NexPoint Capital, Inc. - FORM 10-Q

NexPoint Capital, Inc. - FORM 10-Q - November 12, 2020

Attached files

Attached files

file	filename
EX-32.1 - EX-32.1 - NexPoint Capital, Inc.	d56999dex321.htm
EX-31.2 - EX-31.2 - NexPoint Capital, Inc.	d56999dex312.htm
EX-31.1 - EX-31.1 - NexPoint Capital, Inc.	d56999dex311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED September 30, 2020

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 814-01074

NexPoint Capital, Inc.

(Exact name of registrant as specified in its charter)


Delaware		38-3926499
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

300 Crescent Court, Suite 700 Dallas, Texas		75201
(Address of principal executive offices)		(Zip Code)

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

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


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.

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 September 30, 2020, the Registrant had 10,494,309 shares of common stock, $0.001 par value, outstanding.

Part I – Financial Information

Item 1.

Financial Statements

NexPoint Capital, Inc.

Statements of Assets and Liabilities


	September 30, 2020 (Unaudited)			December 31, 2019
Assets
Unaffiliated investments, at fair value (cost of $56,268,519 and $97,920,246, respectively)	$	53,484,725		$	94,674,323
Affiliated investments, at fair value (cost of $7,035,712 and $5,457,776, respectively)⁽¹⁾		5,876,503			5,753,369
Cash and cash equivalents		4,268,422			7,764,892
Due from counterparty⁽²⁾		—			21,400,000
Dividends and interest receivable		271,244			1,042,105
Receivable from Adviser⁽³⁾		94,039			50,130
Other receivables		39,117			—
Prepaid expenses		2,084			12,208

Total assets		64,036,134			130,697,027


Liabilities
Credit facilities payable⁽⁴⁾		—			33,714,864
Payable for investments purchased		—			2,533,314
Payable on total return swap⁽²⁾		—			11,458
Unrealized depreciation on total return swap⁽²⁾		—			2,745,042
Common stock repurchased		—			1,102,405
Payable to Adviser⁽³⁾		260,976			570,453
Interest expense and commitment fees payable		—			80,207
Accrued expenses and other liabilities		233,178			378,205
Distributions payable		944,487			625,526

Total liabilities		1,438,641			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, 10,494,309 and 10,425,431 shares issued and outstanding, respectively)		10,494			10,425
Paid-in capital in excess of par		94,105,374			93,412,260
Total accumulated earnings (loss)		(31,518,375	)		(4,487,132	)

Total net assets	$	62,597,493		$	88,935,553

Net asset value per share of common stock	$	5.96		$	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

NexPoint Capital, Inc.

Statements of Operations

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Investment income:
Interest	$	879,499		$	1,457,099		$	2,440,684		$	4,537,921
Interest paid in kind		22,425			163,327			377,440			467,266
Dividend income from unaffiliated investments		84,493			279,927			503,857			770,810
Dividend income from affiliated investments ⁽¹⁾		133,221			79,643			502,709			183,175
Other fee income		1			—			108,555			49,895

Total investment income		1,119,639			1,979,996			3,933,245			6,009,067

Expenses:
Investment advisory fees ⁽²⁾		201,136			499,288			829,100			1,495,977
Custodian and accounting service fees		81,522			80,668			234,657			236,864
Administration fees ⁽²⁾		59,839			100,029			185,433			299,367
Interest expense and commitment fees ⁽³⁾		—			315,653			176,707			961,302
Stock transfer fee		59,005			74,605			175,227			272,779
Audit and tax fees		46,114			59,123			140,397			179,110
Legal fees		27,538			18,703			52,854			67,291
Reports to stockholders		14,173			13,448			43,517			46,552
Other expenses		23,980			64,113			41,375			87,693
Directors’ fees ⁽²⁾		6,238			4,956			16,127			15,106
Amortized offering costs		—			—			—			5,445

Total expenses		519,545			1,230,586			1,895,394			3,667,486

Expenses (waived) or recouped by the Adviser ⁽²⁾		(94,039	)		17,417			(247,947	)		(97,139	)

Net expenses		425,506			1,248,003			1,647,447			3,570,347

Net investment income		694,133			731,993			2,285,798			2,438,720


Net realized and unrealized gains (losses) on investments:
Net realized gain/(loss) on:
Unaffiliated investments and securities sold short		(2,737,698	)		(221,845	)		(19,220,443	)		674,663
Affiliated investments ⁽¹⁾		—			—			(1,452,337	)		—
Total return swaps ⁽⁴⁾		—			491,235			(6,929,996	)		1,298,077
Net change in unrealized appreciation (depreciation) on:
Unaffiliated investments and securities sold short		5,150,162			1,084,500			462,129			1,313,553
Affiliated investments ⁽¹⁾		(454,501	)		60,174			(1,454,802	)		2,700,811
Total return swaps ⁽⁴⁾		—			(352,574	)		2,745,042			(321,860	)

Net realized and unrealized gains (losses)		1,957,963			1,061,490			(25,850,407	)		5,665,244

Net increase/(decrease) in net assets resulting from operations	$	2,652,096		$	1,793,483		$	(23,564,609	)	$	8,103,964

Per share information—basic and diluted per common share
Net investment income:	$	0.07		$	0.07		$	0.22		$	0.23
Earnings (loss) per share:	$	0.25		$	0.17		$	(2.24	)	$	0.78
Weighted average shares outstanding:		10,528,658			10,458,686			10,520,781			10,424,953

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

⁽²⁾	See Note 4 for a discussion of related party transactions and arrangements.

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

⁽⁴⁾	See Note 7 for a discussion of total return swaps.

See Notes to Financial Statements

NexPoint Capital, Inc.

Statements of Changes in Net Assets

(Unaudited)


	Common Stock						Paid in Capital in Excess of Par			Distributable Earnings			Total Net Assets
	Shares			Par Amount			Paid in Capital in Excess of Par			Distributable Earnings			Total Net Assets
Balance at June 30, 2019		10,448,961		$	10,449		$	93,756,115		$	(3,732,688	)	$	90,033,876
Increase (decrease) in net assets resulting from operations
Net investment income		—			—			—			731,993			731,993
Net realized gain (loss) on investments and securities sold short		—			—			—			(221,845	)		(221,845	)
Net realized gain (loss) on total return swaps⁽¹⁾		—			—			—			491,235			491,235
Net change in unrealized appreciation (depreciation) on investments and securities sold short		—			—			—			1,144,674			1,144,674
Net change in unrealized appreciation (depreciation) on total return swaps⁽¹⁾		—			—			—			(352,574	)		(352,574	)
Shareholder distributions:
Issuance of common stock		—			—			—			—			—
Repurchase of common stock		(127,127	)		(127	)		(1,090,622	)		—			(1,090,749	)
Reinvestment of common stock		93,278			93			794,039			—			794,132
Distributions to shareholders		—			—			—			(1,889,168	)		(1,889,168	)

Total increase (decrease) for the three months ended September 30, 2019		(33,849	)		(34	)		(296,583	)		(95,685	)		(392,302	)

Balance at September 30, 2019		10,415,112		$	10,415		$	93,459,532		$	(3,828,373	)	$	89,641,574

Distributions to shareholders per share		—		$	—		$	—		$	0.18		$	0.18

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		—			—			—			2,438,720			2,438,720
Net realized gain (loss) on investments and securities sold short		—			—			—			674,663			674,663
Net realized gain (loss) on total return swaps⁽¹⁾		—			—			—			1,298,077			1,298,077
Net change in unrealized appreciation (depreciation) on investments and securities sold short		—			—			—			4,014,364			4,014,364
Net change in unrealized appreciation (depreciation) on total return swaps⁽¹⁾		—			—			—			(321,860	)		(321,860	)
Shareholder distributions:
Issuance of common stock		—			—			—			—			—
Repurchase of common stock		(323,385	)		(323	)		(2,772,957	)		—			(2,773,280	)
Reinvestment of common stock		416,170			416			3,630,080			—			3,630,496
Distributions to stockholders		—			—			—			(5,630,569	)		(5,630,569	)

Total increase (decrease) for the nine months ended September 30, 2019		92,785			93			857,123			2,473,395			3,330,611

Balance at September 30, 2019		10,415,112		$	10,415		$	93,459,532		$	(3,828,373	)	$	89,641,574

Distributions to shareholders per share		—		$	—		$	—		$	0.54		$	0.54

⁽¹⁾ See Note 7 for a discussion on Total Return Swaps.

See Notes to Financial Statements

NexPoint Capital, Inc.

Statements of Changes in Net Assets

(Unaudited)


	Common Stock						Paid in Capital in Excess of Par			Distributable Earnings			Total Net Assets
	Shares			Par Amount			Paid in Capital in Excess of Par			Distributable Earnings			Total Net Assets
Balance at June 30, 2020		10,545,693		$	10,546		$	94,418,250		$	(33,225,984	)	$	61,202,812
Increase (decrease) in net assets resulting from operations
Net investment income		—			—			—			694,133			694,133
Net realized gain (loss) on investments and securities sold short		—			—			—			(2,737,698	)		(2,737,698	)
Net realized gain (loss) on total return swaps⁽¹⁾		—			—			—			—			—
Net change in unrealized appreciation (depreciation) on investments and securities sold short		—			—			—			4,695,661			4,695,661
Net change in unrealized appreciation (depreciation) on total return swaps⁽¹⁾		—			—			—			—			—
Shareholder distributions:
Issuance of common stock		—			—			—			—			—
Repurchase of common stock		(51,384	)		(52	)		(312,876	)		—			(312,928	)
Reinvestment of common stock		—			—			—			—			—
Distributions to shareholders		—			—			—			(944,487	)		(944,487	)

Total increase (decrease) for the three months ended September 30, 2020		(51,384	)		(52	)		(312,876	)		1,707,609			1,394,681

Balance at September 30, 2020		10,494,309		$	10,494		$	94,105,374		$	(31,518,375	)	$	62,597,493

Distributions to shareholders per share		—		$	—		$	—		$	0.09		$	0.09

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		—			—			—			2,285,798			2,285,798
Net realized gain (loss) on investments and securities sold short		—			—			—			(20,672,780	)		(20,672,780	)
Net realized gain (loss) on total return swaps⁽¹⁾		—			—			—			(6,929,996	)		(6,929,996	)
Net change in unrealized appreciation (depreciation) on investments and securities sold short		—			—			—			(992,673	)		(992,673	)
Net change in unrealized appreciation (depreciation) on total return swaps⁽¹⁾		—			—			—			2,745,042			2,745,042
Shareholder distributions:
Issuance of common stock		—			—			—			—			—
Repurchase of common stock		(146,718	)		(147	)		(823,469	)		—			(823,616	)
Reinvestment of common stock		215,596			216			1,516,583			—			1,516,799
Distributions to stockholders		—			—			—			(3,466,634	)		(3,466,634	)

Total increase (decrease) for the nine months ended September 30, 2020		68,878			69			693,114			(27,031,243	)		(26,338,060	)

Balance at September 30, 2020		10,494,309		$	10,494		$	94,105,374		$	(31,518,375	)	$	62,597,493

Distributions to shareholders per share		—		$	—		$	—		$	0.33		$	0.33

⁽¹⁾	See Note 7 for a discussion on Total Return Swaps.

See Notes to Financial Statements

NexPoint Capital, Inc.

Statements of Cash Flows

(Unaudited)


	Nine Months Ended September 30,
	2020			2019
Cash flows provided by (used in) operating activities
Net increase (decrease) in net assets resulting from operations	$	(23,564,609	)	$	8,103,964

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		(48,565,179	)		(33,681,146	)
Payment-in-kind investments		(377,440	)		(467,266	)
Proceeds from sales and principal repayments of investment securities		69,041,052			30,502,390
Net realized (gain) loss on investments		20,672,780			(674,663	)
Net change in unrealized (appreciation) depreciation on investments		992,673			(4,014,364	)
Net change in unrealized (appreciation) depreciation on total return swaps		(2,745,042	)		321,860
Amortization of premium/discount, net		(697,422	)		(706,565	)
Amortization of capitalized offering costs		—			5,445
Increase (decrease) in operating assets and liabilities:
(Increase) decrease in receivable for investments sold		—			(267,600	)
(Increase) decrease in dividends and interest receivable		770,861			(398,680	)
(Increase) decrease in receivable from Adviser		(43,909	)		—
(Increase) decrease in other receivables		(39,117	)		—
(Increase) decrease in prepaid expenses		10,124			5,674
(Increase) decrease in due from counterparty		21,400,000			(80,000	)
(Increase) decrease in receivable due on total return swap		—			77,911
Increase (decrease) in payable for investments purchased		(2,533,314	)		(2,573,276	)
Increase (decrease) in payable to Adviser		(309,477	)		324,829
Increase (decrease) in interest expense and commitment fees payable		(80,207	)		86,376
Increase (decrease) in accrued expenses and other liabilities		(145,027	)		(170,040	)
Increase (decrease) in payable on total return swap		(11,458	)		—

Net cash flow provided by (used in) operating activities		33,775,289			(3,605,151	)


Cash flows provided by (used in) financing activities
Repurchase of common stock, net of payable		(1,926,021	)		(1,682,531	)
Distributions paid in cash		(1,630,874	)		(2,089,518	)
(Decrease) in credit facilities payable		(40,971,068	)		(6,727,171	)
Increase in credit facilities payable		7,256,204			12,793,206

Net cash flow provided by (used in) financing activities		(37,271,759	)		2,293,986

Net decrease in cash and cash equivalents		(3,496,470	)		(1,311,165	)


Cash and cash equivalents
Beginning of the period		7,764,892			7,112,205

End of the period	$	4,268,422		$	5,801,040


Supplemental disclosure and non-cash financing activities
Paid-in-kind interest income	$	377,440		$	467,266
Cash paid during the period for interest	$	256,914		$	874,926
Reinvestment of distributions paid	$	1,516,799		$	3,630,496
Local and excise taxes paid	$	47,000		$	194,579

See Notes to Financial Statements

NexPoint Capital, Inc.

Schedule of Investments

As of September 30, 2020

(Unaudited)


Portfolio Company⁽¹⁾⁽²⁾	Interest Rate			Base Rate Floor			Maturity Date		Principal Amount		Amortized Cost⁽³⁾		Fair Value

Senior Secured Loans – 51.3%⁽⁴⁾
Energy – 0.8%
Fieldwood Energy, LLC (First Lien Term Loan)⁽⁵⁾								4/11/2022	$	1,800,549	$	1,798,137	$	479,396
Fieldwood Energy, LLC (Second Lien Term Loan)⁽⁵⁾								4/11/2023		567,797		556,231		869

														480,265

Healthcare – 42.0%
Air Methods Corp. (First Lien Term Loan)⁽⁶⁾		L + 350			1.00	%		4/22/2024		1,967,576		1,518,883		1,732,697
Auris Luxembourg III S.a.r.l. (First Lien Term Loan)^{(7) (8)}		L + 375			0.00	%		2/27/2026		2,547,419		2,536,698		2,364,858
BioClinica Holding I, LP (First Lien Term Loan)⁽⁷⁾		L + 425			1.00	%		10/20/2023		1,937,134		1,732,695		1,915,342
BW NHHC Holdco, Inc. (First Lien Term Loan)⁽⁶⁾		L + 500			0.00	%		5/15/2025		4,525,463		2,996,567		3,906,991
Covenant Surgical Partners, Inc. (First Lien Delayed Draw Term Loan)⁽⁹⁾		4% Fixed						7/1/2026		333,333		796		(26,112	)
Covenant Surgical Partners, Inc. (First Lien Term Loan)⁽⁷⁾		L + 400			0.00	%		7/1/2026		1,650,062		1,654,022		1,520,805
Envision Healthcare Corp. (First Lien Term Loan)⁽⁷⁾		L + 375			0.00	%		10/10/2025		5,902,424		4,348,221		4,287,698
Global Medical Response, Inc. (First Lien Term Loan)⁽⁶⁾		L + 425			1.00	%		3/14/2025		3,409,567		3,090,159		3,315,804
Patterson Medical Holdings, Inc. (First Lien Term Loan)⁽⁶⁾		L + 475			1.00	%		8/29/2022		2,427,783		2,136,333		2,298,806
RadNet, Inc. (First Lien Term Loan)^(6) (8)		L + 375			1.00	%		6/30/2023		3,517,098		3,417,655		3,479,729
Sound Inpatient Physicians (Second Lien Term Loan)⁽⁷⁾		L + 675			0.00	%		6/26/2026		1,555,556		1,444,433		1,523,480

														26,320,098

Manufacturing – 2.6%
Truck Hero, Inc. (Second Lien Term Loan)⁽⁷⁾		L + 825			1.00	%		4/17/2025		1,666,667		1,229,207		1,613,892

Service – 4.6%
Advantage Sales & Marketing, Inc. (Second Lien Term Loan)⁽⁶⁾		L + 650			1.00	%		7/25/2022		3,000,000		2,272,682		2,910,210

Telecommunication Services – 1.3%
TerreStar Corp. (First Lien Term Loan)^(10) (11)		11% PIK						2/27/2021		635,447		635,447		634,811
TerreStar Corp. (First Lien Term Loan)^(10) (11)		11% PIK						2/28/2022		150,438		150,438		150,287
TerreStar Corp. (First Lien Term Loan)^(10) (11)		11% PIK						2/28/2022		26,877		26,876		26,850

														811,948


Total Senior Secured Loans														32,136,413


Asset-Backed Securities – 0.4%
Financials – 0.4%
Grayson Investor Corp. ^{(8) (10) (11) (12) (13) (14)}								11/1/2021		800		456,000		238,000
PAMCO CLO 1997-1A B ^{(8) (10) (11) (12) (14) (15)}										374,239		215,187		44,310

														282,310


Total Asset-Backed Securities														282,310


Corporate Bonds – 10.7%
Healthcare – 10.2%
Hadrian Merger Sub, Inc. ⁽¹²⁾		8.500	%					5/1/2026		2,728,000		2,330,730		2,724,072
Surgery Center Holdings ^{(8) (12)}		6.750	%					7/1/2025		3,630,000		3,488,488		3,625,081

														6,349,153

Media/Telecommunications – 0.5%
iHeartCommunications, Inc. ⁽⁸⁾		6.375	%					5/1/2026		115,507		313,455		120,549
iHeartCommunications, Inc. ⁽⁸⁾		8.375	%					5/1/2027		214,073		584,792		211,250

														331,799

Total Corporate Bonds														6,680,952

See Notes to Financial Statements.

NexPoint Capital, Inc.

Schedule of Investments (continued)

As of September 30, 2020

(Unaudited)


				Shares
Common Stocks – 15.1%
Chemicals – 0.1%
MPM Holdings, Inc. ⁽¹⁶⁾					8,500	$	17,000	$	42,500

Financials – 2.8%
American Banknote Corp. ^{(10) (11) (16)}					750,000		2,062,500		1,732,500

Healthcare – 0.1%
SteadyMed Ltd. ^{(8) (10) (11) (16)}					54,749		14,508		40,405

Materials – 0.0%
OmniMax International, Inc. ^{(10) (11) (16)}					6,698		663,116		—

Real Estate – 2.6%
Creative Science Properties, Inc. ^(10) (11)					100,000		1,500,000		1,661,000

Real Estate Investment Trust (REIT) – 1.6%
NexPoint Residential Trust, Inc. ^(8) (17)					22,456		723,094		995,924

Retail – 0.4%
Tru Kids, Inc. ⁽¹⁶⁾					237		1,119,168		225,840

Service – 0.0%
Western States Life Insurance ⁽¹⁶⁾					237		253,404		25,093

Telecommunication Services – 7.5%
TerreStar Corp. ^{(10) (11) (16)}					14,035		1,599,990		4,704,953


Total Common Stocks									9,428,215


LLC Interests – 9.9%
Consumer Products – 3.2%
US GAMING LLC ^{(10) (11) (16)}					2,000		2,000,000		2,000,000

Real Estate – 6.3%
SFR WLIF II, LLC ^{(10) (11)}					3,348,888		3,348,888		2,437,455
SFR WLIF III, LLC ^{(10) (11)}					1,651,112		1,651,112		1,491,235

									3,928,690

Real Estate Investment Trust (REIT) – 0.4%
NexPoint Capital REIT, LLC ^{(10) (11) (17) (18)}					100		—		247,117


Total LLC Interests									6,175,807


Partnership Units – 7.4%
Real Estate – 7.4%
NexPoint Real Estate Finance Operating Partnership, LP ⁽¹⁷⁾					315,631		6,312,618		4,633,462


Total Partnership Units									4,633,462

	Preferred Dividend Rate
Preferred Stocks – 0.0%
Real Estate Investment Trust (REIT) – 0.0%
RAIT Financial Trust ⁽¹⁹⁾		8.875%			148,057		3,051,714		—

Total Preferred Stocks


Warrants – 0.0%
Healthcare – 0.0%
Galena Biopharma, Inc. ^{(10) (11) (16)}			1/12/2021		1,500,054		—		—
Gemphire Therapeutics, Inc. ^{(10) (11) (16)}			3/15/2022		4,752		—		260
SCYNEXIS, Inc. ^{(10) (11) (16)}			6/21/2021		19,500		—		—

									260

Materials – 0.0%
OmniMax International, Inc. ^{(10) (11) (16)}			8/6/2025		207		—		—

Media/Telecommunications – 0.0%
iHeartMedia, Inc. ^{(8) (16)}			5/1/2039		2,875		52,987		23,809


Total Warrants									24,069


Total Investments- 94.8%						$	63,304,231	$	59,361,228

Cash Equivalents –6.4%⁽²⁰⁾								$	4,004,290
Other Assets & Liabilities, net- (1.2%)								$	(768,025	)

Net Assets- 100.0%								$	62,597,493

See Notes to Financial Statements.

NexPoint Capital, Inc.

Schedule of Investments (continued)

As of September 30, 2020

(Unaudited)

⁽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 September 30, 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 investment is on non-accrual status as of September 30, 2020.

⁽⁶⁾ The interest rate on these investments is subject to a base rate of 3-Month LIBOR, which at September 30, 2020 was 0.23%. The LIBOR rate used to calculate interest is the higher of the prevailing 3 month LIBOR rate in effect on the date of the quarterly reset, or the LIBOR base rate floor shown.

⁽⁷⁾ The interest rate on these investments is subject to a base rate of 1-Month LIBOR, which at September 30, 2020 was 0.15%. The LIBOR rate used to calculate interest is the higher of the prevailing 1 month LIBOR rate in effect on the date of the monthly reset, or the LIBOR base rate floor shown.

⁽⁸⁾ The investment is not a qualifying asset under Section 55 of the 1940 Act. A business development company, such as the Company, may not acquire any asset other than a qualifying asset, unless at the time the acquisition is made, qualifying assets represent at least 70% of the business development company’s total assets. Non-qualifying assets represented 17.4% of the Company’s total assets as of September 30, 2020.

⁽⁹⁾ The investment has an unfunded commitment as of September 30, 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 $15,409,183 or 24.6% of net assets were fair valued under the Company’s valuation procedures as of September 30, 2020.

⁽¹²⁾ Securities exempt from registration under Rule 144A of the 1933 Act. These securities may only be resold in transactions exempt from registration to qualified institutional buyers. As of September 30, 2020, these securities amounted to $6,631,463, or 10.6% of net assets.

⁽¹³⁾ The investment is considered to be the equity tranche of the issuer.

⁽¹⁴⁾ Securities of collateralized loan obligations where an affiliate of the Adviser serves as collateral manager.

⁽¹⁵⁾ The issuer is in default of its payment obligation, or is in danger of default.

⁽¹⁶⁾ Non-income producing security.

⁽¹⁷⁾ Represents an affiliated issuer. Assets with a total aggregate value of $5,876,503, or 9.4% of net assets, were affiliated with the Company as of September 30, 2020 (see Note 10).

⁽¹⁸⁾ 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”.

⁽¹⁹⁾ The issuer has suspended the quarterly dividend for this security.

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

Glossary

^PIK Payment-in-Kind

See Notes to Financial Statements.

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

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

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

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

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 September 30, 2020, the Adviser controls 2,549,002 total shares, including reinvestment of dividends, for a net amount of approximately $15.2 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 September 30, 2020 and for the three and nine months ended September 30, 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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.

Statements of Cash Flows

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

Cash and Cash Equivalents

The Company considers liquid assets deposited with a bank and certain short-term debt instruments with original maturities of three months or less to be cash equivalents. These investments represent amounts held with financial institutions that are readily accessible to pay Company expenses or purchase investments. Cash and cash equivalents are valued at cost plus accrued interest, which approximates market value. The value of cash equivalents denominated in foreign currencies, if any, is determined by converting to U.S. dollars on the date of the Statements of Assets and Liabilities. As of September 30, 2020 and December 31, 2019, the Company had cash and cash equivalents of $4,268,422 and $7,764,892, respectively. As of September 30, 2020 and December 31, 2019, $4,004,290 and $7,745,979 was held in the State Street U.S. Government Money Market Fund, and $264,132 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 September 30, 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 and nine months ended September 30, 2020, the Company recognized $1 and $108,555 of fee income, respectively. For the three and nine months ended September 30, 2019, the Company recognized $0 and $49,895 of fee income, respectively.

Fair Value of Financial Instruments

It is the Company’s policy to hold the investments at fair value. 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 Adviser will provide the Board with portfolio company valuations which are based on relevant inputs, including indicative dealer quotes, values of like securities, recent portfolio company financial statements and forecasts, and valuations prepared by third-party valuation services.

With respect to investments for which market quotations are not readily available, the Board and the Adviser undertake a multi-step valuation process each quarter, 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 valuations.

•

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

•

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

As of September 30, 2020, the Company held the following investments for which a sufficient level of current, reliable market quotations were not available:


Instrument	Type	Fair value
Grayson Investor Corp.	Asset-Backed Securities	$	238,000
PAMCO CLO 1997-1A B	Asset-Backed Securities		44,310
American Banknote Corp.	Common Stocks		1,732,500
Creative Science Properties, Inc.	Common Stocks		1,661,000
OmniMax International, Inc.	Common Stocks		—
SteadyMed Ltd.	Common Stocks		40,405
TerreStar Corp.	Common Stocks		4,704,953
NexPoint Capital REIT, LLC	LLC Interests		247,117
SFR WLIF III, LLC	LLC Interests		1,491,235
SFR WLIF II, LLC	LLC Interests		2,437,455
US GAMING LLC	LLC Interests		2,000,000
TerreStar Corp.	Senior Secured Loans		634,811
TerreStar Corp.	Senior Secured Loans		150,287
TerreStar Corp.	Senior Secured Loans		26,850
Galena Biopharma, Inc.	Warrants		—
Gemphire Therapeutics, Inc.	Warrants		260
OmniMax International, Inc.	Warrants		—
SCYNEXIS, Inc.	Warrants		—

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	Fair value
PAMCO CLO 1997-1A B	Asset-Backed Securities	$	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.	Warrants		—
Gemphire Therapeutics, Inc.	Warrants		1,340
OmniMax International, Inc.	Warrants		647
SCYNEXIS, Inc.	Warrants		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 and the Board utilizes an independent third-party valuation service to value such investments in a manner consistent with the Company’s multistep valuation process previously described.

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 procedures.

As of September 30, 2020, the Company’s investments consisted of senior secured loans, bonds, asset-backed securities, common stocks, LLC interests, preferred stocks, corporate bonds, partnership units 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.

Prior to its termination, the Company valued the total return swaps (“TRS”) in accordance with the agreement (the “TRS Agreement”) with BNP Paribas (“BNP Paribas”) that established the TRS. Pursuant to the TRS Agreement, the value of the TRS was 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 were valued based on indicative bid prices provided by an independent third-party pricing service. Bid prices reflected the highest price that market participants may have been willing to pay. These valuations were 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 Adviser evaluates the Level 2 and 3 investments for changes in liquidity, including: whether a broker is willing to execute at the quoted price, the depth and consistency of prices from third party services, and the existence of contemporaneous, observable trades in the market. Additionally, management evaluates the Level 1 and 2 assets and liabilities on a quarterly basis for changes in listings or delistings on national exchanges.

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

The inputs or methodology used for valuing investments are not necessarily an indication of the risk associated with investing in those investments. Transfers in and out of the levels are recognized at the fair value at the end of the period. The following are summaries of the Company’s investments categorized within the fair value hierarchy as of September 30, 2020 and December 31, 2019:


	September 30, 2020
Investments	Level 1		Level 2		Level 3		Total
Assets
Senior Secured Loans
Energy	$	—	$	480,265	$	—	$	480,265
Healthcare		—		26,320,098		—		26,320,098
Manufacturing		—		1,613,892		—		1,613,892
Service		—		2,910,210		—		2,910,210
Telecommunication Services		—		—		811,948		811,948
Asset-Backed Securities
Financials		—		—		282,310		282,310
Corporate Bonds
Healthcare		—		6,349,153		—		6,349,153
Media/Telecommunications		—		331,799		—		331,799
Common Stocks
Chemicals		—		42,500		—		42,500
Financials		—		—		1,732,500		1,732,500
Healthcare		—		—		40,405		40,405
Materials		—		—		—		—
Real Estate		—		—		1,661,000		1,661,000
Real Estate Investment Trusts (REITs)		995,924		—		—		995,924
Retail		—		225,840		—		225,840
Service		—		25,093		—		25,093
Telecommunication Services		—		—		4,704,953		4,704,953
LLC Interests
Consumer Products		—		—		2,000,000		2,000,000
Real Estate		—		—		3,928,690		3,928,690
Real Estate Investment Trusts (REITs)		—		—		247,117		247,117
Partnership Units
Real Estate		—		4,633,462		—		4,633,462
Preferred Stock		—		—		—		—
Warrants
Healthcare		—		—		260		260
Materials		—		—		—		—
Media/Telecommunications		—		23,809		—		23,809

Total Assets	$	995,924	$	42,956,121	$	15,409,183	$	59,361,228

Total Investments	$	995,924	$	42,956,121	$	15,409,183	$	59,361,228



	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 nine months ended September 30, 2020.


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 September 30, 2020		Change in unrealized gain/(loss) on Level 3 securities still held at period end
Assets
Senior Secured Loans
Telecommunication Services	$	721,602		$	—	$	—	$	—	$	—		$	633		$	89,713	$	—		$	811,948	$	633
Unsecured Loans
Materials		3,713,191			—		—		124,719		(2,746,641	)		482,389			313,727		(1,887,385	)		—		—
Asset-Backed Securities
Financials		139,629			333,764		—		—		—			(191,083	)		—		—			282,310		(191,083	)
Common Stocks
Financials		2,467,500			—		—		—		—			(735,000	)		—		—			1,732,500		(735,000	)
Healthcare		40,405			—		—		—		—			—			—		—			40,405		—
Materials		20,898			—		—		—		—			(20,898	)		—		—			—		(20,898	)
Real Estate		—			1,500,000		—		—		—			161,000			—		—			1,661,000		161,000
Telecommunication Services		3,890,081			—		—		—		—			814,872			—		—			4,704,953		814,872
LLC Interests
Consumer Products		2,000,000			—		—		—		—			—			—		—			2,000,000		—
Real Estate		4,932,657			—		—		—		—			(1,003,967	)		—		—			3,928,690		(1,003,967	)
Real Estate Investment Trusts (REITs)		2,425,989			—		—		—		—			10,689			—		(2,189,561	)		247,117		10,689
Warrants
Healthcare		—			29,837		—		—		—			(29,577	)		—		—			260		(29,577	)
Materials		647			—		—		—		—			(647	)		—		—			—		(647	)

Total	$	20,352,599		$	1,863,601	$	—	$	124,719	$	(2,746,641	)	$	(511,589	)	$	403,440	$	(4,076,946	)	$	15,409,183	$	(993,978	)


Liabilities
Total Return Swaps⁽¹⁾	$	(2,745,042	)	$	—	$	—	$	—	$	(6,929,996	)	$	2,745,042		$	7,425,035	$	(495,039	)	$	—	$	—

⁽¹⁾

During the nine months ended September 30, 2020, the Company recognized a net realized loss on the TRS amounting to $6,929,996. The realized losses of the derivative instruments during the nine months ended September 30, 2020 serve as indicators of the volume of derivative activity for the Company. The Company received $483,581 in cash payments from the TRS during the period and paid $7,425,035, with a decrease of $11,458 in payable from BNP Paribas for the nine months ended September 30, 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 nine months ended September 30, 2019.


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 September 30, 2019			Change in unrealized gain/(loss) on Level 3 securities still held at period end
Assets
Senior Secured Loans
Telecommunication Services	$	522,845		$	—	$	—	$	—	$	—	$	523		$	180,155	$	—		$	703,523		$	523
Unsecured Loans
Materials		3,838,472			—		—		130,134		—		(240,784	)		417,310		—			4,145,132			(240,784	)
Asset-Backed Securities
Financials		144,044			—		—		—		—		20,022			—		—			164,066			20,022
Common Stocks
Financials		—			—		—		—		—		217,000			1,925,000		—			2,142,000			217,000
Healthcare		14,509			—		—		—		—		—			—		—			14,509			—
Materials		1,303,257			—		—		—		—		(976,522	)		—		—			326,735			(976,522	)
Media/Telecommunications		1,055,803			—		—		—		—		2,422,882			—		(3,478,685	)		—			2,422,882
Telecommunication Services		3,913,800			—		—		—		—		(11,649	)		—		—			3,902,151			(11,649	)
LLC Interests
Real Estate		—			—		—		—		—		59,169			5,000,000		—			5,059,169			59,169
Real Estate Investment Trusts (REITs)		—			—		—		—		—		81,293			2,189,561		—			2,270,854			81,293
Warrants
Materials		40,340			—		—		—		—		(30,227	)		—		—			10,113			(30,227	)

Total	$	10,833,070		$	—	$	—	$	130,134	$	—	$	1,541,707		$	9,712,026	$	(3,478,685	)	$	18,738,252		$	1,541,707


Liabilities
Total Return Swaps⁽¹⁾	$	(2,547,492	)	$	—	$	—	$	—	$	—	$	(321,860	)	$	—	$	—		$	(2,869,352	)	$	(321,860	)

⁽¹⁾

During the nine months ended September 30, 2019, the Company recognized a net realized gain on the TRS amounting to $1,298,077. The Company received $1,386,143 in cash payments from the TRS during the period and paid $10,157, with a decrease of $77,911 in receivable from BNP Paribas for the nine months ended September 30, 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 nine months ended September 30, 2020, there were 5 transfers from Level 2 to Level 3 due to decreases in market activity. Transfers from Level 3 to Level 2 and from Level 2 to Level 1 are due to an increase in market activity (e.g. frequency of trades), which resulted in an increase of available market inputs to determine price. For the nine months ended September 30, 2019, there was no transfer from Level 2 to Level 3.

The following are summaries of significant unobservable inputs used in the fair valuations of investments categorized within Level 3 of the fair value hierarchy as of September 30, 2020 and December 31, 2019:


Investment	Fair value at September 30, 2020		Valuation technique	Unobservable inputs	Range of input value(s) (weighted average)
LLC Interest	$	6,175,807	Discounted Cash Flow Net Asset Value Transaction Indication of Value	Discount Rate N/A N/A	1.28% - 5.93% N/A N/A
Common Stock		8,138,858	Discounted Cash Flow Multiples Analysis Transaction Indication of Value Probability Weighted Expected Return	Discount Rate Multiple of EBITDA Unadjusted Price/MHz-PoP Liquidity Discount Enterprise Value ($mm) Transaction Price Per Share Probability Assessment	15.50% 5.50x $0.10 - $0.95 25% $771.00 $2.75 - $16.61 20%
Senior Secured Loans		811,948	Discounted Cash Flow	Discount Rate Spread Adjustment	11.10% 0.10%
Asset-Backed Securities		282,310	Discounted Cash Flow Third Party Indication of Value	Discount Rate Broker Quote	21.00% Various
Warrants		260	Black-Scholes Model	Volatility Assumption	50%


Total	$	15,409,183


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	Discount Rate	20.0%
				Multiples Analysis Transaction Analysis Black-Scholes Model	Multiple of EBITDA Multiple of EBITDA Volatility Assumption	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

The significant unobservable input used in the fair value measurement of the Fund’s LLC interests is the discount rate. A significant increase (decrease) in this input in isolation could result in a significantly lower (higher) fair value measurement. The significant unobservable inputs used in the fair value measurement of the Fund’s common equity securities are: multiple of EBITDA, price/MHz-PoP multiple, liquidity discount, discount rate, probability assessment and transaction price. Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement.

The significant unobservable inputs used in the fair value measurement of the Fund’s bank loan securities are: discount rate and spread adjustment. Significant increases (decreases) in either of those inputs in isolation could result in a significantly lower (higher) fair value measurement. The significant unobservable inputs used in the fair value measurement of the Fund’s asset-backed securities are: discount rate and broker quote indication of value. Significant increases (decreases) in either of those inputs in isolation could result in a significantly lower (higher) fair value measurement.

Derivative Transactions

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

Options

The Company purchases options, subject to certain limitations. The Company may invest in options contracts to manage its exposure to the stock and bond markets and fluctuations in foreign currency values. Writing puts and buying calls tend to increase the Company’s exposure to the underlying instrument while buying puts and writing calls tend to decrease the Company’s exposure to the underlying instrument, or economically hedge other Company investments. The Company’s risks in using these contracts include changes in the value of the underlying instruments, nonperformance of the counterparties under the contracts’ terms and changes in the liquidity of the secondary market for the contracts. Options are valued at the last sale price, or if no sales occurred on that day, at the last quoted bid price. As of and during the nine months ended September 30, 2020 and September 30, 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.

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 nine months ended September 30, 2020 and September 30, 2019. Selling commissions and fees of $0 and $0 were paid for the nine months ended September 30, 2020 and September 30, 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.

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 September 30,				For the Nine Months Ended September 30,
	2020		2019		2020			2019
Net increase (decrease) in net assets from operations	$	2,652,096	$	1,793,483	$	(23,564,609	)	$	8,103,964
Weighted average common shares outstanding		10,528,658		10,458,686		10,520,781			10,424,953
Earnings (loss) per common share-basic and diluted	$	0.25	$	0.17	$	(2.24	)	$	0.78

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 quarterly basis. Net realized capital gains, if any, will generally be distributed or deemed distributed at least every 12-month period.

On June 24, 2020, the Board of Directors approved a change in its dividend and capital gains distribution schedule from monthly distributions to quarterly distributions, effective immediately. The first quarterly distribution was paid on October 12, 2020 to shareholders of record as of September 30, 2020. The dividends are expected to be declared in the amount of $0.09 per share of the Company’s common stock to the stockholders of record at each quarter end.

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 was effective for the fiscal year beginning on January 1, 2020. There is no material impact to the financial statements.

In March 2020, the FASB issued Accounting Standard Update (“ASU”) No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” which provides optional exceptions for applying GAAP to contract modifications, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. ASU No. 2020-04 is elective and effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact of adopting ASU No. 2020-04.

Note 3 — Investment Portfolio

The following table shows the composition of the Company’s invested assets by industry classification at fair value at September 30, 2020:


	Fair value		Percentage
Assets
Healthcare	$	32,709,916		55.1	%
Real Estate		10,223,152		17.2	%
Telecommunication Services		5,516,901		9.3	%
Service		2,935,303		4.9	%
Financials		2,014,810		3.4	%
Consumer Products		2,000,000		3.4	%
Manufacturing		1,613,892		2.7	%
Real Estate Investment Trusts (REITs)		1,243,041		2.1	%
Energy		480,265		0.8	%
Media/Telecommunications		355,608		0.6	%
Retail		225,840		0.4	%
Chemicals		42,500		0.1	%
Materials		—		—

Total Assets	$	59,361,228		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	%

The following table summarizes the amortized cost and the fair value of the Company’s invested assets by class of financial asset as of September 30, 2020:


	Amortized Cost		Fair value		Percentage of portfolio (at Fair Value)
Assets
Senior Secured Loans—First Lien	$	26,042,927	$	26,087,962		43.9	%
Senior Secured Loans—Second Lien		5,502,553		6,048,451		10.2	%
Asset-Backed Securities		671,187		282,310		0.5	%
Corporate Bonds		6,717,465		6,680,952		11.3	%
Common Stocks		7,952,780		9,428,215		15.9	%
LLC Interests		7,000,000		6,175,807		10.4	%
Partnership Units		6,312,618		4,633,462		7.8	%
Preferred Stocks		3,051,714		—		0.0	%
Warrants		52,987		24,069		0.0	%

Total Assets		$63,304,231		$59,361,228		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 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	%

The following table shows the composition of the Company’s invested assets by geographic classification at September 30, 2020:


Geography	Fair value		Percentage
Assets
Cayman Islands⁽¹⁾	$	282,310		0.5	%
Luxembourg⁽¹⁾		2,364,858		4.0	%
United States		56,714,060		95.5	%

Total Assets	$	59,361,228		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 investment advisory and administration fees.

For the three and nine months ended September 30, 2020, the Company incurred investment advisory fees payable to the Adviser of $201,136 and $829,100, respectively. For the three and nine months ended September 30, 2019, the Company incurred investment advisory fees payable to the Adviser of $499,288 and $1,495,977, respectively. Amounts waived for investment advisory fees or administrative fees pertaining to periods prior to June 10, 2016 are not recoupable, but amounts waived for investment advisory fees or administrative fees 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 investment advisory fees, administration fees, Other Expenses (as defined under “Expense Limits and Reimbursements” below), and any recoupment to exceed the annual rate of 3.40% of average gross assets. Effective December 20, 2017, the Adviser ended its voluntary waiver of advisory fees.

Incentive Fee

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

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

For the three and nine months ended September 30, 2020, the Company incurred $0 and $0 of incentive fees on capital gains, respectively. For the three and nine months ended September 30, 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 September 30, 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 and nine months ended September 30, 2020, the Company incurred administration fees payable to the Adviser of $59,839 and $185,433, respectively. For the three and nine months ended September 30, 2019, the Company incurred administration fees payable to the Adviser of $100,029 and $299,367, 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 investment advisory and administration 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	Expired
June 30, 2017		389,733		77,947	Expired
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 Adviser has permanently waived the recoupment of any advisory fees or administration fees calculated on the portion of gross assets attributable to the receivable from Adviser balance on the Statements of Assets and Liabilities. The amounts shown have been reduced by this waiver.

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

Organization and Offering Costs

Organization costs include the cost of incorporating, such as the cost of legal services and other fees pertaining to our organization, and are paid by the Adviser. For the three and nine months ended September 30, 2020 and September 30, 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 and nine months ended September 30, 2020, the Adviser incurred and paid offering costs of $0 and $0 respectively, on our behalf. For the three and nine months ended September 30, 2019, the Adviser incurred and paid offering costs of $0 and $0, respectively, on our behalf. For the three and nine months ended September 30, 2020, the Company capitalized $0 and $0 of offering costs, respectively. For the three and nine months ended September 30, 2019, the Company capitalized $0 and $0 of offering costs, respectively. Of this amount, $0 and $0 were amortized to expense during the three and nine months ended September 30, 2020, respectively. Of this amount, $0 and $5,445 were amortized to expense during the three and nine months ended September 30, 2019, respectively. As of September 30, 2020 and September 30, 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 September 30, 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 Fund 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 Fund 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 “Fund Complex” consists of all of the registered investment companies advised by the Adviser and any affiliates as of the period covered by this report. The Company pays no compensation to any of its officers, all of whom are employees of an affiliate of the Adviser. 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 Highland Capital Management, L.P. (“HCMLP”), arising out of HCMLP’s pending Chapter 11 proceedings.

For the three and nine months ended September 30, 2020, the Company recorded an expense relating to director fees of $6,238 and $16,127, respectively. For the three and nine months ended September 30, 2019, the Company recorded an expense relating to director fees of $4,956 and $15,106, respectively, which represents the allocation of the director fees to the Company. As of September 30, 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 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, 2021.

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

Reimbursable Expenses Table

The cumulative total of fees waived by the Adviser under the Expense Limitation Agreement, which are recoupable as of September 30, 2020 is $700,501. This balance, and the balances in the tables below, only include amounts pertaining to the Expense Limitation Agreement, and do not include waived advisory and administration fees subject to recoupment discussed earlier in Note 4. The following table reflects the fee waivers and expense reimbursements due from the Adviser as of September 30, 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/ (recouped) amount			Recoupment eligibility expiration
September 30, 2020	$	687,228	$	439,281	$	247,947	$	94,039		September 30, 2023
June 30, 2020		445,585		291,677		153,908		(30,539	)	June 30, 2023
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/ (recouped) 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

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		—		Expired
June 30, 2017		631,906		433,428		198,478		—		Expired
March 31, 2017		329,791		182,226		147,565		—		Expired

During the three and nine months ended September 30, 2020, $252,953 and $451,431, respectively, of expense reimbursements that were eligible for recoupment by the Adviser expired.

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

Net Increase from Amounts Committed by Affiliates

For the nine months ended September 30, 2020 and September 30, 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 September 30, 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 September 30, 2020 and December 31, 2019, $94,039 and $50,130 were owed from the Adviser to the Company, respectively, largely related to the expense limitation agreement.

As of September 30, 2020 and December 31, 2019, the Company owed $260,976 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 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.

Uncertainty in Income Taxes

The Company will evaluate its tax positions to determine if the tax positions taken meet the minimum recognition threshold in connection with accounting for uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing tax benefits or liabilities in the financial statements. Recognition of a tax benefit or liability with respect to an uncertain tax position is required only when the position is “more likely than not” to be sustained assuming examination by taxing authorities. The Company’s tax returns are subject to examination by the Internal Revenue Service for a period of three fiscal years after they are filed. The Company recognizes interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in the Statements of Operations. During the nine months ended September 30, 2020 and September 30, 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 most recent quarterly tender offer from August 21, 2020, until expiration on September 21, 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 third quarter tender offer, 51,384 shares of the Company were tendered for repurchase, constituting approximately 0.49% of the Company’s outstanding shares.

For the nine months ended September 30, 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. On April 15, 2020, the Financing Arrangement was paid down and closed. At September 30, 2020, there were no current outstanding or fair value amounts. At December 31, 2019, current outstanding and fair value amounts were $33,714,864 and $33,975,517, respectively.

For the three and nine months ended September 30, 2020 and September 30, 2019, the components of total interest expense were as follows:


	Three Months ended				Nine Months ended
	September 2020		September 2019		September 2020			September 2019
Direct interest expense	$	—	$	315,653	$	176,911		$	961,302
Commitment fees		—		—		(204	)		—
Amortization of financing costs		—		—		—

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company