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

OR

 

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

FOR THE TRANSITION PERIOD FROM                      TO                     

COMMISSION FILE NUMBER: 814-01074

 

 

NexPoint Capital, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   38-3926499

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

300 Crescent Court, Suite 700

Dallas, Texas

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

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

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

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

N/A   N/A   N/A

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

Common Stock, par value $0.001 per share

 

 

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

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

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

As of 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

 

1


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

 

2


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
 

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

 

3


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  

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

 

4


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

 

5


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.

6


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.

7


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.

8


NexPoint Capital, Inc.

Schedule of Investments

As of December 31, 2019

 

Portfolio Company  (1)(2)

 

Interest
Rate

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

Senior Secured Loans – 9.0% (4)

           

Energy – 2.1%

           

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

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

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

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

 

 

 
              1,841,046  
           

 

 

 

Healthcare – 5.7%

           

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

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

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

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

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

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

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

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

 

 

 
              5,111,353  
           

 

 

 

Media/Telecommunications – 0.4%

           

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

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

 

 

 

Telecommunication Services – 0.8%

           

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

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

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

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

 

 

 
              721,602  
           

 

 

 

Utility – 0.0%

           

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

          3,500,000       79,372       1,925  
           

 

 

 

Total Senior Secured Loans

              8,012,728  
           

 

 

 

Unsecured Loans – 4.2%

           

Materials – 4.2%

           

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

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

 

 

 

Total Unsecured Loans

              3,713,191  
           

 

 

 

Asset-Backed Securities – 0.8%

           

Financials – 0.8%

           

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

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

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

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

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

          374,239       215,187       139,629  
           

 

 

 
              743,520  
           

 

 

 

Total Asset-Backed Securities

              743,520  
           

 

 

 

Mortgage-Backed Securities – 4.5%

           

Financials – 4.5%

           

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

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

 

 

 

Total Mortgage-Backed Securities

              3,994,444  
           

 

 

 
                    Shares              

Closed-End Mutual Funds – 2.4%

           

Financials – 2.4%

           

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

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

 

 

 

Total Closed-End Mutual Funds

              2,136,410  
           

 

 

 

See Notes to Financial Statements

 

9


NexPoint Capital, Inc.

Schedule of Investments (continued)

As of December 31, 2019

 

Portfolio Company  (1)(2)

 

Interest
Rate

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

Corporate Bonds – 45.9%

 

Financials – 1.7%

 

Freedom Mortgage Corp. (13)(18)

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

 

 

 

Healthcare – 43.8%

           

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

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

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

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

Ortho-Clinical Diagnostics (13)(18)

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

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

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

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

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

 

 

 
              38,987,225  
           

 

 

 

Media/Telecommunications – 0.4%

           

iHeartCommunications, Inc. (18)

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

iHeartCommunications, Inc. (18)

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

 

 

 
              361,074  
           

 

 

 

Total Corporate Bonds

              40,822,499  
           

 

 

 
                  Shares              

Common Stocks – 25.9%

           

Chemicals – 0.0%

           

MPM Holdings, Inc. (12)

          8,500       17,000       42,500  
           

 

 

 

Energy – 5.5%

           

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

          75,000       1,438,740       962,250  

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

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

 

 

 
              4,904,650  
           

 

 

 

Financials – 2.8%

           

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

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

 

 

 

Healthcare – 0.3%

           

Quorum Health Corp. (12)

          224,600       1,284,134       214,740  

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

          54,749       14,508       40,405  
           

 

 

 
              255,145  
           

 

 

 

Materials – 0.0%

           

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

          6,698       663,116       20,898  
           

 

 

 

Media/Telecommunications – 1.9%

           

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

          124,986       631,179       357,460  

iHeartMedia, Inc. (12)(18)

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

 

 

 
              1,715,375  
           

 

 

 

Real Estate Investment Trusts (REITs) – 6.9%

           

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

          26,466       848,748       1,190,970  

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

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

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

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

 

 

 
              6,125,046  
           

 

 

 

Retail – 1.3%

           

Tru Kids, Inc. (12)

          237       1,139,661       1,124,467  
           

 

 

 

Service – 0.1%

           

Western States Life Insurance (12)

          237       255,681       59,183  
           

 

 

 

Telecommunication Services – 4.4%

           

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

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

 

 

 

Utility – 2.7%

           

Vistra Energy Corp. (18)

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

 

 

 

Total Common Stocks

              23,018,795  
           

 

 

 

See Notes to Financial Statements

 

10


NexPoint Capital, Inc.

Schedule of Investments (continued)

As of December 31, 2019

 

LLC Interests – 10.5%

           

Consumer Products – 2.3%

           

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

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

 

 

 

Real Estate – 5.5%

           

SFR WLIF III, LLC (9)(10)

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

SFR WLIF II, LLC (9)(10)

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

 

 

 
              4,932,657  
           

 

 

 

Real Estate Investment Trust (REIT) – 2.7%

           

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

          100       2,189,561       2,425,989  
           

 

 

 

Total LLC Interests

              9,358,646  
           

 

 

 
   

Preferred
Dividend
Rate

                             

Preferred Stocks – 9.5%

           

Financials – 2.3%

           

Tectonic Financial, Inc.

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

 

 

 

Real Estate – 1.7%

           

Creative Science Properties, Inc.

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

 

 

 

Real Estate Investment Trusts (REITs) – 5.5%

           

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

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

RAIT Financial Trust (18)(19)

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

 

 

 
              4,907,470  
           

 

 

 

Total Preferred Stocks

              8,491,470  
           

 

 

 

Rights – 0.1%

           

Utility – 0.1%

           

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

          58,356       148,370       61,391  
           

 

 

 

Total Rights

              61,391  
           

 

 

 

Warrants – 0.1%

           

Healthcare – 0.0%

           

Galena Biopharma, Inc. (10)(12)

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

Gemphire Therapeutics, Inc. (10)(12)

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

SCYNEXIS, Inc. (10)(12)

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

 

 

 
              29,837  
           

 

 

 

Materials – 0.0%

           

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

        8/6/2025       207       —         647  
           

 

 

 

Media/Telecommunications – 0.1%

           

iHeartMedia, Inc. (12)

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

 

 

 

Total Warrants

              74,598  
           

 

 

 

Total Investments - 112.9%

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

 

 

   

 

 

 

Cash Equivalents – 8.7% (20)

            $ 7,764,892  

Other Assets & Liabilities, net - (21.6%)

            $ (19,257,031
           

 

 

 

Net Assets - 100.0%

            $ 88,935,553  
           

 

 

 
                          Notional
Amount (21)
    Unrealized
Depreciation
 

Total Return Swap – (3.1%)

           

BNP Paribas TRS Facility (Note 7)

            50,904,830       (2,745,042

See Notes to Financial Statements

 

11


NexPoint Capital, Inc.

Schedule of Investments (continued)

As of December 31, 2019

 

(1) 

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

(2) 

All investments are denominated in United States Dollars.

(3) 

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

(4) 

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

(5) 

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

(6) 

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

(7) 

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

(8) 

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

(9) 

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

(10) 

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

(11) 

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

(12) 

Non-income producing security.

(13) 

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

(14) 

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

(15) 

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

(16) 

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

(17) 

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

(18) 

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

(19) 

The issuer has suspended the quarterly dividend for this security.

(20) 

State Street U.S. Government Money Market Fund.

(21) 

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

(22) 

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

See Notes to Financial Statements

 

 

12


NexPoint Capital, Inc.

Notes to Financial Statements (Unaudited)

Note 1 — Organization

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

The Company was formed in Delaware on September 30, 2013 and formally commenced operations on September 2, 2014 upon satisfying the minimum offering requirement by raising gross proceeds of $10.0 million in connection with a private placement with NexPoint Advisors, L.P. (the “Adviser”), our external advisor. In aggregate through 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.

 

13


Cash and Cash Equivalents

The Company considers liquid assets deposited with a bank and certain short-term debt instruments with original maturities of three months or less to be cash equivalents. These investments represent amounts held with financial institutions that are readily accessible to pay Company expenses or purchase investments. Cash and cash equivalents are valued at cost plus accrued interest, which approximates market value. The value of cash equivalents denominated in foreign currencies, if any, is determined by converting to U.S. dollars on the date of the Statements of Assets and Liabilities. As of 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.

 

14


   

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  

 

15


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.

 

16


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

 

17


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

 

 

    

 

 

    

 

 

    

 

 

 

 

18


     December 31, 2019  

Investments

   Level 1      Level 2      Level 3      Total  

Assets

 

Senior Secured Loans

 

Energy

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

Healthcare

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

Media/Telecommunications

     —          336,802        —          336,802  

Telecommunication Services

     —          —          721,602        721,602  

Utility

     —          1,925        —          1,925  

Unsecured Loans

           

Materials

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

Asset-Backed Securities

           

Financials

     —          603,891        139,629        743,520  

Mortgage-Backed Securities

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

Closed-End Mutual Funds

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

Corporate Bonds

           

Financials

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

Healthcare

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

Media/Telecommunications

     —          361,074        —          361,074  

Common Stocks

           

Chemicals

     —          42,500        —          42,500  

Energy

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

Financials

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

Healthcare

     214,740        —          40,405        255,145  

Materials

     —          —          20,898        20,898  

Media/Telecommunications

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

Real Estate Investment Trusts (REITs)

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

Retail

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

Service

     —          59,183        —          59,183  

Telecommunication Services

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

Utility

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

LLC Interests

           

Consumer Products

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

Real Estate

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

Real Estate Investment Trusts (REITs)

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

Preferred Stocks

           

Financials

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

Real Estate

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

Real Estate Investment Trusts (REITs)

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

Rights

     —          61,391        —          61,391  

Warrants

           

Healthcare

     —          29,837        —          29,837  

Materials

     —          —          647        647  

Media/Telecommunications

     —          44,114        —          44,114  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

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

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Warrants

   $ —        $ —        $ —        $ —    

Derivatives

 

Total Return Swap Contracts

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

 

 

    

 

 

    

 

 

    

 

 

 

Total Liabilities

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

 

 

    

 

 

    

 

 

    

 

 

 

Total Investments net of Securities Sold Short

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

 

 

    

 

 

    

 

 

    

 

 

 

The table below sets forth a summary of changes in the Company’s Level 3 investments (measured at fair value using significant unobservable inputs) for the nine months ended September 30, 2020.

 

19


Investments:

  Balance as of
December 31,
2019
    Transfers
into
Level 3
    Transfer
out of
Level 3
    Net
amortization
(accretion) of
premium/
(discount)
    Net
realized
gains/
(losses)
    Net change in
unrealized
gains/
(losses)
    Purchases/
PIK
    (Sales
and
redemptions)
    Balance as of
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.

 

20


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.

 

21


The following are summaries of significant unobservable inputs used in the fair valuations of investments categorized within Level 3 of the fair value hierarchy as of 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.

 

22


Derivative Transactions

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

Options

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

 

23


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.

 

24


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
  

 

 

    

 

 

 

 

25


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
  

 

 

    

 

 

    

 

 

 

 

26


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.

 

27


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.

 

28


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.

 

29


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

 

30


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.

 

31


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.

 

32


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

     —          —          —         —