follows:

 

Portfolio Company  Investment Type  June 30, 2018 
Aginity, Inc.  Senior Secured Term Loan  $7,000,000 
Aria Systems, Inc.  Senior Secured Term Loan   5,000,000 
Dtex Systems, Inc.  Senior Secured Term Loan   7,000,000 
Mojix, Inc.  Senior Secured Term Loan   2,000,000 
Total unused commitments to extend financing     $21,000,000 

 

At December 31, 2017 the Company had $11,500,000 in unfunded loan commitments

 

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The Company’s management believes that its available cash balances and/or ability to drawdown capital from investors provides sufficient funds to cover its unfunded commitments as of June 30, 2018. The Company has evaluated the expected net future cash flows related to unfunded commitments and determined the fair value to be zero as of June 30, 2018.

 

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

 

Note 4 – Concentration of Credit Risk

 

In the normal course of business, the Company maintains its cash balances in financial institutions, which at times may exceed federally insured limits. The Company is subject to credit risk to the extent that any financial institution with which it conducts business is unable to fulfill contractual obligations on its behalf. Management monitors the financial condition of those financial institutions and does not currently anticipate any losses from these counterparties.

 

Note 5 – Net Increase/(Decrease) in Net Assets Resulting from Operations per Common Share

 

The following information sets forth the computation of basic income/losses per common share for the three and six months ended June 30, 2018 and 2017:

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2018   2017   2018   2017 
Net increase (decrease) in net assets resulting from operations  $2,189,209   $(1,238,576)  $3,592,518   $(2,120,874)
Per Share Data:(1)                    
Weighted-average shares outstanding for period                    
Basic   8,692,372    1,228,773    8,680,419    784,355 
Diluted   8,692,372    1,228,773    8,680,419    784,355 
Basic and diluted income (loss) per common share                    
Basic  $0.25   $(1.01)  $0.41   $(2.70)
Diluted  $0.25   $(1.01)  $0.41   $(2.70)

 

(1)Per share data is based on average weighted shares outstanding.

 

Note 6 – Net Assets

 

The Company has the authority to issue 100,000,000 shares of common stock, $0.01 par value per share. The common shares issued, the price per share and the proceeds raised, since inception, are detailed in the following table:

 

Issuance Date  Shares Issued   Price Per Share   Gross Proceeds 
October 8, 2015   1,667   $15.00   $25,000 
December 22, 2016   333,333    15.00    5,000,000 
April 19, 2017   1,000,000    15.00    15,000,000 
June 26, 2017   1,666,667    15.00    25,000,000 
September 12, 2017   2,666,667    15.00    40,000,000 
December 22, 2017   3,000,000    15.00    45,000,000 
May 31, 2018 (1)   70,563    14.82    1,045,570 
Total   8,738,897        $131,070,570 

 

(1)Shares were issued as part of the dividend reinvestment program.

 

At each of June 30, 2018 and December 31, 2017 the Company had total commitments of $275,000,000.

 

Capital commitments may be drawn down by the Company on a pro rata basis, as needed, upon not less than ten (10) days’ prior written notice for the purposes of funding the Company’s investments (including follow-on investments), paying the Company’s expenses, including fees under the investment advisory agreement, as amended and restated (the “Amended Advisory Agreement”), by and between the Company and RGC, and/or maintaining a reserve account for the payment of future expenses or liabilities.

 

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Note 7 – Related Party Agreements and Transactions

 

Amended and Restated Advisory Agreement

 

On November 29, 2016, the Company’s Board of Directors approved an investment advisory agreement between RGC and the Company, under which RGC, subject to the overall supervision of the Board of Directors, manages the day-to-day operations of and provides investment advisory services to the Company. On August 3, 2017, the Board of Directors approved the Amended Advisory Agreement and recommended that the Company’s stockholders approve the Amended Advisory Agreement. The Amended Advisory Agreement became effective on September 12, 2017 after approval by the stockholders at a special meeting of stockholders of the Company. Under the terms of the Amended Advisory Agreement, RGC:

 

·determines the composition of the Company’s portfolio, the nature and timing of the changes to the portfolio and the manner of implementing such changes;

 

·identifies, evaluates and negotiates the structure of the investments the Company makes;

 

·executes, closes and monitors the investments the Company makes;

 

·determines the securities and other assets that the Company will purchase, retain or sell;

 

·performs due diligence on prospective investments; and

 

·provides the Company with other such investment advisory, research and related services as the Company may, from time to time, reasonably require for the investment of its funds.

 

Pursuant to the Amended Advisory Agreement, the Company pays RGC a fee for its investment advisory and management services consisting of two components – a base management fee and an incentive fee. The cost of both the base management fee and incentive fee are ultimately borne by the Company’s stockholders.

 

Base Management Fee

 

The base management fee is payable on the first day of each calendar quarter, is subject to an annual cap based on RGC’s actual operating expenses and is calculated based on the Capital Commitments (as defined below) and assets purchased with borrowed funds or other forms of leverage (collectively, the “Pre-Spin-Off Gross Assets”) during the preceding calendar quarter. For purposes of the Amended Advisory Agreement, “Capital Commitments” is defined as the aggregate amount of capital committed to the Company by investors as of the end of the most recently completed calendar quarter. On September 12, 2017, without changing the base management fee percentage, the Advisory Agreement was amended to provide clarification as to the calculation of the base management fee. Prior to amendment, the base management fee was collected on the first day of each quarter based on an estimate of actual operating expenses, not to exceed 1.75% per annum, for the following quarter with an implied, though not defined “true-up” mechanism effected once all actual costs were known. The Amended Advisory Agreement defines the process and timing of the true-up and base management fee. The base management fee is now collected at the maximum annualized rate of 1.75% per annum with a comparison of actual expenses for the immediately preceding calendar year to occur on or before March 31 of the subsequent calendar year, with any excess management fee collected when compared to actual operating expenses credited against the base management fee payable for subsequent quarters.

 

Until the earlier of (1) the consummation of an initial public offering (“IPO”) of the Public Fund (defined below) in connection with a Spin-Off transaction (defined below) and (2) the earliest date at which (a) all Capital Commitments have been called for investments and/or expenses and (b) the Company holds no more than 10.0% of its total assets in cash, the base management fee will be an amount equal to 0.4375% (1.75% annualized) of the Pre-Spin-Off Gross Assets at the end of the most recently completed calendar quarter, provided, however, that the base management fee payable in a calendar year will not exceed the actual operating expenses incurred by RGC during such calendar year (the “Management Fee Cap”). No later than March 31 of each calendar year, RGC will provide the Company a reconciliation of the actual operating expenses incurred by RGC for the prior calendar year and the base management fee paid to RGC for such prior calendar year. To the extent the base management fee paid to RGC for such prior calendar year exceeds the Management Fee Cap (the “Excess Fee”) for such prior calendar year, the base management fee payable to RGC for the second calendar quarter and each subsequent quarter immediately following such calendar year will be reduced by the Excess Fee until such time as the Excess Fee for the prior calendar year has been reduced to zero. For the avoidance of doubt, actual operating expenses of RGC for a particular year will not include any reduction in base management fees as a result of Excess Fees paid by the Company.

 

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For purposes of the Amended Advisory Agreement, a “Spin-Off transaction” includes a transaction whereby the Company offers its stockholders the option to elect to either (i) retain their ownership of shares of the Company’s common stock; (ii) exchange their shares of the Company’s common stock for shares of common stock in a newly formed entity (the “Public Fund”) that will elect to be regulated as a BDC under the 1940 Act and treated as a RIC under Subchapter M of the Code, and will use its commercially reasonable best efforts to complete an IPO of shares of its common stock not later than three years after the Company’s final closing of the Initial Private Offering, which occurred on December 1, 2017; or (iii) exchange their shares of the Company’s common stock for interests of one or more newly formed entities (each, a “Liquidating Fund”) that will each be organized as a limited liability company, and which will, among other things, seek to complete an orderly wind down and/or liquidation of any such Liquidating Fund.

 

Following the earlier of (1) the consummation of an IPO of the Public Fund in connection with a Spin-Off transaction and (2) the earliest date at which (a) all Capital Commitments have been called for investments and/or expenses and (b) the Company holds no more than 10.0% of its total assets in cash, the base management fee will be an amount equal to 0.4375% (1.75% annualized) of the Company’s average daily Gross Assets (defined below) during the most recently completed calendar quarter for so long as the aggregate amount of Gross Assets of the Company as of the end of the most recently completed calendar quarter is less than $500,000,000. For purposes of the Amended Advisory Agreement, “Gross Assets” is defined as the Company’s gross assets, including assets purchased with borrowed funds or other forms of leverage, as well as any paid-in-kind interest, as of the end of the most recently completed fiscal quarter. If the aggregate amount of the Company’s Gross Assets as of the end of the most recently completed calendar quarter is equal to or greater than $500,000,000, but less than $1,000,000,000, the base management fee will be an amount equal to 0.40% (1.60% annualized) of the Company’s average daily Gross Assets during the most recently completed calendar quarter. If the aggregate amount of the Company’s Gross Assets as of the end of the most recently completed calendar quarter is equal to or greater than $1,000,000,000, the base management fee will be an amount equal to 0.375% (1.50% annualized) of the Company’s average daily Gross Assets during the most recently completed calendar quarter.

 

RGC earned base management fees of $1,203,125 and $2,406,250 for the three and six months ended June 30, 2018, respectively. RGC earned base management fees of $968,753 and $1,483,843 for the three and six months ended June 30, 2017, respectively.

 

Incentive Fee

 

The incentive fee, which provides RGC with a share of the income that RGC generates for the Company, consists of an investment-income component and a capital-gains component, which are largely independent of each other, with the result that one component may be payable even if the other is not.

 

Under the investment-income component (the “Income Incentive Fee”), the Company will pay RGC each quarter an incentive fee with respect to the Company’s Pre-Incentive Fee net investment income. The Income Incentive Fee is calculated and payable quarterly in arrears based on the Pre-Incentive Fee net investment income for the immediately preceding fiscal quarter. Payments based on Pre-Incentive Fee net investment income will be based on the Pre-Incentive Fee net investment income earned for the quarter. For this purpose, “Pre-Incentive Fee net investment income” means interest income, dividend income and any other income (including any other fees, such as commitment, origination, structuring, diligence, managerial and consulting fees or other fees that the Company receives from portfolio companies) that the Company accrues during the fiscal quarter, minus the Company’s operating expenses for the quarter (including the base management fee, expenses payable under the administration agreement with the Administrator (the “Administration Agreement”), and any dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee); provided however, that Pre-Incentive Fee net investment income will be reduced by multiplying the Pre-Incentive Fee net investment income earned for the quarter by a fraction, the numerator of which is the Company’s average daily Gross Assets during the immediately preceding fiscal quarter minus average daily borrowings during the immediately preceding fiscal quarter, and the denominator of which is the Company’s average daily Gross Assets during the immediately preceding fiscal quarter. Pre-Incentive Fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with pay in kind interest and zero coupon securities), accrued income the Company has not yet received in cash; provided, however, that the portion of the Income Incentive Fee attributable to deferred interest features will be paid, only if and to the extent received in cash, and any accrual thereof will be reversed if and to the extent such interest is reversed in connection with any write off or similar treatment of the investment giving rise to any deferred interest accrual, applied in each case in the order such interest was accrued. Such subsequent payments in respect of previously accrued income will not reduce the amounts payable for any quarter pursuant to the calculation of the Income Incentive Fee described above. Pre-Incentive Fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation.

 

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Pre-Incentive Fee net investment income, expressed as a rate of return on the value of the Company’s net assets (defined as total assets less liabilities) at the end of the immediately preceding fiscal quarter, will be compared to a “hurdle rate” of 2.0% per quarter (8.0% annualized). The Company will pay RGC an Income Incentive Fee with respect to the Company’s Pre-Incentive Fee net investment income in each calendar quarter as follows: (1) no Income Incentive Fee in any calendar quarter in which the Company’s Pre-Incentive Fee net investment income does not exceed the hurdle rate of 2.0%; (2) 80% of the Company’s Pre-Incentive Fee net investment income with respect to that portion of such Pre-Incentive Fee net investment income, if any, that exceeds the hurdle rate but is less than 2.667% in any calendar quarter (10.668% annualized) (the portion of the Company’s Pre-Incentive Fee net investment income that exceeds the hurdle but is less than 2.667% is referred to as the “catch-up”; the “catch-up” is meant to provide RGC with 20.0% of the Company’s Pre-Incentive Fee net investment income as if a hurdle did not apply if the Company’s Pre-Incentive Fee net investment income exceeds 2.667% in any calendar quarter (10.668% annualized)); and (3) 20.0% of the amount of the Company’s Pre-Incentive Fee net investment income, if any, that exceeds 2.667% in any calendar quarter (10.668% annualized) payable to RGC (once the hurdle is reached and the catch-up is achieved, 20.0% of all Pre-Incentive Fee net investment income thereafter is allocated to RGC).

 

Until the consummation of an IPO of the Public Fund in connection with a Spin-Off transaction, in the event that (a) the sum of the Company’s cumulative net realized losses since the date of the Company’s election to be regulated as a BDC exceeds 2.0% of the total non-control/non-affiliate investments made by the Company since the date of the Company’s election to be regulated as a BDC through the end of the quarter and (b) the Pre-Incentive Fee net investment income adjusted to include any realized capital gains and losses (“Adjusted Pre-Incentive Fee net investment income”), expressed as an annualized rate of return on the value of the Company’s average daily net assets (defined as total assets less liabilities), since the Company’s election to be regulated as a BDC through the end of the quarter is less than 10.0%, no Income Incentive Fee will be payable for such quarter until the first subsequent quarter in which either (x) the sum of the Company’s cumulative net realized losses since the date of the Company’s election to be regulated as a BDC is equal to or less than 2.0% of the total non-control/non-affiliate investments made by the Company since the date of the Company’s election to be regulated as a BDC through the end of such subsequent quarter or (y) the Adjusted Pre-Incentive Fee net investment income, expressed as an annualized rate of return on the value of the Company’s average daily net assets (defined as total assets less liabilities), since the Company’s election to be regulated as a BDC through the of the end of the quarter equals or exceeds 10.0%; provided, however, that in no event will any Income Incentive Fee be payable for any prior quarter after the three-year anniversary of the end of such quarter.

 

After the consummation of an IPO of the Public Fund in connection with a Spin-Off transaction, in the event that (a) the sum of the Company’s cumulative net realized losses for the previous four fiscal quarters or, if fewer than four fiscal quarters have passed since such IPO, that number of fiscal quarters since such IPO (the “Look-Back Period”), exceeds 2.0% of the total non-control/non-affiliate investments (i) made by the Company during the Look-Back Period or (ii) transferred to the Public Fund in connection with a Spin-Off transaction during the Look-Back Period and (b) the Adjusted Pre-Incentive Fee net investment income, expressed as an annualized rate of return on the value of the Company’s average daily net assets (defined as total assets less liabilities), during the Look-Back Period is less than 10.0% no Income Incentive Fee will be payable for such quarter until the first subsequent quarter in which (x) the sum of the Company’s cumulative net realized losses for the Look-Back Period is equal to or less than 2.0% of the total non-control/non-affiliate investments (i) made by the Company during the Look-Back Period or (ii) transferred to the Public Fund in connection with a Spin-Off transaction during the Look-Back Period or (y) the Adjusted Pre-Incentive Fee net investment income, expressed as an annualized rate of return on the value of the Company’s average daily net assets (defined as total assets less liabilities), during the Look-Back Period equals or exceeds 10.0%; provided, however, that in no event will any Income Incentive Fee be paid for any prior quarter after the three-year anniversary of the end of such quarter.

 

Under the capital-gains component of the incentive fee (the “Capital Gains Fee”), the Company will pay RGC, as of the end of each calendar year, 20.0% of the Company’s aggregate cumulative realized capital gains, if any, from the date of the Company’s election to be regulated as a BDC through the end of that calendar year, computed net of the Company’s aggregate cumulative realized capital losses and aggregate cumulative unrealized capital depreciation through the end of such year, less the aggregate amount of any previously paid Capital Gains Fee; provided, however, that the Company will not pay the Capital Gains Fee to RGC for any calendar year in which the sum of the Company’s (1) Pre-Incentive Fee net investment income and (2) realized gains less realized losses and unrealized capital depreciation from the date of the Company’s election to be regulated as a BDC through the end of such calendar year, expressed as a rate of return on the value of the Company’s net assets (defined as total assets less liabilities) at the end of such calendar year is less than 8.0% until the first subsequent calendar quarter in which the sum of the Company’s (1) Pre-Incentive Fee net investment income and (2) realized gains less realized losses and unrealized capital depreciation from the date of the Company’s election to be regulated as a BDC through, and including, the end of such subsequent calendar quarter, expressed as a rate of return on the value of the Company’s net assets (defined as total assets less liabilities) at the end of such calendar quarter is equal to or exceeds 8.0%; provided, further, that in no event will any Capital Gains Fee be paid for any prior year after the three-year anniversary of the end of such year. For the foregoing purpose, the Company’s “aggregate cumulative realized capital gains” will not include any unrealized appreciation. If such amount is negative, then no Capital Gains Fee will be payable for such year.

 

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RGC earned no incentive fees for the three and six months ended June 30, 2018 and 2017.

 

Spin-Off Incentive Fee

 

The Income Incentive Fee will be payable in connection with a Spin-Off transaction. The Income Incentive Fee will be calculated as of the date of the completion of each Spin-Off transaction and will equal the amount of Income Incentive Fee that would be payable to RGC if (1) all of the Company’s investments were liquidated for their current value and any unamortized deferred portfolio investment-related fees would be deemed accelerated, (2) the proceeds from such liquidation were used to pay all of the Company’s outstanding liabilities, and (3) the remainder were distributed to the Company’s stockholders and paid as incentive fee in accordance with the Income Incentive Fee described in clauses (1) and (2) above for determining the amount of the Income Incentive Fee; provided, however, that in no event will the Income Incentive Fee paid in connection with the completion of a Spin-Off transaction (x) include the portion of the Income Incentive Fee attributable to deferred interest features of a particular investment that is not transferred pursuant to a Spin-Off transaction until such time as the deferred interest is received in cash, or (y) exceed 20.0% of the Company’s Pre-Incentive Fee net investment income accrued by the Company for the fiscal quarter as of the date of the completion of the Spin-Off transaction. The Company will make the payment of the Income Incentive Fee paid in connection with the completion of a Spin-Off transaction in cash on or immediately following the date of the completion of a Spin-Off transaction. After a Spin-Off transaction, all calculations relating to the incentive fee payable will be made beginning on the day immediately following the completion of the Spin-Off transaction without taking into account the exchanged shares of the Company’s common stock (or contributions, distributions or proceeds relating thereto).

 

The Capital Gains Fee will be payable in respect of the exchanged shares of the Company’s common stock in connection with a Spin-Off transaction and will be calculated as of the date of the completion of a Spin-Off transaction as if such date were a calendar year-end for purposes of calculating and paying the Capital Gains Fee.

 

No Income Incentive Fee or Capital Gains Fee will be payable in connection with a Spin-Off transaction unless, on the date of the completion of a Spin-Off transaction, the sum of the Company’s (i) Pre-Incentive Fee net investment income and (ii) realized capital gains less realized capital losses and unrealized capital depreciation from the date of the Company’s election to be regulated as a BDC through, and including, the date of the completion of such Spin-Off transaction, is greater than 8.0% of the cumulative net investments made by the Company since the Company’s election to be regulated as a BDC.

 

Administration Agreement

 

The Company reimburses the Administrator for the allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations under the Administration Agreement, including furnishing the Company with office facilities, equipment and clerical, bookkeeping and recordkeeping services at such facilities, as well as providing other administrative services. In addition, the Company reimburses the Administrator for the fees and expenses associated with performing compliance functions, and the Company’s allocable portion of the compensation of certain of its officers, including the Company’s Chief Financial Officer, Chief Compliance Officer and any administrative support staff. Pursuant to the terms of the Administration Agreement, the amounts payable to the Administrator by the Company in any fiscal year will not exceed the greater of (i) 0.75% of the aggregate capital commitments as of the end of the most recently completed fiscal year and (ii) $1.0 million.

 

The Company reimbursed the Administrator $304,745 and $150,704 during the six months ended June 30, 2018 and 2017, respectively. As of June 30, 2018, the Company had accrued a net payable to the Administrator of $20,267. Of the total amount reimbursed to the Administrator, $178,502 was related to overhead allocation expense for the six months ended June 30, 2018. The Company reimbursed the Administrator $1,009,680 during the year ended December 31, 2017 and accrued a payable of $11,954 due to the Administrator as of December 31, 2017. Administration fees were $41,158 and $98,303 for the three and six months ended June 30, 2018, respectively. Administration fees were $31,250 and $62,500 for the three and six months ended June 30, 2017, respectively.

 

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License Agreement

 

The Company has entered into a license agreement with RGC (the “License Agreement”) pursuant to which RGC has granted the Company a personal, non-exclusive, royalty-free right and license to use the name “Runway Growth Credit Fund”. Under the License Agreement, the Company has the right to use the “Runway Growth Credit Fund” name for so long as RGC or one of its affiliates remains the Company’s investment adviser. Other than with respect to this limited license, the Company has no legal right to the “Runway Growth Credit Fund” name.

 

Oaktree Strategic Relationship

 

In December 2016, RGC entered into a strategic relationship with Oaktree Capital Management, L.P. (“Oaktree”). In connection with the strategic relationship, OCM Growth Holdings, LLC, a Delaware limited liability company (“OCM”) managed by Oaktree, made an initial $125.0 million capital commitment to the Company, which was subsequently increased to $139.0 million (the “OCM Commitment”). OCM has granted a proxy to the Company pursuant to which the shares held by OCM will be voted in the same proportion as the Company’s other stockholders vote their shares.

 

In connection with the OCM Commitment, the Company entered into a stockholder agreement, dated December 15, 2016, with OCM, pursuant to which OCM has a right to nominate a member of the Company’s Board of Directors for election. Brian Laibow was appointed to the Company’s Board of Directors as OCM’s representative. OCM also holds an interest in RGC and has the right to appoint a member of RGC’s board of managers and a member of RGC’s investment committee. Brian Laibow is OCM’s initial appointee to RGC’s board of managers and investment committee.

 

Note 8 – Fair Value Measurements

 

The Company’s assets recorded at fair value have been categorized based upon a fair value hierarchy in accordance with ASC Topic 820. See Note 2 for discussion of the Company’s policies.

 

The following tables present information about the Company’s assets measured at fair value as of June 30, 2018 and December 31, 2017, respectively:

 

   As of June 30, 2018 (Unaudited) 
   Level 1   Level 2   Level 3   Total 
Portfolio Investments                    
Senior Secured Term Loans  $-   $-   $130,994,864   $130,994,864 
Warrants   -    -    4,995,343    4,995,343 
Total Portfolio Investments   -    -    135,990,207    135,990,207 
U.S. Treasury Bill   69,990,200    -    -    69,990,200 
Total Investments  $69,990,200   $-   $135,990,207   $205,980,407 

 

   As of December 31, 2017 
   Level 1   Level 2   Level 3   Total 
Portfolio Investments                    
Senior Secured Term Loans  $-   $-   $63,977,756   $63,977,756 
Warrants   -    -    4,239,103    4,239,103 
Total Portfolio Investments   -    -    68,216,859    68,216,859 
U.S. Treasury Bill   72,504,649    -    -    72,504,649 
Total Investments  $72,504,649   $-   $68,216,859   $140,721,508 

 

The Company recognizes transfers into and out of the levels indicated above at the end of the reporting period. There were no transfers into or out of the levels during the period ended June 30, 2018 and the year ended December 31, 2017.

 

 26 

 

 

The following table presents a rollforward of Level 3 assets measured at fair value as of June 30, 2018:

 

   Senior Secured
Term Loans
   Warrants   Total 
Fair value at December 31, 2017  $63,977,756   $4,239,103   $68,216,859 
Amortization of fixed income premiums or discounts   1,980,637    -    1,980,637 
Purchases of investments   74,689,235    1,432,263    76,121,498 
Sales of investments   (9,500,629)   (92,724)   (9,593,353)
Reorganizations   (114,629)   114,629    - 
Realized gain   -    59,792    59,792 
Change in unrealized gain (loss)   (37,506)   (757,720)   (795,226)
Fair value at June 30, 2018  $130,994,864   $4,995,343   $135,990,207 
Change in unrealized gain (loss) on Level 3 investments still held as of June 30, 2018  $(37,506)  $(757,720)  $(795,226)

 

The following table presents a rollforward of Level 3 assets measured at fair value as of December 31, 2017:

 

   Senior Secured
Term Loans
   Warrants   Total 
Fair value at December 31, 2016  $-   $-   $- 
Amortization of fixed income premiums or discounts   806,632    -    806,632 
Purchases of investments   63,171,124    3,833,913    67,005,037 
Sales of investments   -    -    - 
Change in unrealized gain (loss)   -    405,190    405,190 
Fair value at December 31, 2017  $63,977,756   $4,239,103   $68,216,859 
Change in unrealized gain (loss) on Level 3 investments still held as of December 31, 2017  $-   $405,190   $405,190 

 

The following table provides quantitative information regarding Level 3 fair value measurements as of June 30, 2018.

 

Description  Fair Value   Valuation
Technique
  Unobservable
Inputs
  Range (Weighted
Average)
              
Senior Secured Term Loans (1)  $130,994,864   Discounted Cash Flow analysis  Discount rate  16.0%-23.6% (19.3%)
        Market approach  Origination yield  13.8%-14.8% (14.2%)
Warrants (2)   4,995,343   Black-Scholes model  Risk-free interest rate  2.3%-2.8% (2.6%)
           Average industry volatility  20%-70% (43%)
           Estimated time to exit  0.9 years-6.2 years (3.8 years)
Total Level 3 Investments  $135,990,207          

 

The following table provides quantitative information regarding Level 3 fair value measurements as of December 31, 2017.

 

Description  Fair Value   Valuation
Technique
  Unobservable
Inputs
  Range (Weighted
Average)
              
Senior Secured Term Loans (1)  $42,475,947   Market approach  Origination yield  14.3%-21.0% (17.2%)
    21,501,809   Income approach  Discount rate  14.8%-19.4% (16.7%)
               
Warrants (2)   4,239,103   Black-Scholes model  Risk-free interest rate  1.3%-2.3% (2.0%)
           Average industry volatility  20%-70% (43%)
           Estimated time to exit  1.4 years-5.8 years (4.3 years)
Total Level 3 Investments  $68,216,859          

 

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(1)The significant unobservable inputs used in the fair value measurement of the Company’s debt securities are origination yields and discount rates. The origination yield is defined as the initial market price of an investment in a hypothetical market to hypothetical market participants where buyers and sellers are willing participants. The discount rate is related to company-specific characteristics such as underlying investment performance, projected cash flows, and other characteristics of the investment. Significant increases (decreases) in the inputs in isolation may result in a significantly higher (lower) fair value measurement, depending on the materiality of the investment.

 

(2)The significant unobservable inputs used in the fair value measurement of the Company’s warrant and equity-related securities are inputs used in the Black Scholes option pricing model (“OPM”) which include industry volatility, risk free interest rate and estimated time to exit. Significant increases (decreases) in the inputs in isolation would result in a significantly higher (lower) fair value measurement, depending on the materiality of the investment. For some investments, additional consideration may be given to data from the last round of financing or merger/acquisition events near the measurement date.

 

Note 9 – Derivative Financial Instruments

 

In the normal course of business, the Company may utilize derivative contracts in connection with its investment activities. Investments in derivative contracts are subject to additional risks that can result in a loss of all or part of an investment. The derivative activities and exposure to derivative contracts primarily involve equity price risks. In addition to the primary underlying risk, additional counterparty risk exists due to the potential inability of counterparties to meet the terms of their contracts.

 

Warrants

 

The warrants provide exposure and potential gains upon equity appreciation of the portfolio company’s equity value. A warrant has a limited life and expires on a certain date. As a warrant’s expiration date approaches, the time value of the warrant will decline. In addition, if the stock underlying the warrant declines in price, the intrinsic value of an “in the money” warrant will decline. Further, if the price of the stock underlying the warrant does not exceed the strike price of the warrant on the expiration date, the warrant will expire worthless. As a result, there is the potential for the entire value of an investment in a warrant to be lost.

 

Counterparty risk exists from the potential failure of an issuer of warrants to settle its exercised warrants. The maximum risk of loss from counterparty risk is the fair value of the contracts and the purchase price of the warrants. The Company’s Board of Directors considers the effects of counterparty risk when determining the fair value of its investments in warrants.

 

Note 10 – Credit Facilities

 

On June 22, 2018, the Company entered into a demand loan agreement (the “Uncommitted Facility”) and a revolving loan agreement (the “Committed Facility,” and together with the Uncommitted Facility, the “Credit Facilities”) with CIBC Bank USA (“CIBC”).

 

The maximum principal amount of available borrowings under each of the Uncommitted Facility and the Committed Facility is $17.5 million (for a combined maximum principal amount under the Credit Facilities of $35 million), subject in each case to availability under the borrowing base, which is based on unused capital commitments. Borrowings under the Credit Facilities bear interest, at the Company’s election at the time of drawdown, at a rate per annum equal to (i) in the case of LIBOR rate loans, the LIBOR rate for the applicable interest period plus 2.50% or (ii) in the case of prime rate loans, CIBC’s prime commercial rate at the time of the borrowing minus 0.50%.

 

The Credit Facilities mature on June 21, 2019, however, CIBC may terminate the Uncommitted Facility, and call any loans thereunder, at any time on demand. The Company has twenty (20) business days to honor any such demand for payment under the Uncommitted Facility (unless the Company is in payment default or certain bankruptcy or liquidation events that constitute events of default occur, in which case immediate repayment is required). Loans made under the Credit Facilities must also be repaid in full on the earlier of (i) (x) one hundred and eighty (180) days following the funding date of the loan for the first two loans and (y) one hundred and twenty (120) days following the funding date of each subsequent loan, (ii) the maturity date under the Credit Facilities of June 21, 2019, (iii) the occurrence of certain bankruptcy and liquidation events that constitute events of default under the Credit Facilities, and (iv) CIBC’s demand for payment after the occurrence of any other events of default.

 

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The Credit Facilities are secured by a perfected first priority security interest in the Company’s right, title, and interest in and to the capital commitments of the Company’s private investors, including the Company’s right to make capital calls, receive and apply capital contributions, enforce remedies and claims related thereto together with capital call proceeds and related rights, and a pledge of the collateral account into which capital call proceeds are deposited.

 

The Credit Facilities contain customary covenants and events of default for such subscription credit facilities (with customary cure and notice provisions), including, without limitation, maintenance of RIC status; nonpayment; misrepresentation of representations and warranties; breach of covenant; certain bankruptcy and liquidation events; change of control at RGC; the Amended Advisory Agreement or the Administration Agreement, ceasing to remain in effect; investors with aggregate capital commitments to the Company in excess of fifteen percent (15%) of the aggregate capital commitments of all investors in the Company failing to make capital contributions within ten (10) business days of when required; and the commitment period of the Company’s investors terminating because the Company engages in a Spin-Off transaction.

 

On June 26, 2018, the Company drew down $15,000,000 under the Credit Facilities, all of which remains outstanding as of June 30, 2018. Interest is accrued at CIBC’s prime commercial rate less 0.5%. 

 

Borrowing Date  Borrowings   Interest Rate   Maturity Date
June 26, 2018  $15,000,000    4.5%   December 23, 2018
Total  $15,000,000         

 

Note 11 – Financial Highlights

 

   Three Months Ended
June 30, 2018 
(Unaudited)
   Three Months Ended June
30, 2017 
(Unaudited)
 
Per Share Data:(1)          
Net asset value at beginning of period  $14.82   $7.74 
Net investment income (loss)   0.30    (1.01)
Change in unrealized depreciation   (0.05)   - 
Dividends declared   (0.15)   - 
Accretion    -    7.05 
Net asset value at end of period  $14.92   $13.78 
Return from investment operations   2.02%   (13.05)%
Return from accretion    -%   91.09%
Total return based on net asset value (2)   0.67%   78.04%
Weighted-average shares outstanding for period, basic   8,692,372    1,228,773 
Ratio/Supplemental Data:          
Net assets at end of period  $130,378,215   $41,355,798 
Average net assets  $129,924,825   $19,757,217 
Annualized ratio of net operating expenses to average net assets   5.45%   27.86%
Annualized ratio of net investment income (loss) to average net assets   8.20%   (25.25)%
Annualized ratio of net operating expenses excluding management fees and interest expense, to average net assets   1.58%   8.14%
Annualized ratio of net increase (decrease) in net assets resulting from operations to average net assets   6.78%   (25.21)%

 

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   Six Months Ended 
June 30, 2018 
(Unaudited)
   Six Months Ended 
June 30, 2017 
(Unaudited)
 
Per Share Data:(1)          
Net asset value at beginning of period  $14.66   $10.38 
Net investment income (loss)   0.50    (2.70)
Realized gain    0.01    - 
Change in unrealized depreciation   (0.09)   - 
Dividends declared   (0.15)   - 
Accretion (dilution)   (0.01)   6.10 
Net asset value at end of period  $14.92   $13.78 
Return from investment operations   3.41%   (26.01)%
Return from accretion (dilution)   (0.07)%   58.77%
Total return based on net asset value (2)   1.77%   32.76%
Weighted-average shares outstanding for period, basic   8,680,419    784,355 
Ratio/Supplemental Data:          
Net assets at end of period  $130,378,215   $41,355,798 
Average net assets  $129,662,278   $11,398,309 
Annualized ratio of net operating expenses to  average net assets   5.37%   40.21%
Annualized ratio of net investment income (loss) to average net assets   6.73%   (37.87)%
Annualized ratio of net operating expenses excluding management fees, to average net assets   1.52%   13.74%
Annualized ratio of net increase (decrease) in net assets resulting from operations to average net assets   5.59%   (37.83)%

 

(1) Financial highlights are based on weighted-average shares outstanding.
(2) Total return based on net asset value is based upon the change in net asset value per share between the opening and ending net asset values per share in the period. The total returns are not annualized.

 

Note 12 - Subsequent Events

 

On July 6, 2018, the Company funded a $500,000 senior secured term loan (Tranche III) to Mojix, Inc. for a purchase price of $495,000.

 

On July 10, 2018, the Company funded an investment in Aria Systems, Inc. Series G Preferred Stock for a purchase price of $250,000.

 

On July 26, 2018, the Company’s Board of Directors declared a dividend in the amount of $0.25 per share payable on August 31, 2018 to stockholders of record as of August 15, 2018.

 

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

 

Forward-Looking Statements

 

 This quarterly report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about us, our current and prospective portfolio investments, our industry, our beliefs and opinions, and our assumptions. Words such as “anticipates,” “expects,” “intends,” “plans,” “will,” “may,” “continue,” “believes,” “seeks,” “estimates,” “would,” “could,” “should,” “targets,” “projects,” “outlook,” “potential,” “predicts” and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including without limitation:

 

·an economic downturn could impair our portfolio companies’ ability to continue to operate, which could lead to the loss of some or all of our investments in such portfolio companies;

 

·such an economic downturn could disproportionately impact the companies that we intend to target for investment, potentially causing us to experience a decrease in investment opportunities and diminished demand for capital from these companies;

 

·a contraction of available credit and/or an inability to access the equity markets could impair our lending and investment activities;

 

·interest rate volatility could adversely affect our results, particularly to the extent that we use leverage as part of our investment strategy;

 

·currency fluctuations could adversely affect the results of our investments in foreign companies, particularly to the extent that we receive payments denominated in foreign currency rather than U.S. dollars;

 

·our future operating results;

 

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

 

·our contractual arrangements and relationships with third parties;

 

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

 

·competition with other entities and our affiliates for investment opportunities;

 

·the speculative and illiquid nature of our investments;

 

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

 

·the adequacy of our financing sources and working capital;

 

·the loss of key personnel;

 

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

 

·the ability of our external investment adviser, RGC, to locate suitable investments for us and to monitor and administer our investments;

 

·the ability of RGC to attract and retain highly talented professionals;

 

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·our ability to qualify and maintain our qualification as a RIC under Subchapter M of the Code, and as a BDC;

 

·the occurrence of a disaster, such as a cyber-attack against us or against a third party that has access to our data or networks, a natural catastrophe, an industrial accident, failure of our disaster-recovery systems, or consequential employee error;

 

·the effect of legal, tax and regulatory changes; and

 

·the other risks, uncertainties and other factors we identify under “Risk Factors” in Part I, Item 1A of our annual report on Form 10-K for the fiscal year ended December 31, 2017 and in our other filings with the Securities and Exchange Commission (the “SEC”).

 

Although we believe the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this quarterly report on Form 10-Q should not be regarded as a representation by us that our plans and objectives will be achieved. These risks and uncertainties include those described or identified in this quarterly report on Form 10-Q and in “Risk Factors” in Part I, Item 1A of our annual report on Form 10-K for the fiscal year ended December 31, 2017.

 

We have based the forward-looking statements included in this Form 10-Q on information available to us on the date of this Form 10-Q, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with the SEC, including our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

 

The following analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes thereto contained elsewhere in this quarterly report on Form 10-Q.

 

Overview

 

We are an externally managed, non-diversified closed-end investment management company that was formed on August 31, 2015 as a corporation under the laws of the State of Maryland. We have elected to be regulated as a BDC under the 1940 Act. In addition, we have elected to be treated, and intend to qualify annually, as a RIC under Subchapter M of the Code. If we fail to qualify as a RIC for any taxable year, we will be subject to corporate-level U.S. federal income tax on any net taxable income for such year. As a BDC and a RIC, we are required to comply with various regulatory requirements, such as the requirement to invest at least 70% of our assets in “qualifying assets,” source-of-income limitations, asset diversification requirements, and the requirement to distribute annually at least 90% of our investment company taxable income and net tax-exempt interest.

 

We are an “emerging growth company,” as defined in the JOBS Act. We could remain an emerging growth company until the last day of our fiscal year following the fifth anniversary of an IPO, if any, or until the earliest of (i) the last day of the first fiscal year in which we have total annual gross revenue of $1,070,000,000 or more, (ii) December 31 of the fiscal year in which we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act (which would occur if the market value of our common stock held by non-affiliates exceeds $700.0 million, measured as of the last business day of our most recently completed second fiscal quarter, and we have been publicly reporting for at least 12 months), or (iii) the date on which we have issued more than $1.0 billion in non-convertible debt during the preceding three-year period. For so long as we remain an emerging growth company under the JOBS Act, we will be subject to reduced public company reporting requirements.

 

We are externally managed by RGC, an investment adviser that has registered with the SEC under the Investment Advisers Act of 1940, as amended. The Administrator, a wholly-owned subsidiary of RGC, provides all the administrative services necessary for us to operate.

 

We commenced investment activities in portfolio securities during the quarter ended June 30, 2017, and we commenced investment activities in U.S. Treasury Bills during the quarter ended December 31, 2016. In October 2015, in connection with our formation, we issued and sold 1,667 shares of our common stock to David Spreng, our President, Chief Executive Officer and Chairman of our Board of Directors, for an aggregate purchase price of $25,000. In December 2016, we completed the initial closing of capital commitments in the Initial Private Offering, in connection with which we called capital and issued 333,333 shares of our common stock to investors for an aggregate purchase price of $5,000,000. The final closing of the Initial Private Offering occurred on December 1, 2017. As of June 30, 2018, in connection with the Initial Private Offering, we had closed on capital commitments of $275,000,000 and had issued 8,666,667 shares of our common stock to stockholders for a total purchase price of $130,000,000.

 

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Our objective is to build a balanced portfolio with diversification among sponsored and non-sponsored transactions, diversification among sponsors within the sponsored segment, diversification among industry, geography, and stage of development, all contributing to a favorable risk adjusted return for the portfolio viewed as a whole. As we build our portfolio to scale, the effects of our diversification strategy on yield and other metrics may not be fully evident, and the impact of various weightings may be more pronounced from period to period until we achieve greater scale in our portfolio.

 

Portfolio Composition and Investment Activity

 

Portfolio Composition

 

At June 30, 2018, we had investments in twelve portfolio companies and held one U.S. Treasury Bill. At December 31, 2017, we had investments in eight portfolio companies and held one U.S. Treasury Bill. The following table shows the fair value of our investments, by asset class, as of June 30, 2018 and December 31, 2017:

 

   June 30, 2018 (Unaudited)   December 31, 2017 
Investments  Cost   Fair Value   Percentage
of Total
Portfolio
   Cost   Fair Value   Percentage
of Total
Portfolio
 
Portfolio Investments                              
Senior Secured Term Loans  $131,032,370   $130,994,864    63.6%  $63,977,756   $63,977,756    45.5%
Warrants   5,347,873    4,995,343    2.4    3,833,913    4,239,103    3.0 
Total Portfolio Investments   136,380,243    135,990,207    66.0    67,811,669    68,216,859    48.5 
                               
U.S. Treasury Bill   69,990,200    69,990,200    34.0    72,504,649    72,504,649    51.5 
Total Investments  $206,370,443   $205,980,407    100.0%  $140,316,318   $140,721,508    100.0%

 

Investment Activity

 

The value of our investment portfolio will change over time due to changes in the fair value of our underlying investments, as well as changes in the composition of our portfolio resulting from purchases of new and follow-on investments as well as sales of existing investments. Our primary investment activity for the six months ended June 30, 2018 was as follows:

 

·On February 8, 2018, we funded a $5,000,000 senior secured term loan (Tranche II) to eSilicon Corporation for a purchase price of $4,950,000.

 

·On February 13, 2018, the Placecast Inc. senior secured loan was prepaid and we exercised our warrant in Placecast Inc. for total proceeds of $2,474,399.

 

·On April 24, 2018, the Aspen Group, Inc. senior secured loans were prepaid for total proceeds of $8,070,121.

 

·On May 25, 2018, we funded a $7,000,000 senior secured term loan to Aginity, Inc. for a purchase price of $6,692,273 and purchased a warrant to purchase 359,159 shares of Series C Preferred Stock for $167,727.

 

·On June 1, 2018, we funded a $8,000,000 senior secured term loan to Dtex Systems, Inc. for a purchase price of $7,836,000 and purchased a warrant to purchase 500,000 shares of Series C Preferred Stock for $59,000.

 

·On June 7, 2018, we funded a $7,000,000 senior secured term loan to Jibe, Inc. for a purchase price of $6,889,205 and purchased a warrant to purchase 247,242 shares of Series C Preferred Stock for $40,795.

 

·On June 19, 2018, we funded a $25,000,000 senior secured term loan to CareCloud Corporation for a purchase price of $24,355,837 and purchased a warrant to purchase 1,557,956 shares of Series C Preferred Stock for $394,163.

 

·On June 29, 2018, we funded a $25,000,000 senior secured term loan to Aria Systems, Inc. for a purchase price of $23,965,893 and purchased a warrant to purchase 2,170,641 shares of Series G Preferred Stock for $770,578.

 

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Portfolio Reconciliation

 

The following is a reconciliation of our investment portfolio, including U.S. Treasury Bills, for the six months ended June 30, 2018 and year ended December 31, 2017.

 

   Six Months Ended 
June 30, 2018
(unaudited)
   Year Ended
December 31, 2017
 
Beginning Investment Portfolio  $140,721,508   $2,999,849 
Purchase of Investments   76,121,498    67,005,037 
Purchase of U.S. Treasury Bills   138,972,584    156,977,177 
Amortization of Fixed Income Premiums and Discounts   2,006,632    834,194 
Portfolio Investments Repaid   (9,593,353)   - 
Sales and Maturities of U.S. Treasury Bills   (141,513,028)   (87,500,000)
Realized gain on Investments   59,792    - 
Net Change in Unrealized Appreciation (Depreciation) on Investments   (795,226)   405,251 
Ending Investment Portfolio  $205,980,407   $140,721,508 

 

Asset Quality

 

In addition to various risk management and monitoring tools, RGC uses an investment rating system to characterize and monitor the quality of our debt investment portfolio. Equity securities and Treasury Bills are not graded. This debt investment rating system uses a five-level numeric scale. The following is a description of the conditions associated with each investment rating:

 

Investment Rating

  Rating Definition
     
1   Performing above plan of record and/or strong enterprise profile, value, financial performance/coverage. Maintaining full covenant and payment compliance as agreed.
     
2   Performing at or reasonably close to plan of record. Acceptable business prospects, enterprise value, financial coverage. Maintaining full covenant and payment compliance as agreed. All new loans are initially graded Category 2.
     
3   Performing below plan of record. Potential elements of concern over performance, trends and business outlook. Enterprise and financial coverage remain adequate. Some potential covenant non-compliance. Full payment compliance.
     
4   Performing materially below plan of record. Non-compliant with material financial covenants. Payment default/deferral could result without corrective action. Requires close monitoring. Business prospects, enterprise value and collateral coverage declining. These investments may be in workout, and there is a possibility of loss of return but no loss of principal is expected
     
5   Going concern nature in question. Substantial decline in enterprise value and all coverages. Covenant and payment default imminent if not currently present. Investments are nearly always in workout. May experience partial and/or full loss.

 

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The following table shows the investment rankings of our debt investments at fair value as of June 30, 2018 and December 31, 2017.

 

   As of June 30, 2018 (Unaudited)   As of December 31, 2017 
Investment
Rating
  Fair Value   % of
Total
Portfolio
   Number of
Portfolio
Companies
   Fair Value   % of Total
Portfolio
   Number of
Portfolio
Companies
 
1  $9,565,468    4.6%   1    -    -    - 
2   114,316,622    55.5%   9   $56,226,218    40.0%   7 
3   -    -    -    7,751,538    5.5%   1 
4   7,112,774    3.5%   1    -    -    - 
5   -    -    -    -    -    - 
   $130,994,864    63.6%   11   $63,977,756    45.5%   8 

 

Loans and Debt Securities on Non-Accrual Status

 

Generally, when interest and/or principal payments on a loan become past due, or if we otherwise do not expect the borrower to be able to service its debt and other obligations, we will place the loan on non-accrual status and will generally cease recognizing interest income on that loan for financial reporting purposes until all principal and interest have been brought current through payment or due to a restructuring such that the interest income is deemed to be collectible. As of June 30, 2018 and December 31, 2017, we did not have any loans on non-accrual status.

 

Results of Operations

 

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

 

Comparison of the Three Months Ended June 30, 2018 and 2017

 

   Three Months Ended
June 30, 2018
   Three Months Ended
June 30, 2017
 
   Total   Per
Share (1)
   Total   Per
Share (1)
 
                 
Investment income                    
Interest income  $3,659,882   $0.42   $118,061   $0.09 
Dividend income   -    -    13    0.00 
Other income   205,410    0.03    9,930    0.01 
End-of-term payments and other termination fees   543,750    0.06    -    - 
Total investment income  $4,409,042   $0.51   $128,004   $0.10 
                     
Operating expenses                    
Management fees  $1,203,125   $0.14   $968,753   $0.79 
Administration fees   41,158    0.00    31,250    0.03 
Professional fees   215,529    0.02    115,481    0.09 
Overhead allocation expense   91,953    0.02    -    - 
General and administrative expenses   22,831    0.00    14,842    0.01 
Directors’ fees   49,500    0.01    52,000    0.04 
Consulting fees   12,000    0.00    12,237    0.01 
Insurance expense   23,970    0.00    22,200    0.02 
Interest expense   44,486    0.01    -    - 
Other expenses   56,262    0.01    151,640    0.12 
Total operating expenses   1,760,814    0.21    1,368,403    1.11 
                     
Net investment income (loss)  $2,648,228   $0.30   $(1,240,399)  $(1.01)
Net change in unrealized appreciation (depreciation) on investments  $(459,019)  $(0.05)  $1,823   $0.00 
Net increase (decrease) in net assets resulting from operations  $2,189,209   $0.25   $(1,238,576)  $(1.01)

 

 

(1)The basic per share figures noted above are based on weighted averages of 8,692,372 and 1,228,773 shares outstanding for the three months ended June 30, 2018 and 2017, respectively.

 

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Investment Income

 

Our investment objective is to maximize our total return to our stockholders primarily through current income on our loan portfolio, and secondarily through capital appreciation on our warrants and other equity positions. We intend to achieve our investment objective by investing in high growth-potential, private companies. We typically invest in senior secured and second lien secured loans that generally fall into two strategies: Sponsored Growth Lending and Non-Sponsored Growth Lending. Our Sponsored Growth Lending also typically includes the receipt of warrants and/or other equity from venture-backed companies. We expect our investments in loans will generally range from between $5.0 million to $30.0 million, and the upper end of this range may increase as we raise additional capital.

 

We generate revenue in the form of interest on the debt securities that we hold and distributions and capital gains on other interests that we acquire in our portfolio companies. We expect that the debt we invest in will generally have stated terms of 36 to 60 months. Interest on debt securities is generally payable monthly. In some cases, some of our investments may provide for deferred interest payments or PIK interest. The principal amount of the debt securities and any accrued but unpaid interest generally will become due at the maturity date. In addition, we may generate revenue in the form of commitment and other fees in connection with transactions. Original issue discounts and market discounts or premiums will be capitalized, and we will accrete or amortize such amounts as interest income. We will record prepayment premiums on loans and debt securities as interest income. Dividend income, if any, will be recognized on an accrual basis to the extent that we expect to collect such amounts.

 

Investment income for the three months ended June 30, 2018 was $4,409,042, due primarily to interest income earned on our portfolio investments. Investment income for the three months ended June 30, 2017 was $128,004, due primarily to interest income earned on our portfolio investments. The increase in interest income between periods was driven by our deployment of capital and increasing invested balance. Investment income further increased due to prepayments and end of term payments received.

 

Operating Expenses

 

Our primary operating expenses include the payment of fees to RGC under the Amended Advisory Agreement, our allocable portion of overhead expenses under the Administration Agreement, professional fees, and other operating costs described below. We bear all other out-of-pocket costs and expenses of our operations and transactions, including those relating to:

 

·organization and offering (in an amount of up to $1,000,000 in connection with the Initial Private Offering; the amount of organizational and offering expenses in connection with the Initial Private Offering in excess of $1,000,000 were paid by RGC);

 

·our pro-rata portion of fees and expenses related to any future spin-off transaction;

 

·calculating our net asset value (including the cost and expenses of any independent valuation firm);

 

·fees and expenses payable to third parties, including agents, consultants or other advisers, in connection with monitoring financial and legal affairs for us and in providing administrative services, monitoring our investments and performing due diligence on our prospective portfolio companies or otherwise relating to, or associated with, evaluating and making investments;

 

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

 

·sales and purchases of our common stock and other securities;

 

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·investment advisory and management fees;

 

·administration fees, if any, payable under the Administration Agreement;

 

·transfer agent and custodial fees;

 

·federal and state registration fees;

 

·all costs of registration and listing our securities on any securities exchange;

 

·U.S. federal, state and local taxes;

 

·Independent directors’ fees and expenses;

 

·costs of preparing and filing reports or other documents required by the SEC, the Financial Industry Regulatory Authority or other regulators;

 

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

 

·our allocable portion of any fidelity bond, directors’ and officers’ errors and omissions liability insurance, and any other insurance premiums;

 

·direct costs and expenses of administration, including printing, mailing, long distance telephone, copying, secretarial and other staff, independent auditors and outside legal costs; and

 

·all other expenses incurred by us, our Administrator or RGC in connection with administering our business, including payments under the Administration Agreement based on our allocable portion of our Administrator’s overhead in performing its obligations under the Administration Agreement, including rent and the allocable portion of the cost of our Chief Compliance Officer and Chief Financial Officer and their respective staffs.

 

Operating expenses for the three months ended June 30, 2018 and 2017 were $1,760,814 and $1,368,403, respectively. Operating expenses increased for the three months ended June 30, 2018 from the three months ended June 30, 2017 primarily due to increased management fees paid to RGC, overhead allocation expense, interest expense, and professional fees incurred, which include legal, audit and tax preparation fees. The increases in management fees and interest expense were driven by our deployment of capital and increasing invested balance. The increase in overhead allocation expense was driven by allocation of RGC personnel, time, and resources utilized on fund activity. Operating expenses per share for the three months ended June 30, 2018 and 2017 were $0.21 per share and $1.11 per share, respectively.

 

Net Investment Income (Loss)

 

We had net investment income of $2,648,228 for the three months ended June 30, 2018, as compared to a net investment loss of $1,240,399 for the three months ended June 30, 2017. The increase between periods was primarily due to increased interest income earned on our portfolio investments, partially offset by increased management fees and the other operating expenses discussed above. Net investment income (loss) per share for the three months ended June 30, 2018 and 2017 were $0.30 per share and $(1.01) per share, respectively.

 

Net Realized Gain on Investment

 

For the three months ended June 30, 2018 and June 30, 2017, we had no realized gains or losses on investments.

 

Net Change in Unrealized Appreciation (Depreciation) on Investments

 

Our net change in unrealized depreciation on investments of $459,019 for the three months ended June 30, 2018 was primarily due to a decrease in the fair value of our senior secured loan to Mojix Inc. and our warrants for preferred stock of Mojix, Inc. The net change in unrealized appreciation on investments of $1,823 for three months ended June 30, 2017 was solely due to the gain on U.S. Treasury Bills.

 

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Net Increase (Decrease) in Net Assets Resulting from Operations

 

We had a net increase in net assets resulting from operations of $2,189,209 for the three months ended June 30, 2018, as compared to a net decrease in net assets resulting from operations of $1,238,576 for the three months ended June 30, 2017. The increase between periods is attributable to the factors discussed above.

 

Comparison of the Six Months Ended June 30, 2018 and 2017

 

  

Six Months Ended

June 30, 2018

  

Six Months Ended

June 30, 2017

 
   Total  

Per

Share (1)

   Total  

Per

Share (1)

 
                 
Investment income                    
Interest income  $6,627,603   $0.76   $118,151   $0.15 
Dividend income   -    -    13    0.00 
Other income   308,259    0.04    13,218    0.02 
End-of-term payments and other termination fees   843,751    0.10    -    - 
Total investment income  $7,779,613   $0.90   $131,382   $0.17 
                     
Operating expenses                    
Management fees  $2,406,250   $0.28   $1,483,843   $1.89 
Administration fees   98,303    0.01    62,500    0.08 
Professional fees   344,086    0.04    270,915    0.35 
Overhead allocation expense   210,067    0.02    -    - 
General and administrative expenses   62,161    0.01    93,076    0.12 
Directors’ fees   99,000    0.01    102,500    0.12 
Consulting fees   25,000    0.00    24,657    0.03 
Insurance expense   47,940    0.01    44,400    0.06 
Interest expense   66,120    0.01    -    - 
Other expenses   92,734    0.01    172,262    0.22 
Total operating expenses  $3,451,661   $0.40   $2,254,153   $2.87 
                     
Net investment income (loss)  $4,327,952   $0.50   $(2,122,771)  $(2.70)
Net realized gain on investments  $59,792   $0.01   $-   $- 
Net change in unrealized appreciation (depreciation) on investments  $(795,226)  $(0.10)  $1,897   $0.00 
Net increase (decrease) in net assets resulting from operations  $3,592,518   $0.41   $(2,120,874)  $(2.70)

 

(1)The basic per share figures noted above are based on weighted averages of 8,680,419 and 784,355 shares outstanding for the six months ended June 30, 2018 and 2017, respectively.

 

 Investment Income

 

Investment income for the six months ended June 30, 2018 was $7,779,613, due primarily to interest income earned on our portfolio investments. Investment income for the six months ended June 30, 2017 was $131,382, due primarily to interest income earned our portfolio investments. The increase in interest income between periods was driven by our deployment of capital and increasing invested balance. Investment income further increased due to prepayments and end of term payments received.

 

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Operating Expenses

 

Operating expenses for the six months ended June 30, 2018 and 2017 were $3,451,661 and $2,254,153, respectively. Operating expenses increased for the six months ended June 30, 2018 from the six months ended June 30, 2017 primarily due to increased management fees paid to RGC, overhead allocation expense, interest expense, and professional fees incurred, which include legal, audit and tax preparation fees. The increases in management fees and interest expense were driven by our deployment of capital and increasing invested balance. The increase in overhead allocation expense was driven by allocation of RGC personnel, time, and resources utilized on fund activity. Operating expenses per share for the six months ended June 30, 2018 and 2017 were $0.40 per share and $2.87 per share, respectively.

 

Net Investment Income (Loss)

 

We had net investment income of $4,327,952 for the six months ended June 30, 2018, as compared to a net investment loss of $2,122,771 for the six months ended June 30, 2017. The increase between periods was primarily due to increased interest income earned on our portfolio investments, partially offset by increased management fees and the other operating expenses discussed above. Net investment income (loss) per share for the six months ended June 30, 2018 and 2017 were $0.50 per share and $(2.70) per share, respectively.

 

Net Realized Gain on Investment

 

The net realized gain on investments of $59,792 for the six months ended June 30, 2018 was primarily due to the gain on our warrants for preferred stock of Placecast, Inc. For the six months ended June 30, 2017, we had no realized gains or losses on investments.

 

Net Change in Unrealized Appreciation (Depreciation) on Investments

 

Our net change in unrealized depreciation on investments of $795,226 for the six months ended June 30, 2018 was primarily due to a decrease in the fair value of our senior secured loan to Mojix Inc. and our warrants for preferred stock of Mojix, Inc. The net change in unrealized appreciation on investments of $1,897 for the six months ended June 30, 2017 was solely due to the gain on U.S. Treasury Bills.

 

Net Increase (Decrease) in Net Assets Resulting from Operations

 

We had a net increase in net assets resulting from operations of $3,592,518 for the six months ended June 30, 2018, as compared to a net decrease in net assets resulting from operations of $2,120,874 for the six months ended June 30, 2017. The increase between periods is attributable to the factors discussed above.

 

Financial Condition, Liquidity and Capital Resources

 

We generate cash primarily from the net proceeds of the offering of our securities and cash flows from our operations, including investment sales and repayments as well as income earned on investments and cash equivalents. We may also fund a portion of our investments through borrowings under the Credit Facilities (discussed below). We expect that we may also generate cash from any financing arrangements we may enter into in the future and any future offerings of our equity or debt securities. We may fund a portion of our investments through borrowings from banks and issuances of senior securities. Our primary use of funds is to make investments in eligible portfolio companies, pay our operating expenses and make distributions to holders of our common stock.

 

During the six months ended June 30, 2018, cash and cash equivalents decreased to $1,947,614, from $8,141,670 as of December 31, 2017. This decrease was primarily the result of the purchase of investments in portfolio companies and U.S. Treasury Bills and was partially offset by the maturity of the U.S. Treasury Bills for $141,513,028.

 

Equity Activity

 

We have the authority to issue 100,000,000 shares of common stock, $0.01 par value per share.

 

On October 8, 2015, we issued 1,667 shares of our common stock to David Spreng, our President, Chief Executive Officer and Chairman of our Board of Directors, for an aggregate purchase price of $25,000. The remaining shares were issued in connection with the Initial Private Offering, as follows:

 

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Issuance Date  Shares Issued   Price Per Share   Gross Proceeds 
December 22, 2016   333,333   $15.00   $5,000,000 
April 19, 2017   1,000,000   $15.00    15,000,000 
June 26, 2017   1,666,667   $15.00    25,000,000 
September 12, 2017   2,666,667   $15.00    40,000,000 
December 22, 2017   3,000,000   $15.00    45,000,000 
May 31, 2018 (1)   70,563   $14.82    1,045,570 
Total   8,737,230        $131,045,570 

 

(1)Shares were issued as part of the dividend reinvestment program.

 

Contractual Obligations

 

   Payments Due By Period 
                     
   Total   Less than 1
year
   1-3 years   3-5 years   More than 5
years
 
Payable for securities purchased (1)  $62,978,367   $62,978,367   $-   $-   $- 
Credit facilities (2)   15,000,000    15,000,000    -    -    - 
Total  $77,978,367   $77,978,367   $-   $-   $- 

 

(1)Payable for securities purchased relates to the purchase of the U.S. Treasury Bill on margin. The payable for securities purchased was subsequently repaid in July 2018.
(2)Credit facility represents the lines of credit with CIBC which expire on June 21, 2019. Loans made under the Credit Facilities must also be repaid in full on the earlier of (i) (x) one hundred and eighty (180) days following the funding date of the loan for the first two loans and (y) one hundred and twenty (120) days following the funding date of each subsequent loan, (ii) the maturity date under the Credit Facilities of June 21, 2019, (iii) the occurrence of certain bankruptcy and liquidation events that constitute events of default under the Credit Facilities, and (iv) CIBC's demand for payment after the occurrence of any other events of default. See "Note 10 - Credit Facilities" to our financial statements in Part I, Item 1 of this Form 10-Q for more information.

 

Credit Facilities

 

On June 22, 2018, we entered into the Uncommitted Facility and the Committed Facility with CIBC. The maximum principal amount of available borrowings under each of the Uncommitted Facility and the Committed Facility is $17.5 million (for a combined maximum principal amount under the Credit Facilities of $35 million), subject in each case to availability under the borrowing base, which is based on unused capital commitments. Borrowings under the Credit Facilities bear interest, at our election at the time of drawdown, at a rate per annum equal to (i) in the case of LIBOR rate loans, the LIBOR rate for the applicable interest period plus 2.50% or (ii) in the case of prime rate loans, CIBC’s prime commercial rate at the time of the borrowing minus 0.50%. The Credit Facilities mature on June 21, 2019 and are secured by a perfected first priority security interest in our right, title, and interest in and to the capital commitments of our private investors, including our right to make capital calls, receive and apply capital contributions, enforce remedies and claims related thereto together with capital call proceeds and related rights, and a pledge of the collateral account into which capital call proceeds are deposited.

 

On June 26, 2018, we drew down $15,000,000 under the Credit Facilities, all of which remains outstanding. Interest is accrued at CIBC’s prime commercial rate less 0.5%. See “Note 10 – Credit Facilities” to our financial statements in Part I, Item 1 of this Form 10-Q for more information on the Credit Facilities.

 

Off-Balance Sheet Arrangements

 

We currently have no off-balance sheet arrangements, including any risk management of commodity pricing or other hedging practices.

 

Distributions

 

To the extent that we have funds available, we intend to make quarterly distributions to our stockholders. Our stockholder distributions, if any, will be determined by our Board of Directors. Any distribution to our stockholders will be declared out of assets legally available for distribution. We anticipate that distributions will be paid from income primarily generated by interest and dividend income earned on investments made subsequent to the initial closing of capital commitments in the Initial Private Offering. We maintain an “opt out” dividend reinvestment plan for our common stockholders. As a result, if we declare a distribution, then stockholders’ cash distributions will be automatically reinvested in additional shares of our common stock, unless they specifically “opt out” of the dividend reinvestment plan so as to receive cash distributions. During the six months ended June 30, 2018 we declared and paid dividends in the amount of $1,300,250, of which $254,680 was distributed in cash and the remainder distributed in shares to stockholders pursuant to our dividend reinvestment program. During the year ended December 31, 2017, we did not declare or pay any dividends or distributions.

 

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The timing and amount of our distributions, if any, will be determined by our Board of Directors and will be declared out of assets legally available for distribution. The following table shows the dividends per share declared since our formation through June 30, 2018.

 

Date Declared  Record Date  Payment Date  Amount per
Share
 
May 3, 2018  May 15, 2018  May 31, 2018  $0.15 

 

Critical Accounting Policies

 

Basis of Presentation

 

The preparation of the financial statements and related disclosures in conformity with U.S. GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the period reports. Actual results could materially differ from those estimates. We believe that our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments, include the valuation of investments and our election to be treated, and intent to qualify annually, as a RIC. See “Note 2 - Summary of Significant Accounting Policies” to our financial statements in Part I, Item 1 of this Form 10-Q, which describes our critical accounting policies and recently adopted accounting pronouncements not yet required to be adopted by us.

 

Valuation of Investments

 

We measure the value of our investments at fair value in accordance with ASC Topic 820, issued by the FASB. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

 

The Audit Committee is responsible for assisting our Board of Directors in valuing investments that are not publicly traded or for which current market values are not readily available. Investments for which market quotations are readily available are valued using market quotations, which are generally obtained from independent pricing services, broker-dealers or market makers. With respect to portfolio investments for which market quotations are not readily available, our Board of Directors, with the assistance of the Audit Committee, RGC and its senior investment team and independent valuation agents, is responsible for determining, in good faith, the fair value in accordance with the valuation policy approved by our Board of Directors. If more than one valuation method is used to measure fair value, the results are evaluated and weighted, as appropriate, considering the reasonableness of the range indicated by those results. We consider a range of fair values based upon the valuation techniques utilized and select the value within that range that was most representative of fair value based on current market conditions as well as other factors RGC’s senior investment team considers relevant.

 

Our Board of Directors makes this fair value determination on a quarterly basis and any other time when a decision regarding the fair value of the portfolio investments is required. A determination of fair value involves subjective judgments and estimates and depends on the facts and circumstances. Due to the inherent uncertainty of determining the fair value of portfolio investments that do not have a readily available market value, the fair value of the investments may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material.

 

ASC Topic 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. ASC Topic 820 also provides guidance regarding a fair value hierarchy, which prioritizes information used to measure fair value and the effect of fair value measurements on earnings and provides for enhanced disclosures determined by the level within the hierarchy of information used in the valuation. In accordance with ASC Topic 820, these inputs are summarized in the three levels listed below:

 

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·Level 1-Valuations are based on quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date.

 

·Level 2-Valuations are based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly and model-based valuation techniques for which all significant inputs are observable.

 

·Level 3-Valuations based on inputs that are unobservable and significant to the overall fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models incorporating significant unobservable inputs, such as discounted cash flow models and other similar valuations techniques. The valuation of Level 3 assets and liabilities generally requires significant management judgment due to the inability to observe inputs to valuation.

 

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of observable input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment.

 

Under ASC Topic 820, the fair value measurement also assumes that the transaction to sell an asset occurs in the principal market for the asset or, in the absence of a principal market, the most advantageous market for the asset, which may be a hypothetical market, and excludes transaction costs. The principal market for any asset is the market with the greatest volume and level of activity for such asset in which the reporting entity would or could sell or transfer the asset. In determining the principal market for an asset or liability under ASC Topic 820, it is assumed that the reporting entity has access to such market as of the measurement date. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent, knowledgeable and willing and able to transact.

 

With respect to investments for which market quotations are not readily available, our Board of Directors undertakes a multi-step valuation process each quarter, as described below:

 

·Our quarterly valuation process begins with each portfolio company investment being initially valued by RGC’s investment professionals that are responsible for the portfolio investment;

 

·Preliminary valuation conclusions are then documented and discussed with RGC’s senior investment team;

 

·At least once annually, the valuation for each portfolio investment is reviewed by an independent valuation firm. Certain investments, however, may not be evaluated by an independent valuation firm if the net asset value and other aspects of such investments in the aggregate do not exceed certain thresholds;

 

·The Audit Committee then reviews these preliminary valuations from RGC and the independent valuation firm, if any; and

 

·Our Board of Directors then discusses valuations and determines the fair value of each investment in our portfolio, in good faith, based on the input of RGC, the independent valuation firm and the Audit Committee.

 

Our investments are primarily loans made to small, fast-growing companies focused in technology, life sciences, health care information and services, business services and other high-growth industries. These investments are considered Level 3 assets under ASC Topic 820 because there is no known or accessible market or market indices for these types of debt instruments and, thus, RGC’s senior investment team must estimate the fair value of these investment securities based on models utilizing unobservable inputs.

 

Investment Valuation Techniques

 

Debt Investments. To determine the fair value of our debt investments, we compare the cost basis of the debt investment, which includes original issue discount, to the resulting fair value determined using a discounted cash flow model, unless another model is more appropriate based on the circumstances at the measurement date. The discounted cash flow approach entails analyzing the interest rate spreads for recently completed financing transactions which are similar in nature to our investments, in order to determine a comparable range of effective market interest rates for our investments. The range of interest rate spreads utilized is based on borrowers with similar credit profiles. All remaining expected cash flows of the investment are discounted using this range of interest rates to determine a range of fair values for the debt investment.

 

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This valuation process includes, among other things, evaluating the underlying investment performance, the portfolio company’s current financial condition and ability to raise additional capital, as well as macro-economic events that may impact valuations. These events include, but are not limited to, current market yields and interest rate spreads of similar securities as of the measurement date. Significant increases or decreases in these unobservable inputs could result in a significantly higher or lower fair value measurement.

 

Under certain circumstances, we may use an alternative technique to value the debt investments to be acquired by us that better reflects the fair value of the investment, such as the price paid or realized in a recently completed transaction or a binding offer received in an arms-length transaction, the use of multiple probability-weighted cash flow models when the expected future cash flows contain elements of variability or estimates of proceeds that would be received in a liquidation scenario.

 

Warrants. Fair value of warrants is primarily determined using a Black Scholes option-pricing model. Privately held warrants and equity-related securities are valued based on an analysis of various factors including, but not limited to, the following:

 

·Underlying enterprise value of the issuer is estimated based on information available, including any information regarding the most recent rounds of issuer funding. Valuation techniques to determine enterprise value include market multiple approaches, income approaches or approaches that utilize recent rounds of financing and the portfolio company’s capital structure to determine enterprise value. Valuation techniques are also utilized to allocate the enterprise fair value of a portfolio company to the specific class of common or preferred stock exercisable in the warrant. Such techniques take into account the rights and preferences of the portfolio company’s securities, expected exit scenarios, and volatility associated with such outcomes to allocate the fair value to the specific class of stock held in the portfolio. Such techniques include Option Pricing Models, or “OPM,” including back-solve techniques, Probability Weighted Expected Return Models, or “PWERM,” and other techniques as determined to be appropriate.

 

·Volatility, or the amount of uncertainty or risk about the size of the changes in the warrant price, is based on comparable publicly traded companies within indices similar in nature to the underlying company issuing the warrant. Significant increases (decreases) in this unobservable input could result in a significantly lower (higher) fair value.

 

·The risk-free interest rates are derived from the U.S. Treasury yield curve. The risk-free interest rates are calculated based on a weighted average of the risk-free interest rates that correspond closest to the expected remaining life of the warrant. Significant increases (decreases) in this unobservable input could result in a significantly higher (lower) fair value.

 

·Other adjustments, including a marketability discount on private company warrants, are estimated based on our judgment about the general industry environment. Significant increases (decreases) in this unobservable input could result in a significantly lower (higher) fair value.

 

·Historical portfolio experience on cancellations and exercises of warrants are utilized as the basis for determining the estimated life of the warrants in each financial reporting period. Warrants may be exercised in the event of acquisitions, mergers or IPOs, and cancelled due to events such as bankruptcies, restructuring activities or additional financings. These events cause the expected remaining life assumption to be shorter than the contractual term of the warrants. Significant increases or decreases in this unobservable input could result in a significantly higher or lower fair value.

 

Under certain circumstances we may use an alternative technique to value warrants that better reflects the warrants’ fair values, such as an expected settlement of a warrant in the near term, a model that incorporates a put feature associated with the warrant, or the price paid or realized in a recently completed transaction or binding offer received in an arms-length transaction. The fair value may be determined based on the expected proceeds to be received from such settlement or based on the net present value of the expected proceeds from the put option.

 

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

 

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Equity Investments. The fair value of an equity investment in a privately held company is initially the face value of the amount invested. We adjust the fair value of equity investments in private companies upon the completion of a new third-party round of equity financing subsequent to our investment. We may make adjustments to fair value, absent a new equity financing event, based upon positive or negative changes in a portfolio company’s financial or operational performance. We may also reference comparable transactions and/or secondary market transactions in connection with our determination of fair value. The fair value of an equity investment in a publicly traded company is based upon the closing public share price on the date of measurement. These assets are recorded at fair value on a recurring basis. These valuation methodologies involve a significant degree of judgment. There is no single standard for determining the fair value of investments that do not have an active public market. Valuations of privately held investments are inherently uncertain, as they are based on estimates, and their values may fluctuate over time. The determination of fair value may differ materially from the values that would have been used if an active market for these investments existed. In some cases, the fair value of such investments is best expressed as a range of values derived utilizing different methodologies from which a fair value may then be determined.

 

Fair Value

 

The Company’s assets measured at fair value on a recurring basis subject to the requirements of ASC Topic 820 at June 30, 2018 and December 31, 2017 were as follows:

 

   As of June 30, 2018 (Unaudited) 
   Level 1   Level 2   Level 3   Total 
Portfolio Investments                    
Senior Secured Term Loans  $-   $-   $130,994,864   $130,994,864 
Warrants   -    -    4,995,343    4,995,343 
Total Portfolio Investments   -    -    135,990,207    135,990,207 
U.S. Treasury Bill   69,990,200    -    -    69,990,200 
Total Investments  $69,990,200   $-   $135,990,207   $205,980,407 

 

   As of December 31, 2017 
   Level 1   Level 2   Level 3   Total 
Portfolio Investments                    
Senior Secured Term Loans  $-   $-   $63,977,756   $63,977,756 
Warrants   -    -    4,239,103    4,239,103 
Total Portfolio Investments   -    -    68,216,859    68,216,859 
U.S. Treasury Bill   72,504,649    -    -    72,504,649 
Total Investments  $72,504,649   $-   $68,216,859   $140,721,508 

 

The Company recognized transfers into and out of the levels indicated above at the end of the reporting period. There were no transfers into or out of the levels during the six months ended June 30, 2018 and the year ended December 31, 2017.

 

Investment Transactions and Related Investment Income

 

Investment transactions, if any, are recorded on a trade-date basis. We measure realized gains or losses from the repayment or sale of investments using the specific identification method. The amortized cost basis of investments represents the original cost adjusted for the accretion/amortization of discounts and premiums and upfront loan origination fees. We report changes in fair value of investments that are measured at fair value as a component of net change in unrealized appreciation (depreciation) on investments in the statement of operations.

 

Dividends are recorded on the ex-dividend date. Interest income, if any, adjusted for amortization of market premium and accretion of market discount, is recorded on an accrual basis to the extent that we expect to collect such amounts. Original issue discount, principally representing the estimated fair value of detachable equity or warrants obtained in conjunction with our debt investments, and market discount or premium are capitalized and accreted or amortized into interest income over the life of the respective security using the effective interest method. Loan origination fees received in connection with the closing of investments are reported as unearned income, which is included as amortized cost of the investment; the unearned income from such fees is accreted over the contractual life of the loan based on the effective interest method. Upon prepayment of a loan or debt security, any prepayment penalties, unamortized loan origination fees, and unamortized market discounts are recorded as interest income.

 

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Management and Incentive Fees

 

We accrue for base management fees and incentive fees. The accrual for incentive fees includes the recognition of incentive fees on unrealized capital gains, even though such incentive fees are neither earned nor payable to RGC until the gains are both realized and in excess of unrealized depreciation on investments. See “Note 7 – Related Party Agreements and Transactions” to our financial statements in Part I, Item 1 of this Form 10-Q for more information on the Amended Advisory Agreement and the fee structure thereunder.

 

Income Taxes

 

We have elected to be treated, and intend to qualify annually, as a RIC under Subchapter M of the Code. Generally, a RIC is not subject to U.S. federal income taxes on distributed income and gains if it distributes at least 90% of its net ordinary income and net short-term capital gains in excess of its net long-term capital losses, if any, to its stockholders. So long as we qualify, and maintain our status, as a RIC, we generally will not pay corporate-level U.S. federal income taxes on any ordinary income or capital gains that we distribute at least annually to our stockholders as dividends. Rather, any tax liability related to income earned by us represents obligations of our investors and will not be reflected in the financial statements of the Company. We intend to make sufficient distributions to maintain our RIC tax treatment each year and we do not anticipate paying any material U.S. federal income taxes in the future.

 

Recent Developments

 

On July 6, 2018, we funded a $500,000 senior secured term loan (Tranche III) to Mojix, Inc. for a purchase price of $495,000.

 

On July 10, 2018, we funded an investment in Aria Systems, Inc. Series G Preferred Stock for a purchase price of $250,000.

 

On July 26, 2018, our Board of Directors declared a dividend in the amount of $0.25 per share payable on August 31, 2018 to stockholders of record as of August 15, 2018.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

We commenced investment activities in portfolio securities during the quarter ended June 30, 2017 and commenced investment activities in U.S. Treasury Bills during the quarter ended December 31, 2016.

 

We are subject to financial market risk, including changes in the valuations of our investment portfolio. Market risk includes risks that arise from changes in interest rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. The prices of securities held by us may decline in response to certain events, including those directly involving the companies we invest in; conditions affecting the general economy; overall market changes; legislative reform; local, regional, national or global political, social or economic instability; and interest rate fluctuations.

 

Valuation Risk

 

Our investments may not have a readily available market price, and we value these investments at fair value as determined in good faith by our Board of Directors in accordance with our valuation policy. There is no single standard for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while employing a consistently applied valuation process for the types of investments we make. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may fluctuate from period to period. Because of the inherent uncertainty of valuation, these estimated values may differ significantly from the values that would have been used had a ready market for the investments existed, and it is possible that the difference could be material.

 

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Interest Rate Risk

 

Interest rate risk is defined as the sensitivity of our current and future earnings to interest rate volatility, variability of spread relationships, the difference in re-pricing intervals between our assets and liabilities and the effect that interest rates may have on our cash flows. Changes in the general level of interest rates can affect our net interest income, which is the difference between the interest income earned on interest earning assets and our interest expense incurred in connection with our interest-bearing debt and liabilities. Changes in interest rates can also affect, among other things, our ability to acquire and originate loans and securities and the value of our investment portfolio. Our net investment income is affected by fluctuations in various interest rates, including LIBOR and prime rates.

 

We typically expect that interest rates on the investments held in our portfolio will be based on LIBOR, with many of these investments also having a LIBOR floor. As of June 30, 2018, 100.0%, or $131,032,370 (at cost), of our debt portfolio investments bore interest at variable rates, which are LIBOR-based or Prime Rate-based and subject to certain floors, and none of our debt portfolio investments bore interest at fixed rates. As of June 30, 2018, 5.9% of our debt portfolio investments, or $7,789,255 (at cost), are subject to a 12.0% cap on cash interest and 6.0% of our debt portfolio investments, or $7,849,791 (at cost), are subject to a 11.5% cap on cash interest. Any interest above the cap will accrue to principal and be treated as PIK interest. A hypothetical 200 basis point increase or decrease in the interest rates on our variable-rate debt investments could increase our investment income by a maximum of approximately $2,700,000 and decrease our investment income by a maximum of approximately $837,000, on an annual basis. 

 

 Borrowings under the Credit Facilities bear interest, at our election at the time of drawdown, at a rate per annum equal to (i) in the case of LIBOR rate loans, the LIBOR rate for the applicable interest period plus 2.50% or (ii) in the case of prime rate loans, CIBC’s prime commercial rate at the time of the borrowing minus 0.50%. As of June 30, 2018, we had $15.0 million in borrowings outstanding under the Credit Facilities, all of which accrued interest at CIBC’s prime commercial rate less 0.5%.

 

Because we currently borrow, and plan to borrow in the future, money to make investments, our net investment income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest the funds borrowed. Accordingly, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. In periods of rising interest rates, our cost of funds would increase, which could reduce our net investment income if there is not a corresponding increase in interest income generated by our investment portfolio.

 

We regularly measure exposure to interest rate risk. We assess interest rate risk and manage interest rate exposure on an ongoing basis by comparing our interest rate sensitive assets to our interest rate sensitive liabilities. We may hedge against interest rate and currency exchange rate fluctuations by using standard hedging instruments such as futures, options and forward contracts subject to the requirements of the 1940 Act. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in benefits of lower interest rates with respect to our portfolio of investments with fixed interest rates.

 

In addition, any investments we make that are denominated in a foreign currency will be subject to risks associated with changes in currency exchange rates. These risks include the possibility of significant fluctuations in the foreign currency markets, the imposition or modification of foreign exchange controls and potential illiquidity in the secondary market. These risks will vary depending upon the currency or currencies involved.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15 under the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our current disclosure controls and procedures are effective in timely alerting them to material information relating to us that is required to be disclosed by us in the reports we file or submit under the Exchange Act. 

 

There have been no changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

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

 

Item 1A. Risk Factors 

 

You should carefully consider the risks described below and all other information contained in this quarterly report on Form 10-Q, including our interim financial statements and the related notes thereto, before making a decision to purchase our securities. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

 

If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected. If that happens, you may lose all or part of your investment. In addition to the other information set forth in this report, you should carefully consider the factors discussed in “Risk Factors” in Part I, Item 1A of our annual report on Form 10-K for the fiscal year ended December 31, 2017, filed with the SEC on March 29, 2018, which could materially affect our business, financial condition or operating results.

 

Defaults under the Credit Facilities could require stockholders to fund their remaining capital commitments without regard to the underlying value of their investment.

 

The Credit Facilities are secured by a perfected first priority security interest in our right, title, and interest in and to the capital commitments of our private investors, including our right to make capital calls, receive and apply capital contributions, enforce remedies and claims related thereto together with capital call proceeds and related rights, and a pledge of the collateral account into which capital call proceeds are deposited. To the extent an event of default under the Credit Facilities does occur, stockholders could be required to fund any shortfall up to their remaining capital commitments, without regard to the underlying value of their investment.

 

If we are unable to obtain additional debt financing, or if our borrowing capacity is materially reduced, our business could be materially adversely affected.

 

We may want to obtain additional debt financing, or need to do so upon maturity of the Credit Facilities, in order to obtain funds which may be made available for investments. The Credit Facilities mature on June 21, 2019. However, CIBC may terminate the Uncommitted Facility, and call any loans thereunder, at any time on demand. We have 20 business days to honor any such demand for payment under the Uncommitted Facility (unless we are in payment default or certain bankruptcy or liquidation events that constitute events of default occur, in which case immediate repayment is required). If we are unable to increase, renew or replace the Credit Facilities and enter into new debt financing facilities or other debt financing on commercially reasonable terms, our liquidity may be reduced significantly. In addition, if we are unable to repay amounts outstanding under any such facilities and are declared in default or are unable to renew or refinance these facilities, we may not be able to make new investments or operate our business in the normal course. These situations may arise due to circumstances that we may be unable to control, such as lack of access to the credit markets, a severe decline in the value of the U.S. dollar, an economic downturn or an operational problem that affects us or third parties, and could materially damage our business operations, results of operations and financial condition.

 

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

 

On May 31, 2018, pursuant to our dividend reinvestment plan, we issued 70,563 shares of our common stock, at a price of $14.82 per share, to stockholders of record as of May 15, 2018 that did not opt out of the dividend reinvestment plan in order to satisfy the reinvestment portion of our dividends.

 

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Other than pursuant to our dividend reinvestment plan, we did not sell any equity securities during the period covered in this report that were not registered under the Securities Act.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

Not applicable.

 

Item 6. Exhibits

 

The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC:

 

3.1 Articles of Amendment and Restatement (1)
   
3.2 Articles of Amendment (2)

 

3.3 Amended and Restated Bylaws (2)

 

4.1 Form of Subscription Agreement (3)

 

10.1 Demand Loan Agreement, dated as of June 22, 2018, by and between the Registrant, as borrower, and CIBC Bank USA(4)
   
10.2 Revolving Loan Agreement, dated as of June 22, 2018, by and between the Registrant, as borrower, and CIBC Bank USA(4)
   
10.3 Pledge Agreement, dated as of June 22, 2018, by and between the Registrant, as pledgor, and CIBC Bank USA(4)

 

11.1 Computation of Per Share Earnings (Included in the notes to the financial statements contained in this report)*

 

31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended*
   
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended*

 

32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

 

32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

 

 

* Filed herewith.
(1) Previously filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the SEC on December 19, 2016.
   
(2) Previously filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the SEC on June 14, 2017.
   
(3) Previously filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed with the SEC on August 10, 2017.
   
(4) Previously filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the SEC on June 27, 2018.

 

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SIGNATURES

 

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

 

  RUNWAY GROWTH CREDIT FUND INC.
Date: August 9, 2018    
  By: /s/ R. David Spreng
    R. David Spreng
   

President, Chief Executive Officer and Chairman of the Board of Directors

(Principal Executive Officer)

     
Date: August 9, 2018 By: /s/ Thomas B. Raterman
    Thomas B. Raterman
    Chief Financial Officer, Treasurer and Secretary
    (Principal Financial and Accounting Officer)

 

 

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