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EX-31.1 - EX-31.1 - NexPoint Capital, Inc.d888895dex311.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED March 31, 2020 OR

OR

 

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

FOR THE TRANSITION PERIOD FROM                      TO                     

COMMISSION FILE NUMBER: 814-01074

 

 

NexPoint Capital, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   38-3926499
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
300 Crescent Court, Suite 700  
Dallas, Texas   75201
(Address of principal executive offices)   (Zip Code)

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

 

 

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

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange

on which registered

N/A   N/A   N/A

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

Common Stock, par value $0.001 per share

 

 

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☐    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See 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      Smaller reporting company  
     Emerging growth company  

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

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

As of March 31, 2020, the Registrant had 10,498,325 shares of common stock, $0.001 par value, outstanding.

 

 

 


Part I – Financial Information

 

Item 1.

Financial Statements

NexPoint Capital, Inc.

Statements of Assets and Liabilities

 

     March 31, 2020
(Unaudited)
    December 31,
2019
 

Assets

 

Unaffiliated investments, at fair value (cost of $47,702,128 and $97,920,246, respectively)

   $ 34,202,960     $ 94,674,323  

Affiliated investments, at fair value (cost of $7,013,512 and $5,457,776, respectively)(1)

     3,850,673       5,753,369  

Cash and cash equivalents

     933,259       7,764,892  

Due from counterparty(2)

     28,920,000       21,400,000  

Receivable for investments sold

     149,977       —    

Dividends and interest receivable

     483,797       1,042,105  

Receivable from Adviser(3)

     182,802       50,130  

Other receivables

     428,031       —    

Prepaid expenses

     9,717       12,208  
  

 

 

   

 

 

 

Total assets

     69,161,216       130,697,027  
  

 

 

   

 

 

 

Liabilities

 

Credit facilities payable(4)

     937,245       33,714,864  

Payable for investments purchased

     4,535,445       2,533,314  

Payable on total return swap

     495,345       11,458  

Unrealized depreciation on total return swap(2)

     8,571,707       2,745,042  

Common stock repurchased

     —         1,102,405  

Payable to Adviser(3)

     520,411       570,453  

Interest expense and commitment fees payable

     28,250       80,207  

Accrued expenses and other liabilities

     400,395       378,205  

Distributions payable

     629,900       625,526  
  

 

 

   

 

 

 

Total liabilities

     16,118,698       41,761,474  
  

 

 

   

 

 

 

Commitments and contingencies(5)

 

Net assets

 

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

     —         —    

Common stock, $0.001 par value (200,000,000 shares authorized, 10,498,325 and 10,425,431 shares issued and outstanding, respectively)

     10,498       10,425  

Paid-in capital in excess of par

     94,209,558       93,412,260  

Total distributable earnings (loss)

     (41,177,538     (4,487,132
  

 

 

   

 

 

 

Total net assets

   $ 53,042,518     $ 88,935,553  
  

 

 

   

 

 

 

Net asset value per share of common stock

   $ 5.05     $ 8.53  
  

 

 

   

 

 

 

 

(1) 

See Note 10 for a discussion of affiliated investments.

(2) 

See Note 7 for a discussion of total return swaps.

(3) 

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

(4) 

See Note 7 for a discussion of credit facility.

(5) 

See Note 4 and Note 8 for a discussion of the commitments and contingencies of the Company (as defined in Note 1).

See Notes to Financial Statements

 

1


NexPoint Capital, Inc.

Statements of Operations

(Unaudited)

 

     Three Months Ended
March 31,
 
     2020     2019  

Investment income:

 

Interest

   $ 998,424     $ 1,494,454  

Interest paid in kind

     174,457       148,546  

Dividend income from unaffiliated investments

     311,676       254,292  

Dividend income from affiliated investments(1)

     221,401       46,185  

Other fee income

     2,976       44,930  
  

 

 

   

 

 

 

Total investment income

     1,708,934       1,988,407  
  

 

 

   

 

 

 

Expenses:

 

Investment advisory fees(2)

     426,735       491,029  

Interest expense and commitment fees(3)

     170,424       306,350  

Administration fees(2)

     74,616       98,791  

Custodian and accounting service fees

     73,256       77,484  

Stock transfer fee

     72,819       98,501  

Audit and tax fees

     69,428       58,259  

Other expenses

     18,350       9,464  

Reports to stockholders

     15,384       19,801  

Legal fees

     13,108       27,116  

Directors’ fees(2)

     4,511       4,918  

Amortized offering costs

           5,445  
  

 

 

   

 

 

 

Total expenses

     938,631       1,197,158  

Expenses waived or reimbursed by the Adviser(2)

     (184,447     (38,964
  

 

 

   

 

 

 

Net expenses

     754,184       1,158,194  
  

 

 

   

 

 

 

Net investment income

     954,750       830,213  
  

 

 

   

 

 

 

Net realized and unrealized gains (losses) on investments:

 

Net realized gain/(loss) on:

 

Unaffiliated investments and securities sold short

     (14,468,584     786,753  

Affiliated investments(1)

     (1,478,792      

Total return swaps(4)

     (270,059     362,481  

Net change in unrealized appreciation (depreciation) on:

 

Unaffiliated investments and securities sold short

     (10,253,245     3,812,618  

Affiliated investments(1)

     (3,458,432     411,628  

Total return swaps(4)

     (5,826,665     (192,503
  

 

 

   

 

 

 

Net realized and unrealized gains (losses)

     (35,755,777     5,180,977  
  

 

 

   

 

 

 

Net decrease in net assets resulting from operations

     (34,801,027     6,011,190  
  

 

 

   

 

 

 

Per share information—basic and diluted per common share

 

Net investment income:

   $ 0.09     $ 0.08  

Earnings (loss) per share:

   $ (3.32   $ 0.58  

Weighted average shares outstanding:

     10,478,590       10,398,413  

 

(1) 

See Note 10 for a discussion of affiliated investments.

(2) 

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

(3) 

See Note 7 for a discussion of credit facility.

(4) 

See Note 7 for a discussion of total return swaps.

See Notes to Financial Statements

 

2


NexPoint Capital, Inc.

Statement of Changes in Net Assets

(Unaudited)

 

     Common Stock                    
     Shares     Par Amount     Paid in Capital
in

Excess of Par
    Distributable
Earnings
    Total
Net Assets
 

Balance at December 31, 2018

     10,322,327     $ 10,322     $ 92,602,409     $ (6,301,768   $ 86,310,963  

Increase (decrease) in net assets resulting from operations

 

Net investment income

     —         —         —         830,213       830,213  

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

     —         —         —         786,753       786,753  

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

     —         —         —         362,481       362,481  

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

     —         —         —         4,224,246       4,224,246  

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

     —         —         —         (192,503     (192,503

Shareholder distributions:

          

Issuance of common stock

     —         —         —         —         —    

Repurchase of common stock

     (125,146     (125     (1,064,440     —         (1,064,565

Reinvestment of common stock

     188,099       188       1,644,412       —         1,644,600  

Distributions to stockholders(2)

     —         —         —         (1,868,325     (1,868,325
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total increase (decrease) for the three months ended March 31, 2019

     62,953       63       579,972       4,142,865       4,722,900  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2019

     10,385,280     $ 10,385     $ 93,182,381     $ (2,158,903   $ 91,033,863  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Distributions to shareholders per share

     —       $ —       $ —       $ 0.18     $ 0.18  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

See Note 7 for a discussion on Total Return Swaps.

(2) 

Per the Securities Exchange Commission release #33-10532 “Disclosure Update and Simplification”; it is no longer required to differentiate distributions from earnings as either from net investment income or net realized capital gains.

See Notes to Financial Statements

 

3


NexPoint Capital, Inc.

Statement of Changes in Net Assets

(Unaudited)

 

     Common Stock                    
     Shares     Par Amount     Paid in Capital
in

Excess of Par
    Distributable
Earnings
    Total
Net Assets
 

Balance at December 31, 2019

     10,425,431     $ 10,425     $ 93,412,260     $ (4,487,132   $ 88,935,553  

Increase (decrease) in net assets resulting from operations

 

Net investment income

     —         —         —         954,750       954,750  

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

     —         —         —         (15,947,376     (15,947,376

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

     —         —         —         (270,059     (270,059

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

     —         —         —         (13,711,677     (13,711,677

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

     —         —         —         (5,826,665     (5,826,665

Shareholder distributions:

 

Issuance of common stock

     —         —         —         —         —    

Repurchase of common stock

     (49,418     (49     (241,109     —         (241,158

Reinvestment of common stock

     122,312       122       1,038,407       —         1,038,529  

Distributions to stockholders(2)

     —         —         —         (1,889,379     (1,889,379
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total increase (decrease) for the three months ended March 31, 2020

     72,894       73       797,298       (36,690,406     (35,893,035
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2020

     10,498,325     $ 10,498     $ 94,209,558     $ (41,177,538   $ 53,042,518  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Distributions to shareholders per share

     —       $ —       $ —       $ 0.18     $ 0.18  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

See Note 7 for a discussion on Total Return Swaps.

(2) 

Per the Securities Exchange Commission release #33-10532 “Disclosure Update and Simplification”; it is no longer required to differentiate distributions from earnings as either from net investment income or net realized capital gains.

See Notes to Financial Statements

 

4


NexPoint Capital, Inc.

Statements of Cash Flows

(Unaudited)

 

     Three Months Ended
March 31,
 
     2020     2019  

Cash flows used in operating activities

 

Net increase (decrease) in net assets resulting from operations

   $ (34,801,027   $ 6,011,190  

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

    

Purchases of investment securities

     (19,454,662     (14,574,419

Payment-in-kind investments

     (174,457     (148,546

Proceeds from sales and principal repayments of investment securities

     52,488,741       8,522,863  

Net realized (gain) loss on investments

     15,947,376       (786,753

Net change in unrealized (appreciation) depreciation on investments

     13,711,677       (4,224,246

Net change in unrealized depreciation on total return swaps

     5,826,665       192,503  

Amortization of premium/discount, net

     (144,616     (229,735

Amortization of capitalized offering costs

     —         5,445  

Increase (decrease) in operating assets and liabilities:

    

(Increase) decrease in receivable for investments sold

     (149,977     —    

(Increase) decrease in dividends and interest receivable

     558,308       (514,706

(Increase) decrease in receivable from Adviser

     (132,672     —    

(Increase) decrease in other receivables

     (428,031     —    

(Increase) decrease in prepaid expenses

     2,491       2,863  

(Increase) decrease in due from counterparty

     (7,520,000     (1,300,000

(Increase) decrease in receivable due on total return swap

     —         76,190  

Increase (decrease) in payable for investments purchased

     2,002,131       1,885,275  

Increase (decrease) in payable to Adviser

     (50,042     258,952  

Increase (decrease) in interest expense and commitment fees payable

     (51,957     98,165  

Increase (decrease) in accrued expenses and other liabilities

     22,190       (2,214

Increase (decrease) in payable on total return swap

     483,887       —    
  

 

 

   

 

 

 

Net cash flow provided by (used in) operating activities

     28,136,025       (4,727,173
  

 

 

   

 

 

 

Cash flows provided by financing activities

 

Repurchase of common stock, net of payable

     (1,343,563     (1,064,565

Distributions paid in cash

     (846,476     (945,704

(Decrease) in credit facilities payable

     (40,000,000     (3,693,916

Increase in credit facilities payable

     7,222,381       8,709,951  
  

 

 

   

 

 

 

Net cash flow provided by (used in) financing activities

     (34,967,658     3,005,766  
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (6,831,633     (1,721,407

Cash and cash equivalents

 

Beginning of the period

     7,764,892       7,112,205  
  

 

 

   

 

 

 

End of the period

   $ 933,259     $ 5,390,798  
  

 

 

   

 

 

 

Supplemental disclosure and non-cash financing activities

 

Paid-in-kind interest income

   $ 174,457     $ 148,546  

Cash paid during the period for interest

   $ 222,381     $ 208,185  

Reinvestment of distributions paid

   $ 1,038,529     $ 1,644,600  

Local and excise taxes paid

   $ 47,000     $ 139,446  

See Notes to Financial Statements

 

5


NexPoint Capital, Inc.

Schedule of Investments

As of March 31, 2020

(Unaudited)

 

Portfolio Company(1)(2)

  

Interest
Rate

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

Senior Secured Loans – 18.7%(4)

                 

Energy – 1.3%

 

Fieldwood Energy, LLC (Second Lien Term Loan)(5)

   L + 725      1.00      4/11/2023      $ 567,797      $ 554,224      $ 57,915  

Fieldwood Energy, LLC (First Lien Term Loan)(5)

   L + 525      1.00      4/11/2022        1,800,549        1,797,393        641,446  
                 

 

 

 
                    699,361  
                 

 

 

 

Healthcare – 16.0%

 

Auris Luxembourg III S.a.r.l. (First Lien Term Loan)(6) (7)

   L + 375      0.00      2/27/2026        2,560,348        2,548,682        1,965,067  

Covenant Surgical Partners, Inc. (First Lien Delayed Draw Term Loan)(5) (8) (9)

   L + 400      0.00      7/1/2026        333,333        834        (51,667

Covenant Surgical Partners, Inc. (First Lien Term Loan)(5) (8)

   L + 400      0.00      7/1/2026        1,662,500        1,666,656        1,404,813  

Envision Healthcare Corp. (First Lien Term Loan)(6)

   L + 375      0.00      10/10/2025        994,962        860,642        533,136  

ExamWorks Group, Inc. (First Lien Term Loan)(5) (8)

           7/27/2023        1,994,846        2,007,313        1,810,322  

RadNet, Inc. (First Lien Term Loan)(5) (7)

   L + 250      3.25      6/30/2023        3,178,587        3,190,136        2,805,103  
                 

 

 

 
                    8,466,774  
                 

 

 

 

Telecommunication Services – 1.4%

 

TerreStar Corp. (First Lien Term Loan)(10) (11)

   11% PIK         2/27/2021        601,046        601,046        596,839  

TerreStar Corp. (First Lien Term Loan)(10) (11)

   11% PIK         2/28/2022        142,293        142,294        141,297  
                 

 

 

 
                    738,136  
                 

 

 

 

Utility – 0.0%

 

Texas Competitive Electric Holdings Company, LLC (TXU) (First Lien Term Loan)(12)

              3,500,000        79,372        1,225  
                 

 

 

 

Total Senior Secured Loans

                    9,905,496  
                 

 

 

 

Unsecured Loans – 3.2%

 

Materials – 3.2%

 

OmniMax International, Inc. (5) (10) (11)

   14% PIK, 2% Cash         2/6/2021        4,558,900        4,395,722        1,705,029  
                 

 

 

 

Total Unsecured Loans

                    1,705,029  
                 

 

 

 

Asset-Backed Securities – 0.7%

 

Financials – 0.7%

 

Grayson Investor Corp. (7) (13) (14) (15)

           11/1/2021        800        456,000        252,000  

PAMCO CLO 1997-1A B (7) (10) (11) (13) (15) (16)

              374,239        215,187        112,271  
                 

 

 

 
                    364,271  
                 

 

 

 

Total Asset-Backed Securities

                    364,271  
                 

 

 

 

Corporate Bonds – 13.4%

 

Financials – 2.2%

 

Freedom Mortgage Corp. (13) (17)

   8.250%         4/15/2025        1,500,000        1,500,000        1,188,705  
                 

 

 

 

Healthcare – 10.6%

 

Acadia Healthcare Co., Inc. (7) (13) (17)

   5.625%         2/15/2023        1,000,000        1,016,652        948,645  

Hadrian Merger Sub, Inc. (13) (17)

   8.500%         5/1/2026        2,728,000        2,306,229        2,055,664  

Surgery Center Holdings (7) (13) (17)

   6.750%         7/1/2025        3,630,000        3,476,359        2,645,344  
                 

 

 

 
                    5,649,653  
                 

 

 

 

Media/Telecommunications – 0.6%

 

iHeartCommunications, Inc. (17)

   6.375%         5/1/2026        114,206        313,455        108,710  

iHeartCommunications, Inc. (17)

   8.375%         5/1/2027        214,073        584,792        187,565  
                 

 

 

 
                    296,275  
                 

 

 

 

Total Corporate Bonds

                    7,134,633  
                 

 

 

 
                        Shares                

Common Stocks – 18.3%

 

Chemicals – 0.1%

 

MPM Holdings, Inc. (18)

              8,500        17,000        42,500  
                 

 

 

 

See Notes to Financial Statements.

 

6


NexPoint Capital, Inc.

Schedule of Investments (continued)

As of March 31, 2020

(Unaudited)

 

 

Financials – 4.5%

        

American Banknote Corp. (10) (11) (18)

     750,000      $ 2,062,500      $ 2,392,500  
        

 

 

 

Healthcare – 0.1%

        

SteadyMed Ltd. (7) (10) (11) (18)

     54,749        14,509        40,405  
        

 

 

 

Materials – 0.0%

        

OmniMax International, Inc. (10) (11) (18)

     6,698        663,116        201  
        

 

 

 

Real Estate – 2.8%

        

Creative Science Properties, Inc.

     100,000        1,500,000        1,500,000  
        

 

 

 

Real Estate Investment Trust (REIT) – 1.0%

        

NexPoint Residential Trust, Inc. (7) (17) (19)

     21,751        700,894        548,343  
        

 

 

 

Retail – 1.5%

        

Tru Kids, Inc. (18)

     237        1,139,661        787,127  
        

 

 

 

Service – 0.1%

        

Western States Life Insurance (18)

     237        255,681        41,428  
        

 

 

 

Telecommunication Services – 8.2%

        

TerreStar Corp. (10) (11) (18)

     14,035        1,599,990        4,342,990  
        

 

 

 

Total Common Stocks

           9,695,494  
        

 

 

 

LLC Interests – 15.5%

        

Consumer Products – 3.8%

        

US GAMING LLC (10) (11) (18)

     2,000        2,000,000        2,000,000  
        

 

 

 

Real Estate – 11.2%

        

NexPoint Real Estate Finance, LLC (19)

     315,631        6,312,618        3,045,838  

SFR WLIF II, LLC (10) (11)

     3,348,888        3,348,888        1,602,276  

SFR WLIF III, LLC (10) (11)

     1,651,112            1,651,112        1,326,437  
        

 

 

 
           5,974,551  
        

 

 

 

Real Estate Investment Trust (REIT) – 0.5%

        

NexPoint Capital REIT, LLC (10) (11) (19) (20)

     100        —          256,492  
        

 

 

 

Total LLC Interests

           8,231,043  
        

 

 

 

 

     Preferred
Dividend
Rate
                            

Preferred Stocks – 1.7%

             

Real Estate Investment Trusts (REITs) – 1.7%

             

Braemar Hotels & Resorts, Inc. (7)

     5.500        160,233        2,483,612        889,293  

RAIT Financial Trust (17) (21)

     8.875        148,057        3,051,714        —    
             

 

 

 
                889,293  
             

 

 

 

Total Preferred Stocks

                889,293  
             

 

 

 

Rights – 0.1%

             

Utility – 0.1%

             

Texas Competitive Electric Holdings Company, LLC (TXU) (18)

          58,356        148,370        66,642  
             

 

 

 

Total Rights

                66,642  
             

 

 

 

Warrants – 0.1%

             

Healthcare – 0.1%

             

Galena Biopharma, Inc. (11) (18)

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

Gemphire Therapeutics, Inc. (11) (18)

       3/15/2022        4,752        —          1,198  

SCYNEXIS, Inc. (11) (18)

       6/21/2021        195,000        —          41,481  
             

 

 

 
                42,679  
             

 

 

 

Materials – 0.0%

             

OmniMax International, Inc. (10) (11) (18)

       8/6/2025        207        —          6  
             

 

 

 

Media/Telecommunications – 0.0%

             

iHeartMedia, Inc. (18)

       5/1/2039        2,875        52,987        19,047  
             

 

 

 

Total Warrants

                61,732  
             

 

 

 

Total Investments- 71.7%

           $ 54,715,640      $ 38,053,633  
          

 

 

    

 

 

 

Cash Equivalents –1.8%(22)

              $ 933,259  

Other Assets & Liabilities, net- 26.5%

              $ 14,055,626  
             

 

 

 
Net Assets- 100.0%               $ 53,042,518  
             

 

 

 

See Notes to Financial Statements.

 

7


NexPoint Capital, Inc.

Schedule of Investments (continued)

As of March 31, 2020

(Unaudited)

 

     Notional
Amount(23)
     Unrealized
Depreciation
 

Total Return Swap – (16.2%)

     

BNP Paribas TRS Facility (Note 7)

   $ 49,494,677      $ (8,571,707

 

(1) 

Unless otherwise noted, the Company did not “control” and was not an “affiliated person” of any of its portfolio companies, each as defined in the Investment Company Act of 1940, as amended (the “1940 Act”). In general, under the 1940 Act, the Company would be presumed to “control” a portfolio company if it owned 25% or more of its voting securities or had the power to exercise control over the management or policies of such portfolio company, and would be an “affiliated person” of a portfolio company if it owned 5% or more of its voting securities. Additionally, companies under common control (e.g., companies with a common owner of greater than 25% of their respective voting securities) are affiliates under the 1940 Act.

(2) 

All investments are denominated in United States Dollars.

(3) 

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

(4) 

Senior secured loans in which the Company invests generally pay interest at rates which are periodically determined by reference to a base lending rate plus a spread (unless otherwise identified, all senior secured loans carry a variable rate of interest). These base lending rates are generally (i) the Prime Rate offered by one or more major United States banks, (ii) the lending rate offered by one or more European banks such as the London Interbank Offered Rate (“LIBOR”) or (iii) the coupon rate. Rate shown represents the actual rate at March 31, 2020. Senior secured loans, while exempt from registration under the Securities Act of 1933 (the “1933 Act”), contain certain restrictions on resale and cannot be sold publicly. Senior secured floating rate loans often require prepayments from excess cash flow or permit the borrower to repay at its election. The degree to which borrowers repay, whether as a contractual requirement or at their election, cannot be predicted with accuracy. As a result, the actual remaining maturity may be substantially less than the stated maturity shown.

(5) 

The interest rate on these investments is subject to a base rate of 3-Month LIBOR, which at March 31, 2020 was 1.45%. The LIBOR rate used to calculate interest is the higher of the prevailing 3 month LIBOR rate in effect on the date of the quarterly reset, or the LIBOR base rate floor shown.

(6) 

The interest rate on these investments is subject to a base rate of 1-Month LIBOR, which at March 31, 2020 was 0.99%. The LIBOR rate used to calculate interest is the higher of the prevailing 1 month LIBOR rate in effect on the date of the monthly reset, or the LIBOR base rate floor shown.

(7) 

The investment is not a qualifying asset under Section 55 of the 1940 Act. A business development company, such as the Company, may not acquire any asset other than a qualifying asset, unless at the time the acquisition is made, qualifying assets represent at least 70% of the business development company’s total assets. Non-qualifying assets represented 15.7% of the Company’s total assets as of March 31, 2020.

(8) 

All or a portion of this position has not settled. Full contract rates do not take effect until settlement date.

(9) 

The investment has an unfunded commitment as of March 31, 2020. The unfunded loan commitment may be subject to a commitment termination date that may expire prior to the maturity date stated. The negative cost, if applicable, is the result of the capitalized discount being greater than the principal amount outstanding on the loan. The negative fair value, if applicable, is the result of the capitalized discount on the loan. For further details see Note 8.

(10) 

Classified as Level 3 within the three-tier fair value hierarchy. Please see Note 2 for an explanation of this hierarchy, as well as a list of unobservable inputs used in the valuation of these instruments.

(11) 

Represents fair value as determined by the Company’s Board of Directors (the “Board”), or its designee in good faith, pursuant to the policies and procedures approved by the Board. The Board considers fair valued securities to be securities for which market quotations are not readily available and these securities may be valued using a combination of observable and unobservable inputs. Securities with a total aggregate value of $14,559,422 or 27.4% of net assets were fair valued under the Company’s valuation procedures as of March 31, 2020.

(12) 

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

(13) 

Securities exempt from registration under Rule 144A of the 1933 Act. These securities may only be resold in transactions exempt from registration to qualified institutional buyers. As of March 31, 2020, these securities amounted to $7,202,629, or 13.6% of net assets.

(14) 

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

(15) 

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

(16) 

The issuer is in default of its payment obligation, or is in danger of default.

(17) 

All or part of this security is pledged as collateral for margin/facility borrowings. The market value of the securities pledged as collateral was $7,682,976.

(18) 

Non-income producing security.

(19) 

Represents an affiliated issuer. Assets with a total aggregate market value of $3,850,673, or 7.3% of net assets, were affiliated with the Company as of March 31, 2020 (see Note 10).

(20) 

The investment is deemed to be a “controlled affiliated person” of the Company because the Company owns, either directly or indirectly, 25% or more of the portfolio company’s outstanding voting securities or has the power to exercise control over management or policies of such portfolio company. See Note 4 “Related Party Transactions and Arrangements”.

(21) 

The issuer has suspended the quarterly dividend for this security.

(22) 

State Street U.S. Government Money Market Fund.

(23) 

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

Glossary

PIK 

Payment-in-Kind

See Notes to Financial Statements.

 

8


NexPoint Capital, Inc.

Schedule of Investments

As of December 31, 2019

 

Portfolio Company  (1)(2)

 

Interest
Rate

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

Senior Secured Loans – 9.0% (4)

           

Energy – 2.1%

           

Fieldwood Energy, LLC (First Lien Term Loan) (5)

  L + 525     1.00   4/11/2022     1,800,549     $ 1,797,034     $ 1,514,208  

Fieldwood Energy, LLC (Second Lien Term Loan) (5)

  L + 725     1.00   4/11/2023     567,797       553,265       326,838  
           

 

 

 
              1,841,046  
           

 

 

 

Healthcare – 5.7%

           

Auris Luxembourg III S.a.r.l. (First Lien Term Loan) (6)(7)

  L + 375     0.00   2/27/2026     2,566,812       2,554,699       2,583,933  

Covenant Surgical Partners, Inc. (First Lien Delayed Draw Term Loan) (5)(8)

  L + 400     0.00   7/1/2026     333,333       833       833  

Covenant Surgical Partners, Inc. (First Lien Term Loan) (5)(8)

  L + 400     0.00   7/1/2026     1,666,667       1,670,833       1,670,833  

Envision Healthcare Corp. (First Lien Term Loan) (6)(8)

  L + 375     0.00   10/10/2025     997,481       862,821       855,754  
           

 

 

 
              5,111,353  
           

 

 

 

Media/Telecommunications – 0.4%

           

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

  L + 400     0.00   5/1/2026     333,537       863,774       336,802  
           

 

 

 

Telecommunication Services – 0.8%

           

TerreStar Corp. (First Lien Term Loan) (9)(10)

  11% PIK     2/27/2020     584,639       584,639       583,470  

TerreStar Corp. (First Lien Term Loan) (9)(10)

  11% PIK     2/28/2022     138,409       138,409       138,132  
           

 

 

 
              721,602  
           

 

 

 

Utility – 0.0%

           

Texas Competitive Electric Holdings Company, LLC (TXU) (Escrow Loan) (11)(12)

          3,500,000       79,372       1,925  
           

 

 

 

Total Senior Secured Loans

              8,012,728  
           

 

 

 

Unsecured Loans – 4.2%

           

Materials – 4.2%

           

OmniMax International, Inc. (5)(9)(10)

  14% PIK, 2% Cash     2/6/2021     4,404,735       4,195,580       3,713,191  
           

 

 

 

Total Unsecured Loans

              3,713,191  
           

 

 

 

Asset-Backed Securities – 0.8%

           

Financials – 0.8%

           

Grayson Investor Corp. (7)(13)(14)(15)

      11/1/2021     800       456,000       333,764  

Highland Park CDO I Ltd. 2006 1A A2 (5)(7)(13)(15)

  L + 40     11/25/2051     270,178       225,349       270,127  

PAMCO CLO 1997-1A B (7)(9)(10)(13)(15)(16)

          374,239       215,187       139,629  
           

 

 

 
              743,520  
           

 

 

 

Total Asset-Backed Securities

              743,520  
           

 

 

 

Mortgage-Backed Securities – 4.5%

           

Financials – 4.5%

           

FREMF 2019-KF60 Mortgage Trust (6)(13)

      2/25/2026     4,002,449       3,996,530       3,994,444  
           

 

 

 

Total Mortgage-Backed Securities

              3,994,444  
           

 

 

 
                  Shares              

Closed-End Mutual Funds – 2.4%

           

Financials – 2.4%

           

NexPoint Strategic Opportunities Fund (7)(17)(18)

          120,633       2,419,467       2,136,410  
           

 

 

 

Total Closed-End Mutual Funds

              2,136,410  
           

 

 

 

See Notes to Financial Statements

 

9


NexPoint Capital, Inc.

Schedule of Investments (continued)

As of December 31, 2019

 

Portfolio Company  (1)(2)

 

Interest
Rate

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

Corporate Bonds – 45.9%

 

Financials – 1.7%

 

Freedom Mortgage Corp. (13)(18)

  8.250%     4/15/2025     1,500,000     $ 1,500,000     $ 1,474,200  
           

 

 

 

Healthcare – 43.8%

           

ASP AMC Merger Sub, Inc. (13)(18)

  8.000%     5/15/2025     7,325,000       6,948,779       4,892,478  

Endo Finance LLC / Endo Finco Inc. (7)(13)(18)

  6.000%     7/15/2023     4,500,000       3,877,424       3,262,455  

Ortho-Clinical Diagnostics (13)(18)

  6.625%     5/15/2022     11,217,000       10,862,655       11,174,863  

Surgery Center Holdings (7)(13)(18)

  6.750%     7/1/2025     11,858,000       11,246,267       11,892,566  

Valeant Pharmaceuticals International, Inc. (7)(13)(18)

  6.125%     4/15/2025     7,500,000       6,942,340       7,764,863  
           

 

 

 
              38,987,225  
           

 

 

 

Media/Telecommunications – 0.4%

           

iHeartCommunications, Inc. (18)

  6.375%     5/1/2026     114,206       313,455       124,127  

iHeartCommunications, Inc. (18)

  8.375%     5/1/2027     214,073       584,792       236,947  
           

 

 

 
              361,074  
           

 

 

 

Total Corporate Bonds

              40,822,499  
           

 

 

 
                  Shares              

Common Stocks – 25.9%

           

Chemicals – 0.0%

           

MPM Holdings, Inc. (12)

          8,500       17,000       42,500  
           

 

 

 

Energy – 5.5%

           

Energy Transfer Equity L.P. (7)(18)

          75,000       1,438,740       962,250  

Enterprise Products Partners L.P. (7)(18)

          140,000       3,424,740       3,942,400  
           

 

 

 
              4,904,650  
           

 

 

 

Financials – 2.8%

           

American Banknote Corp. (9)(10)(12)

          750,000       2,062,500       2,467,500  
           

 

 

 

Healthcare – 0.3%

           

Quorum Health Corp. (12)

          224,600       1,284,134       214,740  

SteadyMed Ltd. (7)(9)(10)(12)

          54,749       14,508       40,405  
           

 

 

 
              255,145  
           

 

 

 

Materials – 0.0%

           

OmniMax International, Inc. (9)(10)(12)

          6,698       663,116       20,898  
           

 

 

 

Media/Telecommunications – 1.9%

           

Clear Channel Outdoor Holding, Inc. (12)(18)

          124,986       631,179       357,460  

iHeartMedia, Inc. (12)(18)

          80,350       2,182,708       1,357,915  
           

 

 

 
              1,715,375  
           

 

 

 

Real Estate Investment Trusts (REITs) – 6.9%

           

NexPoint Residential Trust, Inc. (7)(17)(18)

          26,466       848,748       1,190,970  

City Office REIT, Inc. (7)(18)

          108,000       1,480,753       1,460,160  

Independence Realty Trust, Inc. (7)(18)

          246,727       2,146,330       3,473,916  
           

 

 

 
              6,125,046  
           

 

 

 

Retail – 1.3%

           

Tru Kids, Inc. (12)

          237       1,139,661       1,124,467  
           

 

 

 

Service – 0.1%

           

Western States Life Insurance (12)

          237       255,681       59,183  
           

 

 

 

Telecommunication Services – 4.4%

           

TerreStar Corp. (9)(10)(12)

          14,035       1,599,990       3,890,081  
           

 

 

 

Utility – 2.7%

           

Vistra Energy Corp. (18)

          105,000       1,622,256       2,413,950  
           

 

 

 

Total Common Stocks

              23,018,795  
           

 

 

 

See Notes to Financial Statements

 

10


NexPoint Capital, Inc.

Schedule of Investments (continued)

As of December 31, 2019

 

LLC Interests – 10.5%

           

Consumer Products – 2.3%

           

US GAMING LLC (9)(10)(12)

          2,000     $ 2,000,000     $ 2,000,000  
           

 

 

 

Real Estate – 5.5%

           

SFR WLIF III, LLC (9)(10)

          1,651,112       1,651,112       1,615,315  

SFR WLIF II, LLC (9)(10)

          3,348,888       3,348,888       3,317,342  
           

 

 

 
              4,932,657  
           

 

 

 

Real Estate Investment Trust (REIT) – 2.7%

           

NexPoint Capital REIT, LLC (9)(10)(17)(22)

          100       2,189,561       2,425,989  
           

 

 

 

Total LLC Interests

              9,358,646  
           

 

 

 
   

Preferred
Dividend
Rate

                             

Preferred Stocks – 9.5%

           

Financials – 2.3%

           

Tectonic Financial, Inc.

  9.000%         200,000       2,000,000       2,084,000  
           

 

 

 

Real Estate – 1.7%

           

Creative Science Properties, Inc.

          100,000       1,500,000       1,500,000  
           

 

 

 

Real Estate Investment Trusts (REITs) – 5.5%

           

Braemar Hotels & Resorts, Inc. (7)(18)

  5.500%         258,065       3,733,840       4,903,235  

RAIT Financial Trust (18)(19)

  8.875%         148,057       3,051,715       4,235  
           

 

 

 
              4,907,470  
           

 

 

 

Total Preferred Stocks

              8,491,470  
           

 

 

 

Rights – 0.1%

           

Utility – 0.1%

           

Texas Competitive Electric Holdings Company, LLC (TXU) (12)

          58,356       148,370       61,391  
           

 

 

 

Total Rights

              61,391  
           

 

 

 

Warrants – 0.1%

           

Healthcare – 0.0%

           

Galena Biopharma, Inc. (10)(12)

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

Gemphire Therapeutics, Inc. (10)(12)

        3/15/2022       4,752       —         1,340  

SCYNEXIS, Inc. (10)(12)

        6/21/2021       195,000       —         28,497  
           

 

 

 
              29,837  
           

 

 

 

Materials – 0.0%

           

OmniMax International, Inc. (9)(10)(12)

        8/6/2025       207       —         647  
           

 

 

 

Media/Telecommunications – 0.1%

           

iHeartMedia, Inc. (12)

        5/1/2039       2,875       52,988       44,114  
           

 

 

 

Total Warrants

              74,598  
           

 

 

 

Total Investments - 112.9%

          $ 103,378,022     $ 100,427,692  
         

 

 

   

 

 

 

Cash Equivalents – 8.7% (20)

            $ 7,764,892  

Other Assets & Liabilities, net - (21.6%)

            $ (19,257,031
           

 

 

 

Net Assets - 100.0%

            $ 88,935,553  
           

 

 

 
                          Notional
Amount (21)
    Unrealized
Depreciation
 

Total Return Swap – (3.1%)

           

BNP Paribas TRS Facility (Note 7)

            50,904,830       (2,745,042

See Notes to Financial Statements

 

11


NexPoint Capital, Inc.

Schedule of Investments (continued)

As of December 31, 2019

 

(1) 

Unless otherwise noted, the Company did not “control” and was not an “affiliated person” of any of its portfolio companies, each as defined in the Investment Company Act of 1940, as amended (the “1940 Act”). In general, under the 1940 Act, the Company would be presumed to “control” a portfolio company if it owned 25% or more of its voting securities or had the power to exercise control over the management or policies of such portfolio company, and would be an “affiliated person” of a portfolio company if it owned 5% or more of its voting securities. Additionally, companies under common control (e.g., companies with a common owner of greater than 25% of their respective voting securities) are affiliates under the 1940 Act.

(2) 

All investments are denominated in United States Dollars.

(3) 

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

(4) 

Senior secured loans in which the Company invests generally pay interest at rates which are periodically determined by reference to a base lending rate plus a spread (unless otherwise identified, all senior secured loans carry a variable rate of interest). These base lending rates are generally (i) the Prime Rate offered by one or more major United States banks, (ii) the lending rate offered by one or more European banks such as the London Interbank Offered Rate (“LIBOR”) or (iii) the coupon rate. Rate shown represents the actual rate at December 31, 2019. Senior secured loans, while exempt from registration under the Securities Act of 1933 (the “1933 Act”), contain certain restrictions on resale and cannot be sold publicly. Senior secured floating rate loans often require prepayments from excess cash flow or permit the borrower to repay at its election. The degree to which borrowers repay, whether as a contractual requirement or at their election, cannot be predicted with accuracy. As a result, the actual remaining maturity may be substantially less than the stated maturity shown.

(5) 

The interest rate on these investments is subject to a base rate of 3-Month LIBOR, which at December 31, 2019 was 1.91%. The LIBOR rate used to calculate interest is the higher of the prevailing 3 month LIBOR rate in effect on the date of the quarterly reset, or the LIBOR base rate floor shown.

(6) 

The interest rate on these investments is subject to a base rate of 1-Month LIBOR, which at December 31, 2019 was 1.76%. The LIBOR rate used to calculate interest is the higher of the prevailing 1 month LIBOR rate in effect on the date of the monthly reset, or the LIBOR base rate floor shown.

(7) 

The investment is not a qualifying asset under Section 55 of the 1940 Act. A business development company, such as the Company, may not acquire any asset other than a qualifying asset, unless at the time the acquisition is made, qualifying assets represent at least 70% of the business development company’s total assets. Non-qualifying assets represented 29.4% of the Company’s total assets as of December 31, 2019.

(8) 

All or a portion of this position has not settled. Full contract rates do not take effect until settlement date.

(9) 

Classified as Level 3 within the three-tier fair value hierarchy. Please see Note 2 for an explanation of this hierarchy, as well as a list of unobservable inputs used in the valuation of these instruments.

(10) 

Represents fair value as determined by the Company’s Board of Directors (the “Board”), or its designee in good faith, pursuant to the policies and procedures approved by the Board. The Board considers fair valued securities to be securities for which market quotations are not readily available and these securities may be valued using a combination of observable and unobservable inputs. Securities with a total aggregate value of $20,382,436 or 22.9% of net assets were fair valued under the Company’s valuation procedures as of December 31, 2019.

(11) 

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

(12) 

Non-income producing security.

(13) 

Securities exempt from registration under Rule 144A of the 1933 Act. These securities may only be resold in transactions exempt from registration to qualified institutional buyers. As of December 31, 2019, these securities amounted to $45,199,389, or 50.8% of net assets.

(14) 

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

(15) 

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

(16) 

The issuer is in default of its payment obligation, or is in danger of default.

(17) 

Represents an affiliated issuer. Assets with a total aggregate market value of $5,753,369, or 6.5% of net assets, were affiliated with the Company as of December 31, 2019 (see Note 10).

(18) 

All or part of this security is pledged as collateral for margin/facility borrowings. The market value of the securities pledged as collateral was $63,025,400.

(19) 

The issuer has suspended the quarterly dividend for this security.

(20) 

State Street U.S. Government Money Market Fund.

(21) 

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

(22) 

The investment is deemed to be a “controlled affiliated person” of the Company because the Company owns, either directly or indirectly, 25% or more of the portfolio company’s outstanding voting securities or has the power to exercise control over management or policies of such portfolio company. See Note 4 “Related Party Transactions and Arrangements”.

See Notes to Financial Statements

 

 

12


NexPoint Capital, Inc.

Notes to Financial Statements (Unaudited)

Note 1 — Organization

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

The Company was formed in Delaware on September 30, 2013 and formally commenced operations on September 2, 2014 upon satisfying the minimum offering requirement by raising gross proceeds of $10.0 million in connection with a private placement with NexPoint Advisors, L.P. (the “Adviser”), our external advisor. In aggregate through March 31, 2020, the Adviser controls 2,549,002 total shares, including reinvestment of dividends, for a net amount of approximately $12.9 million.

The Company has retained the Adviser to manage certain aspects of its affairs on a day-to-day basis. NexPoint Securities, Inc. (the “Dealer Manager”), an entity under common ownership with the Adviser, served as the dealer manager of the Company’s continuous public offering prior to the termination of the offering. The Adviser and Dealer Manager are related parties and will receive fees and other compensation for services related to the investment and management of the Company’s assets and the continuous public offering. The Company’s continuous public offering ended on February 14, 2018.

Note 2 — Summary of Significant Accounting Policies

Basis of Accounting

The accompanying financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Additionally, the accompanying financial statements of the Company and related financial information have been prepared pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ending December 31, 2020. The interim financial data as of March 31, 2020 and for the three months ended March 31, 2020 and 2019 is unaudited. In the opinion of management, the interim financial data includes all adjustments, consisting only of the normal recurring adjustments, necessary to a fair statement of the results for the interim periods.

Use of Estimates

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

Statements of Cash Flows

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

 

13


Cash and Cash Equivalents

The Company considers liquid assets deposited with a bank and certain short-term debt instruments with original maturities of three months or less to be cash equivalents. These investments represent amounts held with financial institutions that are readily accessible to pay Company expenses or purchase investments. Cash and cash equivalents are valued at cost plus accrued interest, which approximates market value. The value of cash equivalents denominated in foreign currencies, if any, is determined by converting to U.S. dollars on the date of the Statements of Assets and Liabilities. As of March 31, 2020 and December 31, 2019, the Company had cash and cash equivalents of $933,259 and $7,764,892, respectively. As of March 31, 2020 and December 31, 2019, $805,975 and $7,745,979 was held in the State Street U.S. Government Money Market Fund, and $127,284 and $18,913 was held in a custodial account with State Street Bank and Trust Company, respectively.

Securities Sold Short and Restricted Cash

The Company may sell securities short. A security sold short is a transaction in which the Company sells a security it does not own in anticipation that the market price of that security will decline. When the Company sells a security short, it must borrow the security sold short from a broker-dealer and deliver it to the buyer upon conclusion of the transaction. The Company may have to pay a fee to borrow particular securities and is often obligated to pay over any dividends or other payments received on such borrowed securities. Cash held as collateral for securities sold short is classified as restricted cash on the Statements of Assets and Liabilities. Securities held as collateral for securities sold short are shown on the Schedule of Investments for the Company, as applicable. As of March 31, 2020 and December 31, 2019, the Company did not have any securities sold short.

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

Other Fee Income

Fee income may consist of origination/closing fees, amendment fees, administrative agent fees, transaction break-up fees and other miscellaneous fees. Origination fees, amendment fees, and other similar fees are non-recurring fee sources. Such fees are received on a transaction by transaction basis and do not constitute a regular stream of income. For the three months ended March 31, 2020 and March 31, 2019, the Company recognized $2,976 and $44,930 of fee income, respectively.

Fair Value of Financial Instruments

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

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

 

14


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

 

   

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

 

   

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

 

   

The Audit and Qualified Legal Compliance Committee of the Board reviews these preliminary valuations.

 

   

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

 

   

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

As of March 31, 2020, the Company held the following investments for which a sufficient level of current, reliable market quotations were not available:

 

Instrument

   Type    Market value  

PAMCO CLO 1997-1A B

   Asset-Backed    $  112,271  

American Banknote Corp.

   Common Stocks      2,392,500  

OmniMax International, Inc.

   Common Stocks      201  

SteadyMed Ltd.

   Common Stocks      40,405  

TerreStar Corp.

   Common Stocks      4,342,990  

NexPoint Capital REIT, LLC

   LLC Interests      256,492  

SFR WLIF III, LLC

   LLC Interests      1,326,437  

SFR WLIF II, LLC

   LLC Interests      1,602,276  

US GAMING LLC

   LLC Interests      2,000,000  

TerreStar Corp.

   Senior Secured Loans      596,839  

TerreStar Corp.

   Senior Secured Loans      141,297  

OmniMax International, Inc.

   Unsecured Loans      1,705,029  

Galena Biopharma, Inc.

   Warrant      —    

Gemphire Therapeutics, Inc.

   Warrant      1,198  

OmniMax International, Inc.

   Warrant      6  

SCYNEXIS, Inc.

   Warrant      41,481  

 

15


As of December 31, 2019, the Company held the following investments for which a sufficient level of current, reliable market quotations were not available:

 

Instrument

   Type    Market value  

PAMCO CLO 1997-1A B

   Asset-Backed    $  139,629  

American Banknote Corp.

   Common Stocks      2,467,500  

OmniMax International, Inc.

   Common Stocks      20,898  

SteadyMed Ltd.

   Common Stocks      40,405  

TerreStar Corp.

   Common Stocks      3,890,081  

NexPoint Capital REIT, LLC

   LLC Interests      2,425,989  

SFR WLIF III, LLC

   LLC Interests      1,615,315  

SFR WLIF II, LLC

   LLC Interests      3,317,342  

US GAMING LLC

   LLC Interests      2,000,000  

TerreStar Corp.

   Senior Secured Loans      583,470  

TerreStar Corp.

   Senior Secured Loans      138,132  

OmniMax International, Inc.

   Unsecured Loans      3,713,191  

Galena Biopharma, Inc.

   Warrant      —    

Gemphire Therapeutics, Inc.

   Warrant      1,340  

OmniMax International, Inc.

   Warrant      647  

SCYNEXIS, Inc.

   Warrant      28,497  

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

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

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

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

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

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

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

 

16


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

As of March 31, 2020, the Company’s investments consisted of senior secured loans, unsecured loans, bonds, asset-backed securities, mortgage-backed securities, common stocks, LLC interests, preferred stocks, a closed-end mutual fund, a total return swap (“TRS”) and rights and warrants, which may be purchased for a fraction of the price of the underlying securities. The fair value of the Company’s loans, bonds and asset-backed securities are generally based on quotes received from brokers or independent pricing services. Loans, bonds and asset-backed securities with quotes that are based on actual trades with a sufficient level of activity on or near the measurement date are classified as Level 2 assets. Loans, bonds and asset-backed securities that are priced using quotes derived from implied values, indicative bids or a limited number of actual trades are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable.

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

The Company values the TRS in accordance with the agreement (the “TRS Agreement”) with BNP Paribas (“BNP Paribas”) that establishes the TRS. Pursuant to the TRS Agreement, the value of the TRS is based on the increase or decrease in the value of the loans underlying the TRS, together with accrued interest income, interest expense and certain other expenses incurred under the TRS. The loans underlying the TRS are valued based on indicative bid prices provided by an independent third-party pricing service. Bid prices reflect the highest price that market participants may be willing to pay. These valuations are sent to the Company for review and testing. For additional information on the TRS, see Note 7.

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

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

 

17


The inputs or methodology used for valuing investments are not necessarily an indication of the risk associated with investing in those investments. Transfers in and out of the levels are recognized at the fair value at the end of the period. The following are summaries of the Company’s investments categorized within the fair value hierarchy as of March 31, 2020 and December 31, 2019:

 

       March 31, 2020  

Investments

     Level 1        Level 2        Level 3      Total  

Assets

 

Senior Secured Loans

 

Energy

     $ —          $ 699,361        $ —        $ 699,361  

Healthcare

       —            8,466,774          —          8,466,774  

Telecommunication Services

       —            —            738,136        738,136  

Utility

       —            1,225          —          1,225  

Unsecured Loans

 

Materials

       —            —            1,705,029        1,705,029  

Asset-Backed Securities

 

Financials

       —            252,000          112,271        364,271  

Corporate Bonds

                 

Financials

       —            1,188,705          —          1,188,705  

Healthcare

       —            5,649,653          —          5,649,653  

Media/Telecommunications

       —            296,275          —          296,275  

Common Stocks

 

Chemicals

       —            42,500          —          42,500  

Financials

       —            —            2,392,500        2,392,500  

Healthcare

       —            —            40,405        40,405  

Materials

       —            —            201        201  

Real Estate

       —            1,500,000          —          1,500,000  

Real Estate Investment Trusts (REITs)

       548,343          —            —          548,343  

Retail

       —            787,127          —          787,127  

Service

       —            41,428          —          41,428  

Telecommunication Services

       —            —            4,342,990        4,342,990  

LLC Interests

 

Consumer Products

       —            —            2,000,000        2,000,000  

Real Estate

       —            3,045,838          2,928,713        5,974,551  

Real Estate Investment Trusts (REITs)

       —            —            256,492        256,492  

Preferred Stocks

       889,293          —            —          889,293  

Rights

       —            66,642          —          66,642  

Warrants

 

Healthcare

       —            42,679          —          42,679  

Materials

       —            —            6        6  

Media/Telecommunications

       —            19,047          —          19,047  
    

 

 

      

 

 

      

 

 

    

 

 

 

Total Assets

     $ 1,437,636        $ 22,099,254        $ 14,516,743      $ 38,053,633  
    

 

 

      

 

 

      

 

 

    

 

 

 

Liabilities

 

Derivatives

 

Total Return Swap Contracts

     $ —          $ —          $ (8,571,707    $ (8,571,707
    

 

 

      

 

 

      

 

 

    

 

 

 

Total Liabilities

     $ —          $ —          $ (8,571,707    $ (8,571,707
    

 

 

      

 

 

      

 

 

    

 

 

 

Total Investments net of Securities Sold Short

     $ 1,437,636        $ 22,099,254        $ 5,945,036      $ 29,481,926  
    

 

 

      

 

 

      

 

 

    

 

 

 

 

18


     December 31, 2019  

Investments

   Level 1      Level 2      Level 3     Total  

Assets

 

Senior Secured Loans

 

Energy

   $ —        $ 1,841,046      $ —       $ 1,841,046  

Healthcare

     —          5,111,353        —         5,111,353  

Media/Telecommunications

     —          336,802        —         336,802  

Telecommunication Services

     —          —          721,602       721,602  

Utility

     —          1,925        —         1,925  

Unsecured Loans

          

Materials

     —          —          3,713,191       3,713,191  

Asset-Backed Securities

          

Financials

     —          603,891        139,629       743,520  

Mortgage-Backed Securities

     —          3,994,444        —         3,994,444  

Closed-End Mutual Funds

     2,136,410        —          —         2,136,410  

Corporate Bonds

          

Financials

     —          1,474,200        —         1,474,200  

Healthcare

     —          38,987,225        —         38,987,225  

Media/Telecommunications

     —          361,074        —         361,074  

Common Stocks

          

Chemicals

     —          42,500        —         42,500  

Energy

     4,904,650        —          —         4,904,650  

Financials

     —          —          2,467,500       2,467,500  

Healthcare

     214,740        —          40,405       255,145  

Materials

     —          —          20,898       20,898  

Media/Telecommunications

     1,715,375        —          —         1,715,375  

Real Estate Investment Trusts (REITs)

     6,125,046        —          —         6,125,046  

Retail

     —          1,124,467        —         1,124,467  

Service

     —          59,183        —         59,183  

Telecommunication Services

     —          —          3,890,081       3,890,081  

Utility

     2,413,950        —          —         2,413,950  

LLC Interests

          

Consumer Products

     —          —          2,000,000       2,000,000  

Real Estate

     —          —          4,932,657       4,932,657  

Real Estate Investment Trusts (REITs)

     —          —          2,425,989       2,425,989  

Preferred Stocks

          

Financials

     —          2,084,000        —         2,084,000  

Real Estate

     —          1,500,000        —         1,500,000  

Real Estate Investment Trusts (REITs)

     4,903,235        4,235        —         4,907,470  

Rights

     —          61,391        —         61,391  

Warrants

          

Healthcare

     —          29,837        —         29,837  

Materials

     —          —          647       647  

Media/Telecommunications

     —          44,114        —         44,114  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Assets

   $ 22,413,406      $ 57,661,687      $ 20,352,599     $ 100,427,692  
  

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities

          

Warrants

   $ —        $ —        $ —       $ —    

Derivatives

 

Total Return Swap Contracts

   $ —        $ —        $ (2,745,042   $ (2,745,042
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Liabilities

   $ —        $ —        $ (2,745,042   $ (2,745,042
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Investments net of Securities Sold Short

   $ 22,413,406      $ 57,661,687      $ 17,607,557     $ 97,682,650  
  

 

 

    

 

 

    

 

 

   

 

 

 

The table below sets forth a summary of changes in the Company’s Level 3 investments (measured at fair value using significant unobservable inputs) for the three months ended March 31, 2020.

 

19


Investments:

  Balance as of
December 31,
2019
    Transfers
into
Level 3
    Transfer
out of
Level 3
    Net
amortization
(accretion) of
premium/
(discount)
    Net
realized
gains/
(losses)
    Net change in
unrealized
gains/
(losses)
    Purchases/
PIK
    (Sales
and
redemptions)
    Balance as of
March 31,
2020
    Change in
unrealized
gain/(loss)
on Level 3
securities still
held at period
end
 

Assets

                   

Senior Secured Loans

                   

Telecommunication Services

  $ 721,602     $  —       $  —       $ —       $ —       $ (3,758   $ 20,292     $ —       $ 738,136   $ (3,758

Unsecured Loans

                   

Materials

    3,713,191       —         —         45,977     —         (2,208,304     154,165     —         1,705,029       (2,208,304

Asset-Backed Securities

                   

Financials

    139,629       —         —         —         —         (27,358     —         —         112,271       (27,358

Common Stocks

                   

Financials

    2,467,500       —         —         —         —         (75,000     —         —         2,392,500     (75,000

Healthcare

    40,405       —         —         —         —         —         —         —         40,405     —    

Materials

    20,898       —         —         —         —         (20,697     —         —         201     (20,697

Telecommunication Services

    3,890,081       —         —         —         —         452,909     —         —         4,342,990     452,909

LLC Interests

                   

Consumer Products

    2,000,000       —         —         —         —         —         —         —         2,000,000     —    

Real Estate

    4,932,657       —         —         —         —         (2,003,944     —         —         2,928,713     (2,003,944

Real Estate Investment Trusts (REITs)

    2,425,989       —         —         —         —         20,064       —         (2,189,561     256,492     20,064  

Warrants

                   

Materials

    647       —         —         —         —         (641     —         —         6     (641
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 20,352,599     $ —       $ —     $ 45,977     $ —       $ (3,866,729 )   $ 174,457   $ (2,189,561   $ 14,516,743     $ (3,866,729 )
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

                   

Total Return

Swaps(1)

  $ (2,745,042   $ —       $ —       $ —       $ —       $ (5,826,665   $ —     $ —     $ (8,571,707 )   $ (5,826,665 )
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

During the three months ended March 31, 2020, the Company recognized a net realized loss on the TRS amounting to $270,059. The Company received $258,781 in cash payments from the TRS during the period and paid $44,953, with a decrease of $11,458 in payable from, and decrease of $495,345 in payable to BNP Paribas for the three months ended March 31, 2020.

The table below sets forth a summary of changes in the Company’s Level 3 investments (measured at fair value using significant unobservable inputs) for the three months ended March 31, 2019.

 

20


Investments:

  Balance as of
December 31,
2018
    Transfers
into
Level 3
    Transfer
out of
Level 3
    Net
amortization
(accretion) of
premium/
(discount)
    Net
realized
gains/
(losses)
    Net change in
unrealized
gains/
(losses)
    Purchases/
PIK
    (Sales
and
redemptions)
    Balance as of
March 31,
2019
    Change in
unrealized
gain/(loss)
on Level 3
securities still
held at
period

end
 

Assets

                   

Senior Secured Loans

                   

Telecommunication Services

  $ 522,845     $ —       $ —       $ —       $ —       $ (14 )     $ 14,199   $ —       $ 537,030     $ (14 )  

Unsecured Loans

                   

Materials

    3,838,472       —         —         42,031       —         (42,032     134,347     —         3,972,818       (42,032

Asset-Backed Securities

                   

Financials

    144,044       —         —         —         —         6,737     —         —         150,781       6,737  

Common Stocks

                   

Healthcare

    14,509       —         —         —         —         (1     —         —         14,508     (1

Materials

    1,303,257       —         —         —         —         (484,945     —         —         818,312       (484,945

Media/Telecommunications

    1,055,803       —         —         —         —         206,571       —         —         1,262,374       206,571  

Telecommunication Services

    3,913,800       —         —         —         —         94,877       —         —         4,008,677       94,877  

Preferred Stocks

                   

Real Estate Investment Trusts (REITs)

    —         —         —         —         —         6,560       2,189,561       —         2,196,121       6,560  

Warrants

                   

Materials

    40,340       —         —         —         —         (15,011     —         —         25,329       (15,011
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 10,833,070     $  —       $  —       $ 42,031   $  —       $ (227,258 )   $ 2,338,107   $  —       $ 12,985,950   $ (227,258 )
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

                   

Total Return Swaps(1)

  $ (2,547,492   $ —       $ —       $ —       $ —       $ (192,503 )   $  —       $  —       $ (2,739,995 )   $ (192,503 )
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

During the three months ended March 31, 2019, the Company recognized a net realized loss on the TRS amounting to $362,481. The Company received $448,827 in cash payments from the TRS during the period and paid $10,156, with a decrease of $76,190 in receivable from BNP Paribas for the three months ended March 31, 2019.

Investments designated as Level 3 may include investments valued using quotes or indications furnished by brokers which are based on models or estimates and may not be executable prices. In light of the developing market conditions, the Adviser continues to search for observable data points and evaluate broker quotes and indications received for investments. Determination of fair values is uncertain because it involves subjective judgments and estimates that are unobservable. Transfers from Level 2 to Level 3 are due to a decrease in market activity (e.g. frequency of trades), which resulted in a decrease of available market inputs to determine price. For the three months ended March 31, 2020, there was no transfer from Level 2 to Level 3. Transfers from Level 3 to Level 2 and from Level 2 to Level 1 are due to an increase in market activity (e.g. frequency of trades), which resulted in an increase of available market inputs to determine price. For the three months ended March 31, 2019, there was no transfer from Level 2 to Level 3.

 

21


The following are summaries of significant unobservable inputs used in the fair valuations of investments categorized within Level 3 of the fair value hierarchy as of March 31, 2020 and December 31, 2019:

 

Investment

   Fair value at
March 31, 2020
    

Valuation

technique

  

Unobservable

inputs

   Range of input value(s)
(weighted average)

LLC Interest

   $ 5,185,205     

Discounted Cash Flow

Net Asset Value

Cost Basis

  

Discount Rate

N/A

N/A

   2.47% - 8.93%

N/A

N/A

Common Stock

     6,776,096     

Discounted Cash Flow

Multiples Analysis

 

 

Transaction Analysis

Transaction Indication of Value

 

Implied Value

 

Black-Scholes Model

  

Discount Rate

Multiple of EBITDA

Unadjusted Price/MHz-PoP

Risk Discount

Liquidity Discount

Multiple of EBITDA

Enterprise Value ($mm)

Transaction Price Per Share

Cash Payment Value

Probability Assessment

Volatility Assumption

   14.0% - 20.5%

5.75x - 7.50x

$0.12 - $0.95

31.9% - 29.4%

25%

7.75x - 8.25x

$761.0 - $771.0

$2.75

$4.46

20%

30% - 40%

Senior Secured Loans

     738,136      Discounted Cash Flow   

Discount Rate

Spread Adjustment

   11.35%

0.35%

Unsecured Loans

     1,705,029      Black-Scholes Model    Volatility Assumption    30% - 40%

Asset-Backed Securities

     112,271      Discounted Cash Flow    Discount Rate    21.00%

Warrants

     6     

Discounted Cash Flow

Multiples Analysis

Transaction Analysis

Black-Scholes Model

  

Discount Rate

Multiple of EBITDA

Multiple of EBITDA

Volatility Assumption

   20.5%

5.75x - 7.50x

7.75x - 8.25x

30% - 40%

  

 

 

          

Total

   $ 14,516,743           
  

 

 

          

Total Return Swaps

   $ (8,571,707    Third Party Pricing Vendor    N/A    N/A

 

Investment

   Fair value at
December 31, 2019
    

Valuation

technique

  

Unobservable

inputs

   Range of input value(s)
(weighted average)

LLC Interest

   $ 9,358,646     

Discounted Cash Flow

Net Asset Value

Cost Basis

  

Discount Rate

N/A

N/A

   2.59% - 12.5%

N/A

N/A

Common Stock

     6,418,884     

Discounted Cash Flow

Multiples Analysis

 

Transaction Analysis

Transaction Indication of Value

 

Black-Scholes Model

 

Implied Value

  

Discount Rate

Multiple of EBITDA

Unadjusted Price/MHz-PoP

Risk Discount

Liquidity Discount

Multiple of EBITDA

Enterprise Value ($mm)

Transaction Price Per Share

Volatility Assumption

Cash Payment Value

Probability Assessment

   16.0% - 20.0%

6.00x - 8.75x

$0.12 - $0.95

55.2% - 59.8%

25%

8.25x - 8.75x

$365.0 - $771.0

$2.75

30% - 40%

$4.46

20%

Senior Secured Loans

     721,602      Discounted Cash Flow   

Discount Rate

Spread Adjustment

   11.10%

0.10%

Unsecured Loans

     3,713,191      Black-Scholes Model    Volatility Assumption    30% - 40%

Asset-Backed Securities

     139,629      Discounted Cash Flow    Discount Rate    21.00%

Warrants

     647     

Discounted Cash Flow

Multiples Analysis

Transaction Analysis

Black-Scholes Model

  

Discount Rate

Multiple of EBITDA

Multiple of EBITDA

Volatility Assumption

   20.0%

7.0x - 8.75x

8.25x - 8.75x

30 - 40%

  

 

 

          

Total

   $ 20,352,599           
  

 

 

          

Total Return Swaps

   $ (2,745,042    Third Party Pricing Vendor    N/A    N/A

 

22


Derivative Transactions

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

Options

The Company purchases options, subject to certain limitations. The Company may invest in options contracts to manage its exposure to the stock and bond markets and fluctuations in foreign currency values. Writing puts and buying calls tend to increase the Company’s exposure to the underlying instrument while buying puts and writing calls tend to decrease the Company’s exposure to the underlying instrument, or economically hedge other Company investments. The Company’s risks in using these contracts include changes in the value of the underlying instruments, nonperformance of the counterparties under the contracts’ terms and changes in the liquidity of the secondary market for the contracts. Options are valued at the last sale price, or if no sales occurred on that day, at the last quoted bid price. As of and during the three months ended March 31, 2020 and March 31, 2019, the Company did not hold options.

Investment Transactions

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

Income Recognition

Corporate actions (including cash dividends from common stock and equity tranches of asset-backed securities) are recorded on the ex-dividend date, net of applicable withholding taxes, except for certain foreign corporate actions, which are recorded as soon after the ex-dividend date as such information becomes available. Interest income is recorded on the accrual basis. The Company does not accrue as a receivable for interest or dividends on loans, asset-backed securities and other securities if there is a reason to doubt the Company’s ability to collect such income. For loans with contractual PIK (payment-in-kind) interest income, which represents contractual interest accrued and added to the loan balance that generally becomes due at maturity, we will not accrue PIK interest if we believe that the PIK interest is no longer collectible. Loan origination fees, original issue discount and market discount are capitalized and such amounts are amortized as interest income over the respective term of the loan or security. Upon the prepayment of a loan or security, any unamortized loan origination fees and original issue discount are recorded as interest income.

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

 

23


Organization and Offering Costs

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

Paid-in Capital

The proceeds from the issuance of common stock as presented on the Company’s Statements of Changes in Net Assets is presented net of selling commissions and fees for the three months ended March 31, 2020 and March 31, 2019. Selling commissions and fees of $0 and $0 were paid for the three months ended March 31, 2020 and March 31, 2019, respectively.

Earnings Per Share

In accordance with the provisions of ASC Topic 260—Earnings per Share (“ASC 260”), basic earnings per share is computed by dividing earnings available to common stockholders by the weighted average number of shares outstanding during the period. Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis.

 

24


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

 

     For the three months ended
March 31,
 
     2020      2019  

Net increase (decrease) in net assets from operations

   $ (34,801,027    $ 6,011,190  

Weighted average common shares outstanding

     10,478,590        10,398,413  

Earnings (loss) per common share-basic and diluted

   $ (3.32    $ 0.59  

Distributions

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

Recent Accounting Pronouncements

In March 2017, the FASB issued Accounting Standards Update 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20). The amendments in this update shorten the amortization period for certain callable debt securities held at premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. For the company, this update is effective for fiscal years beginning on January 1, 2020. There is no material impact to the financial statements.

 

25


Note 3 — Investment Portfolio

The following table shows the composition of the Company’s invested assets by industry classification at fair value at March 31, 2020:

 

     Fair value      Percentage  

Assets

     

Healthcare

   $ 14,199,511        37.3

Real Estate

     7,474,551        19.6

Telecommunication Services

     5,081,126        13.4

Financials

     3,945,476        10.4

Consumer Products

     2,000,000        5.3

Materials

     1,705,236        4.5

Real Estate Investment Trusts (REITs)

     1,694,128        4.4

Retail

     787,127        2.1

Energy

     699,361        1.8

Media/Telecommunications

     315,322        0.8

Utility

     67,867        0.2

Chemicals

     42,500        0.1

Service

     41,428        0.1
  

 

 

    

 

 

 

Total Assets

   $ 38,053,633        100.0
  

 

 

    

 

 

 

The following table shows the composition of the Company’s invested assets by industry classification at fair value at December 31, 2019:

 

     Fair value      Percentage  

Assets

     

Healthcare

   $ 44,383,560        44.2

Real Estate Investment Trusts (REITs)

     13,458,505        13.4

Financials

     12,900,074        12.9

Energy

     6,745,696        6.7

Real Estate

     6,432,657        6.4

Telecommunication Services

     4,611,683        4.6

Materials

     3,734,736        3.7

Utility

     2,477,266        2.5

Media/Telecommunications

     2,457,365        2.4

Consumer Products

     2,000,000        2.0

Retail

     1,124,467        1.1

Service

     59,183        0.1

Chemicals

     42,500        0.0
  

 

 

    

 

 

 

Total Assets

   $ 100,427,692        100.0
  

 

 

    

 

 

 

 

26


The following table summarizes the amortized cost and the fair value of the Company’s invested assets by class of financial asset as of March 31, 2020:

 

     Amortized Cost      Fair value      Percentage of
Portfolio
(at Fair Value)
 

Assets

 

  

Senior Secured Loans - First Lien

   $ 12,814,996      $ 9,846,356        25.9

Senior Secured Loans - Second Lien

     554,224        57,915        0.2

Senior Secured Lien: Escrow Loan

     79,372        1,225        0.0

Unsecured Loans

     4,395,722        1,705,029        4.4

Asset-Backed Securities

     671,187        364,271        1.0

Corporate Bonds

     9,197,487        7,134,633        18.7

Common Stocks

     7,953,351        9,695,494        25.5

LLC Interests

     13,312,618        8,231,043        21.6

Preferred Stocks

     5,535,326        889,293        2.3

Rights

     148,370        66,642        0.2

Warrants

     52,987        61,732        0.2
  

 

 

    

 

 

    

 

 

 

Total Assets

   $ 54,715,640      $ 38,053,633        100.0
  

 

 

    

 

 

    

 

 

 

The following table summarizes the amortized cost and the fair value of the Company’s invested assets by class of financial asset as of December 31, 2019:

 

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

Assets

 

Senior Secured Loans – First Lien

   $ 8,473,042      $ 7,683,965        7.7

Senior Secured Loans – Second Lien

     553,265        326,838        0.3

Senior Secured Loans – Escrow Loan

     79,372        1,925        0.0

Unsecured Loans

     4,195,580        3,713,191        3.7

Asset-Backed Securities

     896,536        743,520        0.7

Mortgage-Backed Securities

     3,996,530        3,994,444        4.0

Closed-End Mutual Funds

     2,419,467        2,136,410        2.1

Corporate Bonds

     42,275,712        40,822,499        40.6

Common Stocks

     20,812,044        23,018,795        22.9

LLC Interests

     9,189,561        9,358,646        9.3

Preferred Stocks

     10,285,555        8,491,470        8.5

Rights

     148,370        61,391        0.1

Warrants

     52,988        74,598        0.1
  

 

 

    

 

 

    

 

 

 

Total Assets

   $ 103,378,022      $ 100,427,692        100.0
  

 

 

    

 

 

    

 

 

 

The following table summarizes the amortized cost and the fair value of the Company’s invested assets as of March 31, 2020 to include, on a look-through basis, the investments underlying the TRS, as disclosed in Note 7. The investments underlying the TRS had a notional amount and market value of $49,494,677 and $40,643,088, respectively, as of March 31, 2020.

 

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

Assets

        

Senior Secured Loans - First Lien

   $ 54,052,531      $ 43,358,280        55.0

Senior Secured Loans - Second Lien

     8,811,366        7,189,079        9.1

Senior Secured Loans - Escrow Loan

     79,372        1,225        0.0

Unsecured Loans

     4,395,722        1,705,029        2.2

Asset-Backed Securities

     671,187        364,271        0.5

Corporate Bonds

     9,197,487        7,134,633        9.1

Common Stocks

     7,953,351        9,695,494        12.3

LLC Interests

     13,312,618        8,231,043        10.5

Preferred Stocks

     5,535,326        889,293        1.1

Rights

     148,370        66,642        0.1

Warrants

     52,987        61,732        0.1
  

 

 

    

 

 

    

 

 

 

Total Assets

   $ 104,210,317      $ 78,696,721        100.0
  

 

 

    

 

 

    

 

 

 

 

27


The following table summarizes the amortized cost and the fair value of the Company’s invested assets as of December 31, 2019 to include, on a look-through basis, the investments underlying the TRS, as disclosed in Note 7. The investments underlying the TRS had a notional amount and market value of $50,904,830 and $47,899,681, respectively, as of December 31, 2019.

 

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

Assets

        

Senior Secured Loans - First Lien

   $ 51,120,740      $ 47,656,091        32.1

Senior Secured Loans - Second Lien

     8,810,397        8,254,393        5.6

Senior Secured Loans - Escrow Loan

     79,372        1,925        0.0

Unsecured Loans

     4,195,580        3,713,191        2.5

Asset-Backed Securities

     896,536        743,520        0.5

Mortgage-Backed Securities

     3,996,530        3,994,444        2.7

Closed-End Mutual Funds

     2,419,467        2,136,410        1.4

Corporate Bonds

     42,275,712        40,822,499        27.6

Common Stocks

     20,812,044        23,018,795        15.5

LLC Interests

     9,189,561        9,358,646        6.3

Preferred Stocks

     10,285,555        8,491,470        5.7

Rights

     148,370        61,391        0.0

Warrants

     52,988        74,598        0.1
  

 

 

    

 

 

    

 

 

 

Total Assets

   $ 154,282,852      $ 148,327,373        100.0
  

 

 

    

 

 

    

 

 

 

 

28


The following table shows the composition of the Company’s invested assets by geographic classification at March 31, 2020:

 

Geography

   Fair value      Percentage  

Assets

 

Cayman Islands(1)

   $ 364,271        1.0

Luxembourg(1)

     1,965,067        5.2

United States

     35,724,295        93.8
  

 

 

    

 

 

 

Total Assets

   $ 38,053,633        100.0
  

 

 

    

 

 

 

 

(1)

Investment denominated in USD.

The following table shows the composition of the Company’s invested assets by geographic classification at December 31, 2019:

 

Geography

   Fair value      Percentage  

Assets

 

Cayman Islands(1)

   $ 743,520        0.7

Luxembourg(1)

     2,583,933        2.6

United States

     97,100,239        96.7
  

 

 

    

 

 

 

Total Assets

   $ 100,427,692        100.0
  

 

 

    

 

 

 

 

(1)

Investment denominated in USD.

Note 4 — Related Party Transactions and Arrangements

Investment Advisory Fee

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

For the three months ended March 31, 2020 and March 31, 2019, the Company incurred investment advisory fees payable to the Adviser of $426,735 and $491,029, respectively. Amounts waived for management fees or administrative services expenses pertaining to periods prior to June 10, 2016 are not recoupable, but amounts waived for management fees or administrative services expenses pertaining to periods from and after June 10, 2016 are subject to recoupment by the Adviser within three years from the date that such fees were otherwise payable, provided that the recoupment will be limited to the amount of such voluntarily waived fees from and after June 10, 2016 and will not cause the sum of the Company’s advisory fees, administration fees, Other Expenses (as defined under “Expense Limits and Reimbursements” below), and any recoupment to exceed the annual rate of 3.40% of average gross assets. Effective December 20, 2017, the Adviser ended its voluntary waiver of advisory fees.

Incentive Fee

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

 

29


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

For the three months ended March 31, 2020 and March 31, 2019, the Company incurred $0 and $0 of incentive fees on capital gains, respectively. Since inception, the Company has accrued $0 of incentive fees on capital gains in aggregate. Effective December 20, 2017, the Adviser ended its voluntary waiver of incentive fees. No such fees have been paid with respect to realized gains to the Adviser as of March 31, 2020.

Administration Fee

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

For the three months ended March 31, 2020 and March 31, 2019, the Company incurred administration fees payable to the Adviser of $74,616 and $98,791, respectively. Amounts waived for management fees or administrative services expenses pertaining to periods prior to June 10, 2016 are not recoupable, but amounts waived for management fees or administrative services, expenses pertaining to periods from and after June 10, 2016 are subject to recoupment by the Adviser within three years from the date that such fees were otherwise payable, provided that the recoupment will be limited to the amount of such voluntarily waived fees from and after June 10, 2016 and will not cause the sum of the Company’s advisory fees, administration fees, Other Expenses, and any recoupment to exceed the annual rate of 3.40% of average gross assets. Effective December 20, 2017, the Adviser ended its voluntary waiver of administration fees.

Investment Advisory and Administration Fees Table

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

 

Period ended

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

December 31, 2017

   $ 413,916      $ 75,906      December 31, 2020

September 30, 2017

     305,288        69,308      September 30, 2020

June 30, 2017

     389,733        77,947      June 30, 2020

March 31, 2017

     390,969        78,194      Expired

December 31, 2016

     366,861        73,372      Expired

September 30, 2016

     343,320        68,664      Expired

June 30, 2016

     74,421        14,884      Expired
  

 

 

    

 

 

    

Total

   $ 2,284,508      $ 458,275     

 

(1) 

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

 

30


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

Organization and Offering Costs

Organization costs include the cost of incorporating, such as the cost of legal services and other fees pertaining to our organization, and are paid by the Adviser. For the three months ended March 31, 2020 and March 31, 2019, the Adviser did not incur or pay organization costs on our behalf.

Offering costs include legal fees, promotional costs and other costs pertaining to the public offering of our shares of common stock, and are capitalized and amortized to expense over one year. For the three months ended March 31, 2020 and March 31, 2019, the Adviser incurred and paid offering costs of $0 and $0, respectively, on our behalf. For the three months ended March 31, 2020 and March 31, 2019, the Company capitalized $0 and $0 of offering costs, respectively. Of this amount, $0 and $5,445 were amortized to expense during the three months ended March 31, 2020 and March 31, 2019, respectively. As of March 31, 2020 and March 31, 2019, $0 and $0 remained on the Statements of Assets and Liabilities, respectively.

Organization costs and offering costs are limited to 1% of total gross proceeds raised in the offering and are not due and payable to the Adviser to the extent they exceed that amount. As of March 31, 2020, the cumulative aggregate amount of $5,327,574 of organization and offering costs exceeds 1% of total proceeds raised. Subsequent to the termination of the offering, the Adviser forfeited the right to reimbursement of the remaining $4,305,091 of these costs.

Fees Paid to Officers and Directors

Each director receives an annual retainer of $150,000 payable in quarterly installments and allocated among each portfolio in the Funds Complex based on relative net assets. Directors are reimbursed for actual out-of-pocket expenses relating to attendance at meetings, however, the Chairman of the Board and the Chairman of the Audit and Qualified Legal Committee each receive an additional payment of $10,000 payable in quarterly installments and allocated among each portfolio in the Funds Complex based on relative net assets. The Directors do not receive any separate compensation in connection with service on Committees or for attending Board or Committee Meetings. They do not have any pension or retirement plan. The “Funds Complex” consists of all of the registered investment companies advised by the Adviser and any affiliates as of the period covered by this report. The Company pays no compensation to any of its officers, all of whom are employees of an affiliate of the Adviser. Effective January 28, 2020, Mr. Honis is treated as an “interested person” of the Company (as defined in the 1940 Act) in light of certain relationships between Mr. Honis and certain affiliates of the Adviser, including HCMLP, arising out of HCMLP’s pending Chapter 11 proceedings.”

For the three months ended March 31, 2020 and March 31, 2019, the Company recorded an expense relating to director fees of $4,511 and $4,918, respectively, which represents the allocation of the director fees to the Company. As of March 31, 2020, there was no expenses payable relating to director fees.

Expense Limits and Reimbursements

Pursuant to an expense limitation agreement, the Adviser is contractually obligated to waive fees and, if necessary, pay or reimburse certain other expenses to limit the ordinary “Other Expenses” to 1.0% of the quarter-end value of the Company’s gross assets through the one year anniversary of the effective date of the registration statement (the “Expense Limitation Agreement”). Under the Expense Limitation Agreement, “Other Expenses” are all expenses with the exception of advisor and administration fees, organization and offering costs and the following: (i) interest, taxes, dividends tied to short sales, brokerage commissions, and other expenditures which are capitalized in accordance with U.S. GAAP; (ii) expenses incurred indirectly as a result of investments in other

 

31


investment companies and pooled investment vehicles; (iii) other expenses attributable to, and incurred as a result of, our investments; (iv) expenses payable to the Adviser, as administrator, for providing significant managerial assistance to our portfolio companies; and (v) other extraordinary expenses (including litigation expenses) not incurred in the ordinary course of our business. The obligation will automatically renew for one-year terms unless it is terminated by the Company or the Adviser upon written notice within 120 days of the end of the current term or upon termination of the Investment Advisory Agreement. The Expense Limitation Agreement will continue through at least April 30, 2020.

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

Reimbursable Expenses Table

The cumulative total of fees waived by the Adviser under the Expense Limitation Agreement, which are recoupable as of March 31, 2020 is $940,867. This balance, and the balances in the tables below, only include amounts pertaining to the Expense Limitation Agreement, and do not include waived advisory and administration fees subject to recoupment discussed earlier in Note 4. The following table reflects the fee waivers and expense reimbursements due from the Adviser as of March 31, 2020, which may become subject to recoupment by the Adviser.

 

Period ended

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

March 31, 2020

   $ 257,226      $ 72,779      $ 184,447      $ 184,447        March 31, 2023  

The following table reflects the fee waivers and expense reimbursements due from the Adviser as of December 31, 2019, September 30, 2019, June 30, 2019 and March 31, 2019, which may become subject to recoupment by the Adviser.

 

Period ended

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

December 31, 2019

   $ 1,098,789      $ 951,520      $ 147,269      $ 50,130       December 31, 2022  

September 30, 2019

     849,345        752,206        97,139        (17,417     September 30, 2022  

June 30, 2019

     586,411        471,855        114,556        75,592       June 30, 2022  

March 31, 2019

     295,177        256,213        38,964        38,964       March 31, 2022  

The following table reflects the fee waivers and expense reimbursements due from the Adviser as of December 31, 2018, September 30, 2018, June 30, 2018 and March 31, 2018, which may become subject to recoupment by the Adviser.

 

Period ended

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

December 31, 2018

   $ 1,352,097      $ 924,677      $ 427,420      $ 279,079        December 31, 2021  

September 30, 2018

     950,045        801,704        148,341        23,992        September 30, 2021  

June 30, 2018

     613,809        489,460        124,349        44,203        June 30, 2021  

March 31, 2018

     341,882        261,736        80,146        80,146        March 31, 2021  

 

32


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

 

Period ended

   Yearly cumulative
other expense
     Yearly expense
limitation
     Yearly cumulative
expense
reimbursement
     Quarterly
recoupable/(recouped)
amount
    Recoupment
eligibility
expiration
 

December 31, 2017

   $ 1,304,585      $ 975,289      $ 329,296      $ (122,135     December 31, 2020  

September 30, 2017

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

June 30, 2017

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

March 31, 2017

     329,791        182,226        147,565        —         Expired  

During the three months ended March 31, 2020, $147,565 of expense reimbursements that were eligible for recoupment by the Adviser expired.

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

Net Increase from Amounts Committed by Affiliates

For the three months ended March 31, 2020 and March 31, 2019, the Adviser did not voluntarily reimburse the Company for unrealized losses sustained. Cumulatively since inception, the Adviser has committed $2,275,000 to voluntarily reimburse the Company for such losses. Had these commitments not been made, the net asset value (“NAV”) as of March 31, 2020 would have been lower by approximately this amount. These commitments are shown in the Statements of Operations as net increase from amounts committed by affiliates and are not recoupable.

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

Receivable from Adviser / Payable to Adviser

As of March 31, 2020 and December 31, 2019, $182,802 and $50,130 were owed from the Adviser to the Company, respectively.

As of March 31, 2020 and December 31, 2019, the Company owed $520,411 and $570,453, respectively, to the Adviser, largely related to advisory fees, administration fees, and the expense limitation agreement.

Indemnification

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

Note 5 — U.S. Federal Income Tax Information

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

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

 

33


Uncertainty in Income Taxes

The Company will evaluate its tax positions to determine if the tax positions taken meet the minimum recognition threshold in connection with accounting for uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing tax benefits or liabilities in the financial statements. Recognition of a tax benefit or liability with respect to an uncertain tax position is required only when the position is “more likely than not” to be sustained assuming examination by taxing authorities. The Company’s tax returns are subject to examination by the Internal Revenue Service for a period of three fiscal years after they are filed. The Company recognizes interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in the Statements of Operations. During the three months ended March 31, 2020 and March 31, 2019, the Company did not incur any interest or penalties. Furthermore, management of the Company is also not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly change in the next 12 months.

Note 6 — Share Repurchase Program

On a quarterly basis, the Company intends to offer to repurchase shares of common stock on such terms as may be determined by the Board in its complete and absolute discretion unless, in the judgment of directors who are not “interested persons” of the Company (as defined in the 1940 Act) such repurchases would not be in the best interests of the Company’s stockholders or would violate applicable law. The Company will conduct such repurchase offers in accordance with the requirements of Rule 13e-4 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the 1940 Act. In months in which the Company repurchases shares of common stock, it will conduct repurchases on the same date that it holds its first weekly closing for the sale of shares of common stock in its public offering. Any offer to repurchase shares of common stock will be conducted solely through tender offer materials mailed to each stockholder.

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

The Company conducted its quarterly tender offer from February 24, 2020, until expiration of March 23, 2020 at 4:00 p.m. New York City time, during which the Company offered to purchase for cash up to 2.5% of its outstanding shares of common stock. During the first quarter tender offer, 49,472 shares of the Company were tendered for repurchase, constituting approximately 0.47% of the Company’s outstanding shares.

For the three months ended March 31, 2020, the Company repurchased 0 shares as part of its death and disability repurchase program.

Note 7 — Credit Facility and Leverage Facilities

On October 19, 2017, the Company entered into a financing arrangement (the “Financing Arrangement”) with BNP Paribas Prime Brokerage International, Ltd., BNP Prime Brokerage, Inc., and BNP Paribas (together, the “BNPP Entities”). Under the Financing Agreement, the BNPP Entities may make margin loans to the Company at a rate of one-month LIBOR + 1.30%. The BNPP Entities have the right to cap the amount of margin loans with prior notice to the Company. The Financing Arrangement may be terminated by either the Company or the BNPP Entities with 179 days notice. At March 31, 2020, current outstanding and fair value amounts were $937,245 and $979,224, respectively. At December 31, 2019, current outstanding and fair value amounts were $33,714,864 and $33,975,517, respectively.

 

34


For the three months ended March 31, 2020 and March 31, 2019, the components of total interest expense were as follows:

 

     Three Months ended  
     March 2020     March 2019  

Direct interest expense

   $ 170,628     $ 306,350  

Commitment fees

     (204     —    

Amortization of financing costs

     —         —    
  

 

 

   

 

 

 

Total interest expense

   $ 170,424     $ 306,350  
  

 

 

   

 

 

 

Average daily amount outstanding

     26,008,690       33,569,198  

Weighted average interest rate

     2.59     3.67

The Company is required to maintain 200% asset coverage with respect to its borrowings outstanding. Asset coverage is calculated by subtracting the Company’s total liabilities, not including any amount representing bank loans and senior securities, from the Company’s total assets and dividing the result by the principal amount of the borrowings outstanding. As of the dates indicated below, the Company’s borrowings outstanding and asset coverage was as follows:

 

Period ended

   Total amount
outstanding
     % of asset
coverage
 

March 31, 2020

   $ 21,511,922        347

December 31, 2019

     63,219,694        241

BNP Paribas Total Return Swap

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

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

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

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

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

 

35


The Company may terminate the TRS at any time more than one month prior to the TRS’s scheduled termination date upon providing no less than 30 days prior notice to BNP Paribas.

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

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

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

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

The following is a summary of the underlying loans subject to the TRS as of March 31, 2020:

 

Underlying Loan

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

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

   Service      L + 650        1.00     7/25/2022      $ 2,853,750      $ 2,220,000      $ (633,750

Air Medical Group Holdings (First Lien Term Loan)

   Aerospace      L + 425        1.00     3/14/2025        4,882,550        4,188,032        (694,518

ASP AMC Merger Sub, Inc. (First Lien Term Loan)

   Financial      L + 350        1.00     4/21/2024        1,817,554        1,404,204        (413,350

VVC Holding Corp. (First Lien Term Loan)

   Healthcare      L + 450        0.00     2/11/2026        5,890,649        5,533,454        (357,195

BioClinica, Inc. (First Lien Term Loan)

   Healthcare      L + 425        1.00     10/20/2023        1,869,310        1,655,118        (214,192

Envision Healthcare Corp. (First Lien Term Loan)

   Healthcare      L + 375        0.00     10/10/2025        4,659,766        3,258,750        (1,401,016

ExamWorks Group, Inc. (First Lien Term Loan)

   Healthcare      L + 375        1.00     7/27/2023        2,020,000        1,740,000        (280,000

Granite Acquisition, Inc. (Second Lien Term Loan)

   Utility      L + 725        1.00     12/19/2022        3,736,725        3,527,831        (208,894

BW NHHC Holdco, Inc. (First Lien Term Loan)

   Healthcare      L + 500        0.00     5/15/2025        4,525,868        2,911,111        (1,614,757

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

   Healthcare      L + 475        1.00     8/28/2022        2,443,577        1,830,395        (613,182

 

36


Radnet Management Inc. (First Lien Term Loan)

   Healthcare      L + 350        1.00     7/1/2023        1,963,033        1,695,125        (267,908

Sound Inpatient Physicians (First Lien Term Loan)

   Healthcare      L + 675        0.00     6/28/2026        1,575,000        1,322,222        (252,778

Truck Hero, Inc. (Second Lien Term Loan)

   Manufacturing      L + 825        1.00     4/21/2025        1,666,667        1,383,333        (283,334

Vyaire Medical, Inc. (First Lien Term Loan)

   Healthcare      L + 475        1.00     4/30/2025        4,782,423        3,574,363        (1,208,060

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

   Service      L + 475        0.75     11/29/2024        4,807,805        4,399,150        (408,655
                   

 

 

 
                   Total      $ (8,851,589
                   

 

 

 
                   Accrued income and liabilities        279,882  
                   

 

 

 
                   Total TRS Fair Value      $ (8,571,707
                   

 

 

 

 

(1) 

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

The following is a summary of the underlying loans subject to the TRS as of December 31, 2019:

 

Underlying Loan

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

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

   Service      L + 650        1.00     7/25/2022      $ 2,853,750      $ 2,640,000      $ (213,750

Air Medical Group Holdings (First Lien Term Loan)

   Aerospace      L + 425        1.00     3/14/2025        3,917,518        3,791,960        (125,558

ASP AMC Merger Sub, Inc. (First Lien Term Loan)

   Financial      L + 350        1.00     4/21/2024        1,822,226        1,730,025        (92,201

VVC Holding Corp. (First Lien Term Loan)

   Healthcare      L + 450        0.00     2/11/2026        5,905,504        5,964,975        59,471  

BioClinica, Inc. (First Lien Term Loan)

   Healthcare      L + 425        1.00     10/20/2023        1,874,140        1,893,662        19,522  

Employbridge, LLC (First Lien Term Loan)

   Service      L + 450        1.00     4/18/2025        767,142        751,799        (15,343

Endo Luxembourg Finance Company I S.a r.l. (First Lien Term Loan)

   Healthcare      L + 425        0.75     4/27/2024        3,959,091        3,762,121        (196,970

Envision Healthcare Corp. (First Lien Term Loan)

   Healthcare      L + 375        0.00     10/10/2025        4,671,563        4,207,500        (464,063

Granite Acquisition, Inc. (Second Lien Term Loan)

   Utility      L + 725        1.00     12/19/2022        3,736,715        3,704,222        (32,493

BW NHHC Holdco, Inc. (First Lien Term Loan)

   Healthcare      L + 500        0.00     5/15/2025        4,537,384        3,420,139        (1,117,245

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

   Healthcare      L + 475        1.00     8/28/2022        2,449,958        2,300,085        (149,873

Radnet Management Inc. (First Lien Term Loan)

        L + 350        1.00     7/1/2023        1,492,721        1,485,331        (7,390

Sound Inpatient Physicians (First Lien Term Loan)

   Healthcare      L + 675        0.00     6/28/2026        1,575,000        1,567,222        (7,778

Truck Hero, Inc. (Second Lien Term Loan)

   Manufacturing      L + 825        1.00     4/21/2025        1,666,667        1,583,333        (83,334

Vyaire Medical, Inc. (First Lien Term Loan)

   Healthcare      L + 475        1.00     4/30/2025        4,794,592        4,295,155        (499,437