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EX-31.1 - EX-31.1 - NexPoint Capital, Inc.d197897dex311.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED June 30, 2021

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.)

2515 McKinney Avenue, Suite 1100

Dallas, Texas

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

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

Securities registered pursuant to Section 12(b) of the Act: None

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

Common Stock, par value $0.001 per share

 

 

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

Indicate by check mark whether the registrant has submitted electronically 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     

Yes  ☐    No  ☒ 

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

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

As of June 30, 2021, the Registrant had 10,106,783 shares of common stock, $0.001 par value, outstanding.

 

 

 


Part I – Financial Information

 

Item 1.

Financial Statements

 

1


NexPoint Capital, Inc.

Statements of Assets and Liabilities

 

     June 30, 2021
(Unaudited)
    December 31,
2020
 

Assets

 

Unaffiliated investments, at fair value (cost of $47,728,671 and $54,444,617, respectively)

   $ 49,254,619     $ 54,031,676  

Affiliated investments, at fair value (cost of $12,036,152 and $12,020,643, respectively)(1)

     13,076,822       10,636,939  

Cash and cash equivalents

     4,305,672       729,467  

Receivable for investments sold

     21,391       —    

Dividends and interest receivable

     300,219       285,212  

Receivable from Adviser(2)

     68,919       101,542  

Prepaid expenses

     5,499       —    
  

 

 

   

 

 

 

Total assets

     67,033,141       65,784,836  
  

 

 

   

 

 

 

Liabilities

 

Payable for fund shares repurchased

     660       —    

Payable to Adviser(2)

     364,196       423,537  

Accrued expenses and other liabilities

     161,315       228,062  

Distributions payable

     909,620       942,765  
  

 

 

   

 

 

 

Total liabilities

     1,435,791       1,594,364  
  

 

 

   

 

 

 

Commitments and contingencies(3)

 

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, 10,106,783 and 10,475,168 shares issued and outstanding, respectively)

     10,107       10,475  

Paid-in capital in excess of par

     90,002,309       92,354,786  

Distributable earnings (accumulated loss)

     (24,415,066     (28,174,789
  

 

 

   

 

 

 

Total net assets

   $ 65,597,350     $ 64,190,472  
  

 

 

   

 

 

 

Net asset value per share of common stock

   $ 6.49     $ 6.13  
  

 

 

   

 

 

 

 

(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 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

2


NexPoint Capital, Inc.

Statements of Operations

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2021     2020     2021     2020  

Investment income:

 

Interest

   $ 767,493     $ 562,761     $ 1,604,389     $ 1,561,185  

Interest paid-in-kind

     24,965       180,558       48,649       355,015  

Dividend income from unaffiliated investments

     12,400       107,688       13,654       419,364  

Dividend income from affiliated investments (1)

     242,917       148,087       488,561       369,488  

Other fee income

     —         105,578       —         108,554  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     1,047,775       1,104,672       2,155,253       2,813,606  

Expenses:

 

Investment advisory fees (3)

     304,995       201,229       608,702       627,964  

Custodian and accounting service fees

     76,425       79,879       152,246       153,135  

Administration fees (3)

     59,201       50,978       121,740       125,594  

Stock transfer fee

     52,153       43,403       101,486       116,222  

Audit and tax fees

     41,699       24,855       96,340       94,283  

Other expenses

     9,261       (955     70,754       17,395  

Legal fees

     18,884       12,208       31,640       25,316  

Reports to stockholders

     15,212       13,960       17,236       29,344  

Directors’ fees (3)

     4,708       5,378       8,765       9,889  

Interest expense and commitment fees (2)

     —         6,283       —         176,707  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     582,538       437,218       1,208,909       1,375,849  

Expenses (waived) or recouped by the Adviser (3)

     (68,919     30,539       (132,365     (153,908
  

 

 

   

 

 

   

 

 

   

 

 

 

Net expenses

     513,619       467,757       1,076,544       1,221,941  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

     534,156       636,915       1,078,709       1,591,665  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gains (losses) on investments:

 

Net realized gain (loss) on:

 

Unaffiliated investments

     243,170       (2,014,161     151,510       (16,482,745

Affiliated investments (1)

     —         26,455       —         (1,452,337

Total return swaps (4)

     —         (6,659,937     —         (6,929,996

Net change in unrealized appreciation (depreciation) on:

 

Unaffiliated investments

     1,216,261       5,565,212       1,938,889       (4,688,033

Affiliated investments (1)

     1,325,838       2,458,131       2,424,374       (1,000,301

Total return swaps (4)

     —         8,571,707       —         2,745,042  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gains (losses)

     2,785,269       7,947,407       4,514,773       (27,808,370
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

   $ 3,319,425     $ 8,584,322     $ 5,593,482     $ (26,216,705
  

 

 

   

 

 

   

 

 

   

 

 

 

Per share information - basic and diluted per common share

 

Net investment income:

   $ 0.05     $ 0.06     $ 0.10     $ 0.15  

Earnings (loss) per share:

   $ 0.32     $ 0.81     $ 0.54     $ (2.49

Weighted average shares outstanding:

     10,301,897       10,555,009       10,404,696       10,516,799  

 

(1) 

See Note 10 for a discussion of affiliated investments.

(2) 

See Note 7 for a discussion of credit facility.

(3) 

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

(4) 

See Note 7 for a discussion of total return swaps.

 

See Notes to Financial Statements

3


NexPoint Capital, Inc.

Statements of Changes in Net Assets

(Unaudited)

 

     Common Stock                    
     Shares     Par Amount     Paid in Capital
in
Excess of Par
    Distributable
Earnings
    Total
Net Assets
 

Balance at March 31, 2020

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

Increase (decrease) in net assets resulting from operations

 

Net investment income

     —         —         —         636,915       636,915  

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

     —         —         —         (1,987,706     (1,987,706

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

     —         —         —         (6,659,937     (6,659,937

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

     —         —         —         8,023,343       8,023,343  

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

     —         —         —         8,571,707       8,571,707  

Shareholder distributions:

 

Issuance of common stock

     —         —         —         —         —    

Repurchase of common stock

     (45,916     (46     (269,484     —         (269,530

Reinvestment of common stock

     93,284       94       478,176       —         478,270  

Distributions to stockholders

     —         —         —         (632,768     (632,768
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total increase (decrease) for the three months ended June 30, 2020

     47,368       48       208,692       7,951,554       8,160,294  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2020

     10,545,693     $ 10,546     $ 94,418,250     $ (33,225,984   $ 61,202,812  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Distributions to stockholders per share

     —       $ —       $ —       $ 0.06     $ 0.06  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     —         —         —         1,591,665       1,591,665  

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

     —         —         —         (17,935,082     (17,935,082

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

     —         —         —         (5,688,334     (5,688,334

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

     (95,334     (95     (510,593     —         (510,688

Reinvestment of common stock

     215,596       216       1,516,583       —         1,516,799  

Distributions to stockholders

     —         —         —         (2,522,147     (2,522,147
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total increase (decrease) for the six months ended June 30, 2020

     120,262       121       1,005,990       (28,738,852     (27,732,741
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2020

     10,545,693     $ 10,546     $ 94,418,250     $ (33,225,984   $ 61,202,812  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Distributions to stockholders per share

     —       $ —       $ —       $ 0.24     $ 0.24  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

See Note 7 for a discussion on Total Return Swaps.

 

See Notes to Financial Statements

4


NexPoint Capital, Inc.

Statements of Changes in Net Assets

(Unaudited)

 

     Common Stock                    
     Shares     Par Amount     Paid in Capital
in
Excess of Par
    Distributable
Earnings
    Total
Net Assets
 

Balance at March 31, 2021

     10,268,218     $ 10,268     $ 91,038,998     $ (26,824,872   $ 64,224,394  

Increase (decrease) in net assets resulting from operations

 

Net investment income

     —         —         —         534,156       534,156  

Net realized gain (loss) on investments

     —         —         —         243,170       243,170  

Net change in unrealized appreciation (depreciation) on investments

     —         —         —         2,542,099       2,542,099  

Shareholder distributions:

 

Issuance of common stock

     —         —         —         —         —    

Repurchase of common stock

     (214,460     (215     (1,368,041     —         (1,368,256

Reinvestment of common stock

     53,025       53       331,353       —         331,406  

Distributions to stockholders

     —         —         —         (909,619     (909,619
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total increase (decrease) for the three months ended June 30, 2021

     (161,435     (162     (1,036,688     2,409,806       1,372,956  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2021

     10,106,783     $ 10,107     $ 90,002,309     $ (24,415,066   $ 65,597,350  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Distributions to stockholders per share

     —       $ —       $ —       $ 0.09     $ 0.09  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2020

     10,475,168     $ 10,475     $ 92,354,786     $ (28,174,789   $ 64,190,472  

Increase (decrease) in net assets resulting from operations

 

Net investment income

     —         —         —         1,078,709       1,078,709  

Net realized gain (loss) on investments

     —         —         —         151,510       151,510  

Net change in unrealized appreciation (depreciation) on investments

     —         —         —         4,363,263       4,363,263  

Shareholder distributions:

 

Issuance of common stock

     —         —         —         —         —    

Repurchase of common stock

     (477,745     (478     (3,029,104     —         (3,029,582

Reinvestment of common stock

     109,360       109       676,628       —         676,737  

Distributions to stockholders

     —         —         —         (1,833,759     (1,833,759
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total increase (decrease) for the six months ended June 30, 2021

     (368,385     (369     (2,352,476     3,759,723       1,406,878  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2021

     10,106,783     $ 10,107     $ 90,002,309     $ (24,415,066   $ 65,597,350  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Distributions to stockholders per share

     —       $ —       $ —       $ 0.18     $ 0.18  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

See Notes to Financial Statements

5


NexPoint Capital, Inc.

Statements of Cash Flows

(Unaudited)

 

     Six Months Ended
June 30,
 
     2021     2020  

Cash flows provided by (used in) operating activities

 

Net increase (decrease) in net assets resulting from operations

   $ 5,593,482     $ (26,216,705

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

     (402,261     (42,245,592

Payment-in-kind investments

     (48,802     (355,015

Proceeds from sales and principal repayments of investment securities

     7,799,355       60,723,644  

Net realized (gain) loss on investments

     (151,510     17,935,082  

Net change in unrealized (appreciation) depreciation on investments

     (4,363,263     5,688,334  

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

     —         (2,745,042

Amortization of premium/discount, net

     (496,345     (330,878

Change in operating assets and liabilities:

    

(Increase) decrease in receivable for investments sold

     (21,391     (8,852

(Increase) decrease in dividends and interest receivable

     (15,007     625,953  

(Increase) decrease in receivable from Adviser

     32,623       50,130  

(Increase) decrease in prepaid expenses

     (5,499     4,939  

(Increase) decrease in due from counterparty

     —         21,400,000  

(Increase) decrease in receivable due on total return swap

     —         (224,800

Increase (decrease) in payable for investments purchased

     —         (2,533,314

Increase (decrease) in payable to Adviser

     (59,341     (287,708

Increase (decrease) in interest expense and commitment fees payable

     —         (80,207

Increase (decrease) in accrued expenses and other liabilities

     (66,747     (223,999

Increase (decrease) in payable on total return swap

     —         (11,458
  

 

 

   

 

 

 

Net cash flows provided by (used in) operating activities

     7,795,294       31,164,512  

Cash flows provided by (used in) financing activities

 

Repurchase of common stock, net of payable

     (3,028,922     (1,613,093

Distributions paid in cash

     (1,190,167     (1,630,874

(Decrease) in credit facilities payable

     —         (40,971,068

Increase in credit facilities payable

     —         7,256,204  
  

 

 

   

 

 

 

Net cash flows (used in) financing activities

     (4,219,089     (36,958,831
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     3,576,205       (5,794,319

Cash and cash equivalents

 

Beginning of the period

     729,467       7,764,892  
  

 

 

   

 

 

 

End of the period

   $ 4,305,672     $ 1,970,573  
  

 

 

   

 

 

 

Supplemental disclosure and non-cash financing activities

 

Paid-in-kind interest income

   $ 48,802     $ 355,015  

Cash paid during the period for interest

   $ —       $ 256,914  

Reinvestment of distributions paid

   $ 676,737     $ 1,516,799  

Local and excise taxes paid

   $ 34,999     $ 47,000  

 

See Notes to Financial Statements

6


NexPoint Capital, Inc.

Schedule of Investments

As of June 30, 2021

(Unaudited)

 

Portfolio Company(1)(2)

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

Senior Secured Loans – 46.3%(4)

 

Energy – 1.5%

          

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

          4/11/2022      $ 1,800,549      $ 1,799,295      $ 972,296  

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

          4/11/2023        567,797        559,367        56,780  
                

 

 

 
                   1,029,076  
                

 

 

 

Healthcare – 43.4%

          

Air Methods Corp. (First Lien Term Loan) (6)

     L + 350        1.00     4/22/2024        1,952,324        1,585,750        1,928,251  

Auris Luxembourg III S.a.r.l. (First Lien Term Loan) (7) (8)

     L + 375        0.00     2/27/2026        2,528,025        2,518,736        2,504,894  

BW NHHC Holdco, Inc. (First Lien Term Loan) (6)

     L + 500        0.00     5/15/2025        4,490,741        3,156,869        4,144,707  

CNT Holdings I Corp (Second Lien Term Loan) (9)

     L + 675        0.75     10/16/2028        1,500,000        1,492,941        1,526,250  

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

     4% Fixed          7/1/2026        333,333        334,026        331,250  

Covenant Surgical Partners, Inc. (First Lien Term Loan) (7)

     L + 400        0.00     7/1/2026        1,637,718        1,641,182        1,627,482  

Envision Healthcare Corp. (First Lien Term Loan) (7)

     L + 375        0.00     10/10/2025        5,857,368        4,493,032        5,033,675  

Global Medical Response, Inc. (First Lien Term Loan) (9)

     L + 425        1.00     3/14/2025        3,383,272        3,112,513        3,396,552  

Patterson Medical Holdings, Inc. (First Lien Term Loan) (6)

     L + 375        3.25     8/29/2022        2,408,666        2,225,044        2,404,403  

RxBenefits, Inc. (First Lien Term Loan)(6)

     L + 525        0.75     12/17/2027        3,980,000        3,905,088        3,992,437  

Sound Inpatient Physicians (Second Lien Term Loan) (7)

     L + 675        0.00     6/26/2026        1,555,556        1,456,280        1,561,389  
                

 

 

 
                   28,451,290  
                

 

 

 

Telecommunication Services – 1.4%

          

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

     11% PIK          2/27/2022        690,460        690,460        690,460  

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

     11% PIK          2/28/2022        29,204        29,204        29,204  

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

     11% PIK          2/28/2022        27,247        27,247        27,247  

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

     11% PIK          2/28/2022        163,462        163,462        163,462  
                

 

 

 
                   910,373  
                

 

 

 

Total Senior Secured Loans

                30,390,739  
                

 

 

 

Asset-Backed Securities – 0.7%

 

Financials – 0.7%

          

Grayson Investor Corp. (8) (10) (11) (12) (13) (14)

          11/1/2021        800        456,000        376,400  

PAMCO CLO 1997-1A(8) (10) (11) (12) (14) (15)

             374,239        215,188        67,326  
                

 

 

 
                   443,726  
                

 

 

 

Total Asset-Backed Securities

                443,726  
                

 

 

 

Corporate Bonds – 10.5%

 

Healthcare – 10.0%

          

Hadrian Merger Sub, Inc. (12)

     8.500%          5/1/2026        2,728,000        2,370,214        2,852,574  

Surgery Center Holdings (8) (12)

     6.750%          7/1/2025        3,630,000        3,507,512        3,711,784  
                

 

 

 
                   6,564,358  
                

 

 

 

Media/Telecommunications – 0.5%

          

iHeartCommunications, Inc. (8)

     8.375%          5/1/2027        214,073        584,792        229,595  

iHeartCommunications, Inc. (8)

     6.375%          5/1/2026        115,507        313,455        123,102  
                

 

 

 
                   352,697  
                

 

 

 

Total Corporate Bonds

                6,917,055  
                

 

 

 
                         Shares                

Common Stocks – 14.5%

 

Chemicals – 0.1%

          

MPM Holdings, Inc. (16)

             8,500        17,000        42,500  
                

 

 

 

 

 

See Notes to Financial Statements.

7


NexPoint Capital, Inc.

Schedule of Investments (continued)

As of June 30, 2021

(Unaudited)

 

Financials – 1.8%

                              

American Banknote Corp. (10) (11) (16)

              750,000      $ 2,062,500      $ 1,207,500  
                 

 

 

 

Healthcare – 0.7%

           

Amryt Pharma, PLC (8) (16) (17)

        40,000        500,000        485,200  
                 

 

 

 

Real Estate – 2.5%

  

IQHQ, Inc. (10) (11)

              100,000        1,500,000        1,661,000  
                 

 

 

 

Real Estate Investment Trust (REIT) – 1.9%

  

NexPoint Residential Trust, Inc. (8) (18)

              22,944        723,534        1,261,461  
                 

 

 

 

Service – 0.1%

  

Western States Life Insurance (10) (11) (16)

              237        253,404        59,183  
                 

 

 

 

Telecommunication Services – 7.4%

  

TerreStar Corp. (10) (11) (16)

              14,035        1,599,990        4,816,952  
                 

 

 

 

Total Common Stocks

        9,533,796  
                 

 

 

 

LLC Interests – 12.7%

 

Consumer Products – 4.7%

  

US GAMING LLC (10) (11) (16)

              2,000        2,000,000        3,099,704  
                 

 

 

 

Real Estate – 7.7%

  

SFR WLIF II, LLC (10) (11) (18)

              3,348,888        3,348,888        3,468,551  

SFR WLIF III, LLC (10) (11) (18)

              1,651,112        1,651,112        1,543,165  
                 

 

 

 
                    5,011,716  
                 

 

 

 

Real Estate Investment Trust (REIT) – 0.3%

  

NexPoint Capital REIT, LLC (10) (11) (18) (19)

 

           100        —          210,115  
                 

 

 

 

Total LLC Interests

        8,321,535  
                 

 

 

 

Partnership Units – 10.1%

 

Real Estate – 10.1%

  

NexPoint Real Estate Finance Operating Partnership, LP (18)

              315,631        6,312,618        6,593,530  
                 

 

 

 

Total Partnership Units

        6,593,530  
                 

 

 

 
     Preferred
Dividend
Rate
                                    

Preferred Stocks – 0.0%

 

Real Estate Investment Trust (REIT) – 0.0%

  

RAIT Financial Trust (20)

     8.875%              148,057        3,051,714        —    
                 

 

 

 

Total Preferred Stocks

  
 

            

 
                 

 

 

 

Warrants – 0.2%

 

Energy – 0.1%

  

Fieldwood Energy, LLC (10) (11)

              962        53,420        53,420  
                 

 

 

 

Healthcare – 0.0%

  

Gemphire Therapeutics, Inc. (10) (11) (16)

           3/15/2022        4,752        —          1  
                 

 

 

 

Media/Telecommunications – 0.1%

  

iHeartMedia, Inc. (8) (16)

           5/1/2039        2,875        52,987        77,639  
                 

 

 

 

Total Warrants

        131,060  
                 

 

 

 

Total Investments- 95.0%

 

   $ 59,764,824      $ 62,331,441  
              

 

 

    

 

 

 

Cash Equivalents –6.4%(21)

 

   $ 4,215,414  

Other Assets & Liabilities, net- (1.4%)

 

   $ (949,505
                 

 

 

 

Net Assets- 100.0%

 

   $ 65,597,350  
                 

 

 

 

 

(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.

 

 

See Notes to Financial Statements.

8


NexPoint Capital, Inc.

Schedule of Investments (continued)

As of June 30, 2021

(Unaudited)

 

(4) 

Senior secured loans in which the Company invests generally pay interest at rates which are periodically determined by reference to a base lending rate plus a spread (unless otherwise identified, all senior secured loans carry a variable rate of interest). These base lending rates are generally (i) the Prime Rate offered by one or more major United States banks, (ii) the lending rate offered by one or more European banks such as the London Interbank Offered Rate (“LIBOR”) or (iii) the coupon rate. Rate shown represents the actual rate at June 30, 2021. 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 June 30, 2021.

(6) 

The interest rate on these investments is subject to a base rate of 3-Month LIBOR, which at June 30, 2021 was 0.15%. 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 June 30, 2021 was 0.10%. 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 (“BDC”), 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 13.2% of the Company’s total assets as of June 30, 2021.

(9) 

The interest rate on these investments is subject to a base rate of 6-Month LIBOR, which at June 30, 2021 was 0.16%. The LIBOR rate used to calculate interest is the higher of the prevailing 6 month LIBOR rate in effect on the date of the semiannual reset, or the LIBOR base rate floor shown.

(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 $17,473,690 or 26.6% of net assets were fair valued under the Company’s valuation procedures as of June 30, 2021.

(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 June 30, 2021, these securities amounted to $7,008,084, or 10.7% 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) 

Securities exempt from registration under the Securities Act of 1933 (the “Securities Act”), and may be deemed to be “restricted securities” under the Securities Act. As of June 30, 2021, the aggregate fair value of these securities is $485,200 or 0.7% of the Company’s net assets. The acquisition dates of the restricted securities are as follows:

 

Investment

  

Acquisition Date

Amryt Pharma, PLC – Common Stock    12/7/20

 

(18) 

Represents an affiliated issuer. Assets with a total aggregate value of $13,076,822, or 19.9% of net assets, were affiliated with the Company as of June 30, 2021 see Note 10.

(19) 

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”.

(20) 

The issuer has suspended the quarterly dividend for this security.

(21) 

State Street U.S. Government Money Market Fund.

Glossary

 

PIK 

Payment-in-Kind

 

 

See Notes to Financial Statements.

9


NexPoint Capital, Inc.

Schedule of Investments

As of December 31, 2020

 

Portfolio Company(1)(2)

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

Senior Secured Loans – 56.1%(4)

 

Energy – 0.7%

         

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

         4/11/2022      $ 1,800,549      $ 1,797,905      $ 422,004  

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

         4/11/2023        567,797        555,600        823  
               

 

 

 
                  422,827  
               

 

 

 

Healthcare – 51.5%

         

Air Methods Corp. (First Lien Term Loan)(6)

     L + 350       1.00     4/22/2024        1,962,492        1,541,038        1,900,674  

Auris Luxembourg III S.a.r.l. (First Lien Term Loan)(7) (8)

     L + 375       0.00     2/27/2026        2,540,954        2,530,710        2,461,549  

BioClinica Holding I, LP (First Lien Term Loan)(7)

     L + 425       1.00     10/20/2023        1,932,103        1,743,186        1,930,905  

BW NHHC Holdco, Inc. (First Lien Term Loan)(6)

     L + 500       0.00     5/15/2025        4,513,889        3,048,509        3,988,698  

CNT Holdings I Corp. (Second Lien Term Loan)(6)

     L + 675       0.75     10/16/2028        1,500,000        1,492,584        1,530,000  

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

     4% Fixed         7/1/2026        333,333        761        (5,833

Covenant Surgical Partners, Inc. (First Lien Term Loan)(7)

     L + 400       0.00     7/1/2026        1,645,937        1,649,733        1,617,133  

Envision Healthcare Corp. (First Lien Term Loan)(7)

     L + 375       0.00     10/10/2025        5,887,406        4,395,759        4,937,355  

Global Medical Response, Inc. (First Lien Term Loan)(6)

     L + 425       1.00     3/14/2025        3,400,802        3,097,724        3,375,296  

Patterson Medical Holdings, Inc. (First Lien Term Loan)(6)

     L + 475       1.00     8/29/2022        2,421,410        2,165,282        2,345,741  

RadNet, Inc. (First Lien Term Loan)(6) (8)

     L + 375       1.00     6/30/2023        3,462,143        3,370,868        3,461,711  

RxBenefits, Inc. (First Lien Term Loan)(6)

     L + 525       0.75     12/17/2027        4,000,000        3,920,077        3,980,000  

Sound Inpatient Physicians (Second Lien Term Loan)(7)

     L + 675       1.00     6/26/2026        1,555,556        1,448,342        1,547,778  
               

 

 

 
                  33,071,007  
               

 

 

 

Manufacturing – 2.6%

         

Truck Hero, Inc. (Second Lien Term Loan)(7)

     L + 825       1.00     4/17/2025        1,666,667        1,245,903        1,666,667  
               

 

 

 

Telecommunication Services – 1.3%

         

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

     11% PIK         2/27/2022        653,280        653,280        653,280  

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

     11% PIK         2/28/2022        154,659        154,659        154,659  

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

     11% PIK         2/28/2022        27,631        27,631        27,631  

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

     11% PIK         2/28/2022        26,000        26,000        26,000  
               

 

 

 
                  861,570  
               

 

 

 

Total Senior Secured Loans

               36,022,071  
               

 

 

 

Asset-Backed Securities – 0.5%

 

Financials – 0.5%

         

Grayson Investor Corp. (8) (10) (11) (12) (13) (14)

         11/1/2021        800        456,000        286,000  

PAMCO CLO 1997-1A B (8) (10) (11) (12) (14) (15)

            374,239        215,187        77,767  
               

 

 

 
                  363,767  
               

 

 

 

Total Asset-Backed Securities

               363,767  
               

 

 

 

Corporate Bonds – 10.7%

 

Healthcare – 10.2%

         

Hadrian Merger Sub, Inc. (12)

     8.500       5/1/2026        2,728,000        2,343,691        2,826,371  

Surgery Center Holdings (8) (12)

     6.750       7/1/2025        3,630,000        3,494,669        3,704,869  
               

 

 

 
                  6,531,240  
               

 

 

 

Media/Telecommunications – 0.5%

         

iHeartCommunications, Inc. (8)

     8.375       5/1/2027        214,073        584,792        228,903  

iHeartCommunications, Inc. (8)

     6.375       5/1/2026        115,507        313,455        123,809  
               

 

 

 
                  352,712  
               

 

 

 

Total Corporate Bonds

                  6,883,952  
               

 

 

 

 

 

See Notes to Financial Statements.

10


NexPoint Capital, Inc.

Schedule of Investments (continued)

As of December 31, 2020

 

                                       Shares                

Common Stocks – 15.0%

 

Chemicals – 0.1%

             

MPM Holdings, Inc. (16)

           $ 8,500      $ 17,000      $ 42,500  
                

 

 

 

Financials – 1.8%

             

American Banknote Corp. (10) (11) (16)

             750,000        2,062,500        1,125,000  
                

 

 

 

Healthcare – 0.9%

             

Amryt Pharma, PLC (8) (16) (17)

             40,000        500,000        566,400  

SteadyMed Ltd. (8) (10) (11) (16)

             54,749        14,508        40,405  
                

 

 

 
                   606,805  
                

 

 

 

Real Estate – 2.6%

             

IQHQ, Inc. (10) (11)

             100,000        1,500,000        1,661,000  
                

 

 

 

Real Estate Investment Trust (REIT) – 1.5%

             

NexPoint Residential Trust, Inc. (8) (18)

             22,640        708,025        957,898  
                

 

 

 

Retail – 0.8%

                

Tru Kids, Inc. (10) (11) (16)

             237        1,119,168        532,642  
                

 

 

 

Service – 0.1%

                

Western States Life Insurance (10) (11) (16)

             237        253,404        59,183  
                

 

 

 

Telecommunication Services – 7.2%

                

TerreStar Corp. (10) (11) (16)

             14,035        1,599,990        4,630,427  
                

 

 

 

Total Common Stocks

                   9,615,455  
                

 

 

 

LLC Interests – 10.2%

                

Consumer Products – 3.2%

                

US GAMING LLC (10) (11) (16)

             2,000        2,000,000        2,070,427  
                

 

 

 

Real Estate – 6.6%

                

SFR WLIF III, LLC (10) (11) (18)

             1,651,112        1,651,112        1,493,629  

SFR WLIF II, LLC (10) (11) (18)

             3,348,888        3,348,888        2,742,974  
                

 

 

 
                   4,236,603  
                

 

 

 

Real Estate Investment Trust (REIT) – 0.4%

                

NexPoint Capital REIT, LLC (10) (11) (18) (19)

             100        —          228,215  
                

 

 

 

Total LLC Interests

                   6,535,245  
                

 

 

 

Partnership Units – 8.1%

                

Real Estate – 8.1%

                

NexPoint Real Estate Finance Operating Partnership, LP (18)

             315,631        6,312,618        5,214,223  
                

 

 

 

Total Partnership Units

                   5,214,223  
                

 

 

 
     Preferred
Dividend
Rate
                                   

Preferred Stocks – 0.0%

 

Real Estate Investment Trust (REIT) – 0.0%

             

RAIT Financial Trust (20)

     8.875           148,057        3,051,714        —    
                

 

 

 

Total Preferred Stocks

                                 
                

 

 

 

Warrants – 0.1%

 

Healthcare – 0.0%

             

Galena Biopharma, Inc. (10) (11) (16)

 

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

Gemphire Therapeutics, Inc. (10) (11) (16)

 

       3/15/2022        4,752        —          —    

SCYNEXIS, Inc. (10) (11) (16)

 

       6/21/2021        19,500        —          —    
                

 

 

 
                   1  
                

 

 

 

Media/Telecommunications – 0.1%

             

iHeartMedia, Inc. (8) (16)

 

       5/1/2039        2,875        52,988        33,901  
                

 

 

 

Total Warrants

                   33,902  
                

 

 

 

Total Investments- 100.7%

              $ 66,465,260      $ 64,668,615  
             

 

 

    

 

 

 

Cash Equivalents –0.8%(21)

 

   $ 525,975  

Other Assets & Liabilities, net- (1.5%)

                 $ (1,004,118
                

 

 

 

Net Assets- 100.0%

                 $ 64,190,472  
                

 

 

 

 

 

See Notes to Financial Statements.

11


NexPoint Capital, Inc.

Schedule of Investments (continued)

As of December 31, 2020

 

(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, 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 December 31, 2020.

(6) 

The interest rate on these investments is subject to a base rate of 3-Month LIBOR, which at December 31, 2020 was 0.24%. 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 December 31, 2020 was 0.14%. 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 18.2% of the Company’s total assets as of December 31, 2020.

(9) 

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

(10) 

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

(11) 

Represents fair value as determined by the Company’s Board of Directors (the “Board”), or its designee in good faith, pursuant to the policies and procedures approved by the Board. The Board considers fair valued securities to be securities for which market quotations are not readily available and these securities may be valued using a combination of observable and unobservable inputs. Securities with a total aggregate value of $15,809,240 or 24.6% of net assets were fair valued under the Company’s valuation procedures as of December 31, 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 December 31, 2020, these securities amounted to $6,895,007, or 10.7% 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) 

Securities exempt from registration under the Securities Act of 1933 (the “Securities Act”), and may be deemed to be “restricted securities” under the Securities Act. As of December 31, 2020, the aggregate fair value of these securities is $566,400 or 0.9% of the Company’s net assets. The acquisition dates of the restricted securities are as follows:

 

    

Investment

  

Acquisition Date

   Amryt Pharma, PLC – Common Stock    12/7/20

 

(18) 

Represents an affiliated issuer. Assets with a total aggregate value of $10,636,939, or 16.6% of net assets, were affiliated with the Company as of December 31, 2020 see Note 10.

(19) 

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”.

(20) 

The issuer has suspended the quarterly dividend for this security.

(21) 

State Street U.S. Government Money Market Fund.

Glossary

 

PIK 

Payment-in-Kind

 

 

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 Standards 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 as of June 30, 2021, the Adviser controls 2,549,002 total shares (or 25.22%) of the Company, including reinvestment of dividends, for a net amount of approximately $16.5 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, 2021. The interim financial data as of June 30, 2021 and for the three and six months ended June 30, 2021 and 2020 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.

 

13


Statements of Cash Flows

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

Cash and Cash Equivalents

The Company considers liquid assets deposited with a bank, money market funds, 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 fair 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 June 30, 2021 and December 31, 2020, the Company had cash and cash equivalents of $4,305,672 and $729,467, respectively. As of June 30, 2021 and December 31, 2020, $4,215,414 and $525,975 was held in the State Street U.S. Government Money Market Fund, and $90,258 and $203,492 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, when applicable. Securities held as collateral for securities sold short are shown on the Schedules of Investments for the Company, as applicable. As of June 30, 2021 and December 31, 2020, the Company did not have any securities sold short.

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

Other Fee Income

Fee income may consist of origination/closing fees, amendment fees, administrative agent fees, transaction break-up fees and other miscellaneous fees. Origination fees, amendment fees, and other similar fees are non-recurring fee sources. Such fees are received on a transaction by transaction basis and do not constitute a regular stream of income. For the three and six months ended June 30, 2021, the Company recognized $0 and $0 of fee income, respectively. For the three and six months ended June 30, 2020, the Company recognized $105,578 and $108,554 of fee income, respectively.

 

14


Fair Value of Financial Instruments

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

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

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

 

   

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

 

   

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

 

   

The Audit and Qualified Legal Compliance Committee of the Board , in assistance of Board valuation oversight, reviews portfolio valuation, including oversight of valuations determined by the Adviser and the Valuation Committee pursuant to the policies and procedures appproved by the Board.

 

   

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 pursuant to board-approved policies and procedures.

As of June 30, 2021, 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    $  376,400  

PAMCO CLO 1997-1A B

   Asset-Backed Securities      67,326  

American Banknote Corp.

   Common Stocks      1,207,500  

IQHQ, Inc.

   Common Stocks      1,661,000  

 

15


TerreStar Corp.

   Common Stocks      4,816,952  

Western States Life Insurance

   Common Stocks      59,183  

NexPoint Capital REIT, LLC

   LLC Interests      210,115  

SFR WLIF III, LLC

   LLC Interests      1,543,165  

SFR WLIF II, LLC

   LLC Interests      3,468,551  

US GAMING LLC

   LLC Interests      3,099,704  

TerreStar Corp.

   Senior Secured Loans      690,460  

TerreStar Corp.

   Senior Secured Loans      29,204  

TerreStar Corp.

   Senior Secured Loans      27,247  

TerreStar Corp.

   Senior Secured Loans      163,462  

Fieldwood Energy, LLC

   Warrants      53,420  

Gemphire Therapeutics, Inc.

   Warrants      1  

As of December 31, 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    $  286,000  

PAMCO CLO 1997-1A B

   Asset-Backed Securities      77,767  

American Banknote Corp.

   Common Stocks      1,125,000  

IQHQ, Inc.

   Common Stocks      1,661,000  

SteadyMed Ltd.

   Common Stocks      40,405  

TerreStar Corp.

   Common Stocks      4,630,427  

Tru Kids, Inc.

   Common Stocks      532,642  

Western States Life Insurance

   Common Stocks      59,183  

NexPoint Capital REIT, LLC

   LLC Interests      228,215  

SFR WLIF III, LLC

   LLC Interests      1,493,629  

SFR WLIF II, LLC

   LLC Interests      2,742,974  

US GAMING LLC

   LLC Interests      2,070,427  

TerreStar Corp.

   Senior Secured Loans      653,280  

TerreStar Corp.

   Senior Secured Loans      154,659  

TerreStar Corp.

   Senior Secured Loans      27,631  

TerreStar Corp.

   Senior Secured Loans      26,000  

Galena Biopharma, Inc.

   Warrants      1  

Gemphire Therapeutics, Inc.

   Warrants      —    

SCYNEXIS, Inc.

   Warrants      —    

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,

 

16


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 utilize an independent third-party valuation service to value such investments in a manner consistent with the Company’s multistep valuation process previously described.

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

As of June 30, 2021, 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.

 

17


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

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

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

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

The inputs or methodology used for valuing investments are not necessarily an indication of the risk associated with investing in those investments. The following are summaries of the Company’s investments categorized within the fair value hierarchy as of June 30, 2021 and December 31, 2020:

 

18


     June 30, 2021  

Investments

   Level 1      Level 2      Level 3      Total  

Assets

 

Senior Secured Loans

 

Energy

   $ —          $ 1,029,076      $ —        $ 1,029,076  

Healthcare

     —          28,451,290        —          28,451,290  

Telecommunication Services

     —          —          910,373        910,373  

Asset-Backed Securities

 

Financials

     —          —          443,726        443,726  

Corporate Bonds

 

Healthcare

     —          6,564,358        —          6,564,358  

Media/Telecommunications

     —          352,697        —          352,697  

Common Stocks

 

Chemicals

     —          42,500        —          42,500  

Financials

     —          —          1,207,500        1,207,500  

Healthcare

     485,200        —          —          485,200  

Real Estate

     —          —          1,661,000        1,661,000  

Real Estate Investment Trusts (REITs)

     1,261,461        —          —          1,261,461  

Service

     —          —          59,183        59,183  

Telecommunication Services

     —          —          4,816,952        4,816,952  

LLC Interests

 

Consumer Products

     —          —          3,099,704        3,099,704  

Real Estate

     —          —          5,011,716        5,011,716  

Real Estate Investment Trusts (REITs)

     —          —          210,115        210,115  

Partnership Units

 

Real Estate

     —          6,593,530        —          6,593,530  

Preferred Stocks(1)

 

Real Estate Investment Trusts (REITs)

     —          —          —          —    

Warrants

 

Energy

     —          —          53,420        53,420  

Healthcare

     —          —          1        1  

Media/Telecommunications

     —          77,639        —          77,639  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

   $ 1,746,661      $ 43,111,090      $ 17,473,690      $ 62,331,441  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Investments

   $ 1,746,661      $ 43,111,090      $ 17,473,690      $ 62,331,441  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Includes RAIT Financial Trust Preferred Stock at zero value.

 

     December 31, 2020  

Investments

   Level 1      Level 2      Level 3      Total  

Assets

 

Senior Secured Loans

 

Energy

   $ —        $ 422,827      $ —        $ 422,827  

Healthcare

     —          33,071,007        —          33,071,007  

Manufacturing

     —          1,666,667        —          1,666,667  

Telecommunication Services

     —          —          861,570        861,570  

Asset-Backed Securities

           

Financials

     —          —          363,767        363,767  

Corporate Bonds

           

Healthcare

     —          6,531,240        —          6,531,240  

Media/Telecommunications

     —          352,712        —          352,712  

Common Stocks

           

Chemicals

     —          42,500        —          42,500  

Financials

     —          —          1,125,000        1,125,000  

Healthcare

     566,400        —          40,405        606,805  

Real Estate

     —          —          1,661,000        1,661,000  

Real Estate Investment Trusts (REITs)

     957,898        —          —          957,898  

Retail

     —          —          532,642        532,642  

Service

     —          —          59,183        59,183  

Telecommunication Services

     —          —          4,630,427        4,630,427  

 

19


LLC Interests

           

Consumer Products

     —          —          2,070,427        2,070,427  

Real Estate

     —          —          4,236,603        4,236,603  

Real Estate Investment Trusts (REITs)

     —          —          228,215        228,215  

Partnership Units

           

Real Estate

     —          5,214,223        —          5,214,223  

Preferred Stock(1)

     —          —          —          —    

Warrants

           

Healthcare

     —          —          1        1  

Media/Telecommunications

     —          33,901        —          33,901  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

   $  1,524,298      $ 47,335,077      $ 15,809,240      $ 64,668,615  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Investments

   $ 1,524,298      $ 47,335,077      $ 15,809,240      $ 64,668,615  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Includes RAIT Financial Trust Preferred Stock at zero value.

The table below sets forth a summary of changes in the Company’s Level 3 investments (measured at fair value using significant unobservable inputs) for the six months ended June 30, 2021.

 

Investments:

   Balance as of
December 31,
2020
     Transfers
into
Level 3
     Transfer
out of
Level 3
     Net
amortization
(accretion) of
premium/
(discount)
     Net
realized
gains/
(losses)
    Net change in
unrealized
gains/
(losses)
    Purchases/
PIK
     (Sales
and
redemptions)
    Balance as of
June 31, 2021
     Change in
unrealized
gain/(loss)
on Level 3
securities still
held at period
end
 

Assets

                          

Senior Secured Loans

                          

Telecommunication Services

   $ 861,570      $  —        $  —        $ —        $ —       $ —       $ 48,803      $ —       $ 910,373    $ —    

Asset-Backed Securities

                          

Financials

     363,767        —          —          —          —         79,959       —          —         443,726        79,959  

Common Stocks

                          

Financials

     1,125,000        —          —          —          —         82,500     —          —         1,207,500      82,500

Healthcare

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

Real Estate

     1,661,000        —          —          —          —         —         —          —         1,661,000        —    

Retail

     532,642        —          —          —          (515,500     586,525       —          (603,667     —          —    

Service

     59,183        —          —          —          —         —         —          —         59,183        —    

Telecommunication Services

     4,630,427        —          —          —          —         186,525       —          —         4,816,952        186,525  

LLC Interests

                          

Consumer Products

     2,070,427        —          —          —          —         1,029,277       —          —         3,099,704        1,029,277  

Real Estate

     4,236,603        —          —          —          —         775,113       —          —         5,011,716      775,113  

Real Estate Investment Trusts

(REITs)

     228,215        —          —          —          —         (18,100     —          —         210,115      (18,100

Warrants

                          

Energy

     —          —          —          —          —         —         53,420        —         53,420        —    

Healthcare

     1        —          —          —          —         —         —          —         1      —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $  15,809,240      $ —        $  —      $ —        $ (515,500   $ 2,681,394   $  102,223    $ (603,667   $  17,473,690      $ 2,094,869
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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

 

20


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
June 30, 2020
    Change in
unrealized
gain/(loss)
on Level 3
securities still
held at period
end
 

Assets

                   

Senior Secured Loans

                   

Telecommunication Services

  $ 721,602     $ —       $ —       $ —       $ —       $ (3,295   $ 67,287     $ —       $ 785,594   $ (3,295

Unsecured Loans

                   

Materials

    3,713,191       —         —         92,885     —         (2,949,626     313,728     —         1,170,178       (2,949,626

Asset-Backed Securities

                   

Financials

    139,629       333,764       —         —         —         (172,545     —         —         300,848       (172,545

Common Stocks

                   

Financials

    2,467,500       —         —         —         —         (375,000     —         —         2,092,500     (375,000

Healthcare

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

Materials

    20,898       —         —         —         —         (20,630     —         —         268     (20,630

Telecommunication Services

    3,890,081       —         —         —         —         871,293     —         —         4,761,374     871,293

Real Estate

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

LLC Interests

                   

Consumer Products

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

Real Estate

    4,932,657       —         —         —         —         (722,122     —         —         4,210,535     (722,122

Real Estate Investment Trusts

(REITs)

    2,425,989       —         —         —         —         12,489       —         (2,189,561     248,917     12,489  

Warrants

                   

Healthcare

    —         29,837       —         —         —         (8,412     —         —         21,425       (8,412

Materials

    647       —         —         —         —         (639     —         —         8     (639
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 20,352,599     $ 1,863,601     $  —     $ 92,885     $ —       $  (3,368,487 )   $ 381,015   $ (2,189,561   $  17,132,052     $  (3,368,487 )
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

                   

Total Return

Swaps(1)

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

During the six months ended June 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 six months ended June 30, 2020 serve as indicators of the volume of derivative activity for the Company. The Company received $258,781 in cash payments from the TRS during the period and paid $7,425,035, with a decrease of $11,458 in payable from, and increase of $224,800 in receivable from BNP Paribas for the six months ended June 30, 2020.

Investments designated as Level 3 may include investments valued using quotes or indications furnished by brokers which are based on models or estimates and may not be executable prices. In light of the developing market conditions, the Adviser continues to search for observable data points and evaluate broker quotes and indications received for investments. Determination of fair values is uncertain because it involves subjective judgments and estimates that are unobservable. Transfers from Level 2 to Level 3 are due to a decrease in market activity (e.g. frequency of trades), which resulted in a decrease of available market inputs to determine price. For the six months ended June 30, 2021, there were no transfers from Level 2 to Level 3. For the six months ended June 30, 2020, there were four 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.

 

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 June 30, 2021 and December 31, 2020:

 

Investment

   Fair value at
June 30, 2021
     Valuation
technique
     Unobservable
inputs
    Range of input value(s)
(weighted average)
 

LLC Interest

   $ 8,321,535       

Discounted Cash Flow

Net Asset Value

Multiples Analysis

 

 

 

    

Discount Rate

N/A

Multiple of EBITDA

 

 

 

   

1.49% - 5.43%

N/A

6.45x - 8.45x

 

 

 

Common Stock

     7,744,635       

Discounted Cash Flow

Multiples Analysis

Transaction Indication of Value

 

 

 

    

Discount Rate

Multiple of EBITDA

Unadjusted Price/MHz-PoP

Liquidity Discount

Enterprise Value ($mm)

Transaction Price Per Share

Multiple of EBITDA

Cash Offer per Share

 

 

 

 

 

 

 

 

   

16.80%

3.00x - 8.00x

$0.09 - $0.95

25%

$831

$16.61

8.00x

$2,500

 

 

 

 

 

 

 

 

Senior Secured Loans

     910,373        Discounted Cash Flow        Discount Rate       11.00%  

Asset-Backed Securities

     443,726       

Discounted Cash Flow

Third Party Indication of Value

 

 

    

Discount Rate

Broker Quote

 

 

   

21.00%

Various

 

 

Private Placement Equity

     53,420           Cash Offer per Share       $55.53  

Warrants

     1        Black-Scholes Model        Volatility Assumption       130.23%  
  

 

 

         

Total

   $ 17,473,690          
  

 

 

         

 

Investment

   Fair value at
December 31, 2020
     Valuation
technique
     Unobservable
inputs
  Range of input value(s)
(weighted average)
 

LLC Interest

   $ 6,535,245       

Discounted Cash Flow

Net Asset Value

Multiples Analysis

 

 

 

   Discount Rate

Long Term Growth Rate

Net Asset Value

Multiple of EBITDA

   

1.28% - 11.30%

6.90%

$0.82 - $2,282.15

3.50x - 7.95x

 

 

 

 

Common Stock

     8,048,657       

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

Multiple of EBITDA

Cash Offer per Share

Probability Assessment

   

15.50%

3.50x - 7.00x

$0.09 - $0.95

25%

$771.00

$2.75 - $16.61

8.00x

$2,500

20%

 

 

 

 

 

 

 

 

 

Senior Secured Loans

     861,570        Discounted Cash Flow      Discount Rate     11.00%  

Asset-Backed Securities

     363,767       

Discounted Cash Flow

Third Party Indication of Value

 

 

   Discount Rate

Broker Quote

   

21.00%

Various

 

 

Warrants

     1        Black-Scholes Model      Volatility Assumption     78.9% - 429.9%  
  

 

 

         

Total

   $ 15,809,240          
  

 

 

         

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

 

22


The significant unobservable inputs used in the fair value measurement of the Company’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 Company’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.

The significant unobservable input used in the fair value measurement of the Company’s warrant securities is: volatility assumption. Significant increases (decreases) in this input in isolation could result in a significantly lower (higher) fair value measurement.

Derivative Transactions

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

Options

The Company purchases options, subject to certain limitations. The Company may invest in options contracts to manage its exposure to the stock and bond markets and fluctuations in foreign currency values. Writing puts and buying calls tend to increase the Company’s exposure to the underlying instrument while buying puts and writing calls tend to decrease the Company’s exposure to the underlying instrument, or economically hedge other Company investments. The Company’s risks in using these contracts include changes in the value of the underlying instruments, nonperformance of the counterparties under the contracts’ terms and changes in the liquidity of the secondary market for the contracts. Options are valued at the last sale price, or if no sales occurred on that day, at the last quoted bid price. As of and during the six months ended June 30, 2021 and June 30, 2020, the Company did not hold options.

Investment Transactions

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

Income Recognition

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

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

 

23


Organization and Offering Costs

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

Paid-in Capital

The proceeds from the issuance of common stock as presented on the Company’s Statements of Changes in Net Assets is presented net of selling commissions and fees for the six months ended June 30, 2021 and June 30, 2020. Selling commissions and fees of $0 and $0 were paid for the six months ended June 30, 2021 and June 30, 2020, respectively.

Earnings Per Share

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

 

24


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

 

     For the Three Months Ended
June 30,
     For the Six Months Ended
June 30,
 
     2021      2020      2021      2020  

Net increase (decrease) in net assets from operations

   $ 3,319,425      $ 8,584,322      $ 5,593,482      $ (26,216,705

Weighted average common shares outstanding

     10,301,897        10,555,009        10,404,696        10,516,799  

Earnings (loss) per common share-basic and diluted

   $ 0.32      $ 0.81      $ 0.54      $ (2.49

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 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 2020, the FASB issued 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 ASU No. 2020-04.

 

25


Note 3 — Investment Portfolio

The following table shows the composition of the Company’s invested assets by industry classification at fair value at June 30, 2021:

 

     Fair value      Percentage  

Assets

     

Healthcare

   $ 35,500,849        57.0

Real Estate

     13,266,246        21.3

Telecommunication Services

     5,727,325        9.2

Consumer Products

     3,099,704        5.0

Financials

     1,651,226        2.6

Real Estate Investment Trusts (REITs)

     1,471,576        2.3

Energy

     1,082,496        1.7

Media/Telecommunications

     430,336        0.7

Service

     59,183        0.1

Chemicals

     42,500        0.1
  

 

 

    

 

 

 

Total Assets

   $ 62,331,441        100.0
  

 

 

    

 

 

 

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

 

     Fair value      Percentage  

Assets

     

Healthcare

   $ 40,209,053        62.2

Real Estate

     11,111,826        17.2

Telecommunication Services

     5,491,997        8.5

Consumer Products

     2,070,427        3.2

Manufacturing

     1,666,667        2.6

Financials

     1,488,767        2.3

Real Estate Investment Trusts (REITs)

     1,186,113        1.8

Retail

     532,642        0.8

Energy

     422,827        0.6

Media/Telecommunications

     386,613        0.6

Service

     59,183        0.1

Chemicals

     42,500        0.1
  

 

 

    

 

 

 

Total Assets

   $ 64,668,615        100.0
  

 

 

    

 

 

 

 

26


The following table summarizes the amortized cost and the fair value of the Company’s invested assets by class of financial asset as of June 30, 2021:

 

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

Assets

 

  

Senior Secured Loans - First Lien

   $ 25,681,908      $ 27,246,320        43.7

Senior Secured Loans - Second Lien

     3,508,588        3,144,419        5.0

Asset-Backed Securities

     671,188        443,726        0.7

Corporate Bonds

     6,775,973        6,917,055        11.1

Common Stocks

     6,656,428        9,533,796        15.3

LLC Interests

     7,000,000        8,321,535        13.4

Partnership Units

     6,312,618        6,593,530        10.6

Preferred Stocks

     3,051,714        —          0.0

Warrants

     106,407        131,060        0.2
  

 

 

    

 

 

    

 

 

 

Total Assets

   $ 59,764,824      $ 62,331,441        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, 2020:

 

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

Assets

 

Senior Secured Loans – First Lien

   $ 30,123,122      $ 31,276,803        48.3

Senior Secured Loans – Second Lien

     4,742,429        4,745,268        7.3

Asset-Backed Securities

     671,187        363,767        0.6

Corporate Bonds

     6,736,607        6,883,952        10.6

Common Stocks

     7,774,595        9,615,455        14.9

LLC Interests

     7,000,000        6,535,245        10.1

Partnership Units

     6,312,618        5,214,223        8.1

Preferred Stocks

     3,051,714        —          0.0

Warrants

     52,988        33,902        0.1
  

 

 

    

 

 

    

 

 

 

Total Assets

   $ 66,465,260      $ 64,668,615        100.0
  

 

 

    

 

 

    

 

 

 

 

27


The following table shows the composition of the Company’s invested assets by geographic classification at June 30, 2021:

 

Geography

   Fair value      Percentage  

Assets

 

Cayman Islands(1)

   $ 443,726        0.7

Great Britain(1)

     485,200        0.8

Luxembourg(1)

     2,504,894        4.0

United States

     58,897,621        94.5
  

 

 

    

 

 

 

Total Assets

   $ 62,331,441        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, 2020:

 

Geography

   Fair value      Percentage  

Assets

 

Cayman Islands(1)

   $ 363,767        0.6

Great Britain(1)

     566,400        0.9

Luxembourg(1)

     2,461,549        3.8

United States

     61,276,899        94.7
  

 

 

    

 

 

 

Total Assets

   $ 64,668,615        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 six months ended June 30, 2021, the Company incurred investment advisory fees payable to the Adviser of $304,995 and $608,702, respectively. For the three and six months ended June 30, 2020, the Company incurred investment advisory fees payable to the Adviser of $201,229 and $627,964, respectively. Amounts waived for investment advisory fees or administrative fees pertaining to periods prior to June 30, 2018 are not recoupable, but amounts waived for investment advisory fees or administrative fees pertaining to periods from and after June 30, 2018 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 30, 2018 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.

 

28


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

For the three and six months ended June 30, 2021, the Company incurred $0 and $0 of incentive fees on capital gains, respectively. For the three and six months ended June 30, 2020, 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 June 30, 2021.

Administration Fee

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

For the three and six months ended June 30, 2021, the Company incurred administration fees payable to the Adviser of $59,201 and $121,740, respectively. For the three and six months ended June 30, 2020, the Company incurred administration fees payable to the Adviser of $50,978 and $125,594, respectively. Amounts waived for management fees or administrative services expenses pertaining to periods prior to June 30, 2018 are not recoupable, but amounts waived for management fees or administrative services, expenses pertaining to periods from and after June 30, 2018 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 30, 2018 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.

Organization and Offering Costs

Organization costs include the cost of incorporating, such as the cost of legal services and other fees pertaining to our organization, and are paid by the Adviser. For the three and six months ended June 30, 2021 and June 30, 2020, 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. The Company’s continuous public offering ended on February 14, 2018.

Organization costs and offering costs are limited to 1% of total gross proceeds raised in the offering and are not due and payable to the Adviser to the extent they exceed that amount. As of June 30, 2021, 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.

 

29


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 RICs 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 employed by the Adviser, its affiliates or Skyview. In light of certain relationships between John Honis, a director of the Company, and historically affiliated entities of the Adviser, including prior affiliate Highland Capital Management, L.P. (“HCMLP”), arising out of HCMLP’s pending Chapter 11 proceedings, Mr. Honis is treated as an “interested person” of the Company (as defined in the 1940 Act) effective January 28, 2020.

For the three and six months ended June 30, 2021, the Company recorded an expense relating to director fees of $4,708 and $8,765, respectively. For the three and six months ended June 30, 2020, the Company recorded an expense relating to director fees of $5,378 and $9,889, respectively, which represents the allocation of the director fees to the Company. As of June 30, 2021, 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 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, 2022.

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

Reimbursable Expenses Table

The cumulative total of fees waived by the Adviser under the Expense Limitation Agreement, which are recoupable as of June 30, 2021 is $932,193. This balance, and the balances in the tables below, only include amounts pertaining to the Expense Limitation Agreement, and do not include waived advisory and administration fees subject to recoupment discussed earlier in Note 4. The following table reflects the fee waivers and expense reimbursements due from the Adviser as of March 31, 2021 and June 30, 2021, 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
 

June 30, 2021

   $ 436,866      $  304,501      $  132,365      $  68,919        June 30, 2024  

March 31, 2021

   $  220,126      $  156,680      $ 63,446      $ 63,446        March 31, 2024  

 

30


The following table reflects the fee waivers and expense reimbursements due from the Adviser as of December 31, 2020, September 30, 2020, June 30, 2020 and March 31, 2020, which may become subject to recoupment by the Adviser.

 

Period ended

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

December 31, 2020

   $  989,447      $  639,959      $  349,488      $  101,541       December 31, 2023  

September 30, 2020

     687,228        439,281        247,947        94,039       September 30, 2023  

June 30, 2020

     445,585        291,677        153,908        (30,539     June 30, 2023  

March 31, 2020

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

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

 

Period ended

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

December 31, 2019

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

September 30, 2019

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

June 30, 2019

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

March 31, 2019

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

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

 

Period ended

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

December 31, 2018

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

September 30, 2018

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

June 30, 2018

     613,809        489,460        124,349        —          Expired  

March 31, 2018

     341,882        261,736        80,146        —          Expired  

During the three and six months ended June 30, 2021, $44,203 and $124,349, 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.

 

31


Net Increase from Amounts Committed by Affiliates

For the three and six months ended June 30, 2021 and June 30, 2020, 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 since inception, the net asset value (“NAV”) as of June 30, 2021 would have been lower by approximately this amount.

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 June 30, 2021 and December 31, 2020, $68,919 and $101,542 were owed from the Adviser to the Company, respectively, largely related to the expense limitation agreement.

As of June 30, 2021 and December 31, 2020, the Company owed $364,196 and $423,537, respectively, to the Adviser, largely related to advisory fees, and administration fees.

Indemnification

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

Note 5 — U.S. Federal Income Tax Information

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

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

Uncertainty in Income Taxes

The Company will evaluate its tax positions to determine if the tax positions taken meet the minimum recognition threshold in connection with accounting for uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing tax benefits or liabilities in the financial statements. Recognition of a tax benefit or liability with respect to an uncertain tax position is required only when the position is “more likely than not” to be sustained assuming examination by taxing authorities. The Company’s tax returns are subject to examination by the Internal Revenue Service for a period of three fiscal years after they are filed. The Company recognizes interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in the Statements of Operations. During the six months ended June 30, 2021 and June 30, 2020, 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.

 

32


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. 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 (i) not less than the net asset value per share (the “NAV Per Share”) of the Company’s common stock next calculated following the Expiration Date, and (ii) not more than 2.5% greater than the NAV Per Share as of such date. The Board may amend, suspend or terminate the share repurchase program at any time, upon 30 days’ notice.

The Company conducted its quarterly tender offer for the second quarter of 2021 from May 21, 2021, until expiration of June 21, 2021 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 second quarter tender offer, 56,025 shares of the Company were tendered for repurchase, constituting approximately 0.52% of the Company’s outstanding shares.

For the six months ended June 30, 2021, 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 June 30, 2021, there were no current outstanding or fair value amounts.

For the three and six months ended June 30, 2020, the components of total interest expense were as follows:

 

     Three months ended
June 31, 2020
    Six months ended
June 31, 2020
 

Direct interest expense

   $ 6,283     $ 176,911  

Commitment fees

     —         (204

Amortization of financing costs

     —         —    
  

 

 

   

 

 

 

Total interest expense

   $ 6,283     $ 176,707  
  

 

 

   

 

 

 

Average daily amount outstanding

     971,068 (1)      22,670,341 (1) 

Weighted average interest rate

     2.67 %(1)      2.67 %(1) 

 

33


(1)

The Financing Arrangement with BNP was fully paid down and closed as of April 15, 2020, the average daily amount outstanding is calculated through April 15, 2020. The 2.67% represents the weighted average interest rate from January 1, 2020 through April 15, 2020.

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

 

Period

ended

   Total amount
outstanding
     % of asset
coverage
 

06/30/2021

   $  —          —  

03/31/2021

     —          —  

12/31/2020

     —          —  

BNP Paribas Total Return Swap

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

On April 2, 2018, the Company amended and restated the TRS Agreement with BNP Paribas. The amended and restated TRS Agreement, effective April 10, 2018 increased the maximum aggregate notional amount of the portfolio debt securities subject to the TRS to $60 million. On June 10, 2020, the TRS expired.

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

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

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

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

 

34


For purposes of the asset coverage ratio test applicable to the Company as a BDC, the Company would have treated the outstanding notional amount of the TRS, less the initial amount of any cash collateral required to be posted by the Company under the TRS, as a senior security for the life of that instrument. As of June 30, 2021, the company has $0 in receivable from BNP Paribas for the six months ended June 30, 2021.

Further, for purposes of Section 55(a) under the 1940 Act, the Company treats each security underlying the TRS as a qualifying asset if such security is a loan and the obligor on such loan is an eligible portfolio company, and as a non-qualifying asset if the obligor is not an eligible portfolio company.

As of and for the period ended June 30, 2021, there were no positions held in the TRS.

As a result of decreases in the market value of certain of the Company’s assets pledged at derivative counterparties, the Company was required to post additional collateral relating to its margin requirements. The Company experienced delays posting collateral with one counterparty and received an Event of Default notice dated March 23, 2020; however, the Company covered the margin call on March 24, 2020 and received a formal waiver on the Event of Default notice from the counterparty dated April 2, 2020.

Note 8 — Economic Dependency and Commitments and Contingencies

The Adviser has entered into a Services Agreement with Skyview Group, Inc. (“Skyview”), effective February 25, 2021, pursuant to which the Adviser will receive administrative and operational support services to enable it to provide the required advisory services to the Company. The Adviser will compensate Skyview, who provides services to the Company.

From time to time, the Company may be involved in legal proceedings in the normal course of its business. Although the outcome of such litigation cannot be predicted with any clarity, management is of the opinion, based on the advice of legal counsel, that final dispositions of any litigation should not have a material adverse effect on the financial position of the Company as of June 30, 2021.

Unfunded commitments to provide funds to portfolio companies are not recorded in the Company’s Statements of Assets and Liabilities. Since these commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Company has sufficient liquidity to fund these commitments. As of June 30, 2021, the Company had no unfunded debt commitments.

In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties that provide general indemnification. The Company’s maximum exposure under these agreements is unknown, as this would involve future claims that may be made against the Company that have not occurred. The Company believes the risk of material obligations under these indemnities to be low.

Note 9 — Market and Other Risk Factors

The primary risks of investing in the Company are described below in alphabetical order:

Concentration Risk

The Company is classified as a non-diversified investment company within the meaning of the 1940 Act, which means that it is not limited by the 1940 Act with respect to the proportion of the Company’s assets that it may invest in securities of a single issuer. To the extent that the Company assumes large positions in the securities of a small number of issuers, the Company’s net asset value may fluctuate to a greater extent than that of a diversified investment company as a result of changes in the financial condition or the market’s assessment of the issuer. The Company may also be more susceptible to any single economic or regulatory occurrence than a diversified investment company. Beyond the asset diversification requirements associated with the Company’s qualification as a RIC under the Code and certain contractual diversification requirements under a credit facility or other agreements, the Company does not have fixed guidelines for diversification, and its investments could be concentrated in relatively few portfolio companies. As a result, the aggregate returns the Company realizes may be significantly adversely affected if a small number of investments perform poorly

 

35


or if the Company needs to write down the value of any one investment. Additionally, the Company’s investments may be concentrated in relatively few industries. As a result, a downturn in any particular industry in which the Company is invested could also significantly impact the aggregate returns realized.

Covenant-Lite Loans Risk

Loans in which the Company invests include covenant-lite loans, which carry more risk to the lender than traditional loans as they may contain fewer or less restrictive covenants on the borrower than traditionally included in loan documentation or may contain other borrower friendly characteristics. The Company may experience relatively greater difficulty or delays in enforcing its rights on its holdings of certain covenant-lite loans and debt securities than its holdings of loans or securities with the usual covenants.

Counterparty Credit Risk

Counterparty credit risk is the potential loss the Company may incur as a result of the failure of a counterparty or an issuer to make payments according to the terms of a contract. Counterparty credit risk is measured as the loss the Company would record if its counterparties failed to perform pursuant to the terms of their obligations to the Company. Because the Company may enter into over-the-counter forwards, options, swaps and other derivative financial instruments, the Company may be exposed to the credit risk of its counterparties. To limit the counterparty credit risk associated with such transactions, the Company conducts business only with financial institutions judged by the Adviser to present acceptable credit risk.

Credit Risk

Debt securities are subject to the risk of non-payment of scheduled interest and/or principal. Non-payment would result in a reduction of income to the Company, a reduction in the value of the obligation experiencing non-payment and a potential decrease in the Company’s net asset value.

Investments rated below investment grade are commonly referred to as high-yield, high risk or “junk debt.” They are regarded as predominantly speculative with respect to the issuing company’s continuing ability to meet principal and/or interest payments. Investments in high yield debt and high yield senior loans may result in greater net asset value fluctuation than if the Company did not make such investments. Corporate debt obligations, including senior loans, are subject to the risk of non-payment of scheduled interest and/or principal.

Non-payment would result in a reduction of income to the Company, a reduction in the value of the corporate debt obligation experiencing non-payment and a potential decrease in the net asset value of the Company. Some of the loans the Company makes or acquires may provide for the payment by borrowers of Payment-In-Kind (“PIK”) interest or accreted original issue discount at maturity. Such loans have the effect of deferring a borrower’s payment obligation until the end of the term of the loan, which may make it difficult for the Company to identify and address developing problems with borrowers in terms of their ability to repay debt. Particularly in a rising interest rate environment, loans containing PIK and original issue discount provisions can give rise to negative amortization on a loan, resulting in a borrower owing more at the end of the term of a loan than what it owed when the loan was originated. Any such developments may increase the risk of default on the Company’s loans by borrowers.

Because loans are not ordinarily registered with the SEC or any state securities commission or listed on any securities exchange, there is usually less publicly available information about such instruments. In addition, loans may not be considered “securities” for purposes of the anti-fraud protections of the federal securities laws and, as a result, as a purchaser of these instruments, the Company may not be entitled to the anti-fraud protections of the federal securities laws. In the course of investing in such instruments, the Company may come into possession of material nonpublic information and, because of prohibitions on trading in securities of issuers while in possession of such information, the Company may be unable to enter into a transaction in a publicly-traded security of that issuer when it would otherwise be advantageous for us to do so. Alternatively, the Company may choose not to receive material nonpublic information about an issuer of such loans, with the result that the Company may have less information about such issuers than other investors who transact in such assets.

 

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Foreign Securities Risk

Investments in foreign securities involve certain factors not typically associated with investing in U.S. securities, such as risks relating to (i) currency exchange matters, including fluctuations in the rate of exchange between the U.S. dollar (the currency in which the books of the Company are maintained) and the various foreign currencies in which the Company’s portfolio securities will be denominated and costs associated with conversion of investment principal and income from one currency into another; (ii) differences between the U.S. and foreign securities markets, including the absence of uniform accounting, auditing and financial reporting standards and practices and disclosure requirements, and less government supervision and regulation; (iii) political, social or economic instability; and (iv) the extension of credit, especially in the case of sovereign debt.

Illiquid Securities Risk

The Company will generally make investments in private companies. Substantially all of these investments will be subject to legal and other restrictions on resale or will otherwise be less liquid than publicly traded securities. The illiquidity of the Company’s investments may make it difficult for the Company to sell such investments if the need arises. In addition, if it is required to liquidate all or a portion of its portfolio quickly, the Company may realize significantly less than the value at which it has previously recorded its investments. In addition, it may face other restrictions on its ability to liquidate an investment in a portfolio company to the extent that it has material non-public information regarding such portfolio company or if an investment is held by one of its subsidiaries and is subject to contractual limitations on sale, such as the limitations on transfer of assets under certain circumstances under a credit facility.

The Company may seek to address its short-term liquidity needs by carefully managing the settlements of its portfolio transactions, including transactions in loans, by maintaining short-term liquid assets sufficient to meet reasonably anticipated obligations, and by maintaining a credit facility.

Interest Rate Risk

Interest Rate risk is the risk that fixed income securities will decline in value because of changes in interest rates. When interest rates decline, the value of fixed rate securities already held by the Company can be expected to rise. Conversely, when interest rates rise, the value of existing fixed rate portfolio securities can be expected to decline. A company with a longer average portfolio duration will be more sensitive to changes in interest rates than a fund with a shorter average portfolio duration.

On July 27, 2017, the head of the United Kingdom’s Financial Conduct Authority announced a desire to phase out the use of LIBOR by the end of 2021. Please refer to “LIBOR Transition and Associated Risk” for more information.

Investments in Foreign Markets Risk

Investments in foreign markets involve special risks and considerations not typically associated with investing in the United States. These risks include revaluation of currencies, high rates of inflation, restrictions on repatriation of income and capital, and adverse political and economic developments. Moreover, securities issued in these markets may be less liquid, subject to government ownership controls, tariffs and taxes, subject to delays in settlements, and their prices may be more volatile. The Company may be subject to capital gains and repatriation taxes imposed by certain countries in which they invest. Such taxes are generally based on income and/or capital gains earned or repatriated. Taxes are accrued based upon net investment income, net realized gains and net unrealized appreciation as income and/or capital gains are earned.

Leverage Risk

The Company may use leverage in its investment program, including the use of borrowed funds and investments in certain types of options, such as puts, calls and warrants, which may be purchased for a fraction of the price of the underlying securities. While such strategies and techniques increase the opportunity to achieve higher returns on the amounts invested, they also increase the risk of loss. To the extent the Company purchases securities with borrowed funds, its net assets will tend to increase or decrease at a greater rate than if borrowed funds are not used. If the interest expense on borrowings were to exceed the net return on the portfolio securities purchased with borrowed funds, the Company’s use of leverage would result in a lower rate of return than if the Company were not leveraged.

 

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LIBOR Transition and Associated Risk

LIBOR is the average offered rate for various maturities of short-term loans between major international banks who are members of the British Bankers Association. LIBOR is the most common benchmark interest rate index used to make adjustments to variable-rate loans. It is used throughout global banking and financial industries to determine interest rates for a variety of financial instruments (such as debt instruments and derivatives) and borrowing arrangements.

Certain instruments held by the Company pay an interest rate based on LIBOR, which is the average offered rate for various maturities of short-term loans between certain major international banks. LIBOR is expected to be phased out by the end of 2021. While the effect of the phase out cannot yet be determined, it may result in, among other things, increased volatility or illiquidity in markets for instruments based on LIBOR and changes in the value of such instruments. However, the outbreak of COVID-19 may adversely impact the timing of transition planning, and we continue to assess the potential impact of the COVID-19 outbreak on our transition plans. Although, at this time, it is not possible to predict the effect of any such changes, any establishment of alternative reference rates, whether the COVID-19 outbreak will have further effect on LIBOR transition timelines or plans, or other reforms to LIBOR that may be enacted in the United States, United Kingdom or elsewhere.

Due to manipulation allegations in 2012 and reduced activity in the financial markets that it measures, in July 2017, the Financial Conduct Authority (the “FCA”), the United Kingdom financial regulatory body, announced a desire to phase out the use of LIBOR by the end of 2021. As a result, plans are underway to phase out the use of LIBOR by the end of 2021. Although the period from the FCA announcement until the end of 2021 is generally expected to be enough time for market participants to transition to the use of a different benchmark for new securities and transactions, there remains uncertainty regarding the future utilization of LIBOR and the specific replacement rate or rates. As such, the potential effect of a transition away from LIBOR on the Company or the financial instruments utilized by the Company cannot yet be determined. The transition process may involve, among other things, increased volatility or illiquidity in markets for instruments that currently rely on LIBOR. The transition may also result in a change in (i) the value of certain instruments held by the Company, (ii) the cost of temporary borrowing for the Company, or (iii) the effectiveness of related Company transactions such as hedges, as applicable. When LIBOR is discontinued, the LIBOR replacement rate may be lower than market expectations, which could have an adverse impact on the value of preferred and debt-securities with floating or fixed-to-floating rate coupons. Any such effects of the transition away from LIBOR, as well as other unforeseen effects, could result in losses to adversely impact the Company. Since the usefulness of LIBOR as a benchmark could deteriorate during the transition period, these effects could occur prior to the end of 2021.

Options Risk

There are several risks associated with transactions in options on securities. For example, there are significant differences between the securities and options markets that could result in an imperfect correlation between these markets, causing a given transaction not to achieve its objectives. A transaction in options or securities may be unsuccessful to some degree because of market behavior or unexpected events.

When the Company writes a covered call option, the Company forgoes, during the option’s life, the opportunity to profit from increases in the market value of the security covering the call option above the sum of the premium and the strike price of the call, but retains the risk of loss should the price of the underlying security decline. The writer of an option has no control over the time when it may be required to fulfill its obligation and once an option writer has received an exercise notice, it must deliver the underlying security in exchange for the strike price.

When the Company writes a covered put option, the Company bears the risk of loss if the value of the underlying stock declines below the exercise price minus the put premium. If the option is exercised, the Company could incur a loss if it is required to purchase the stock underlying the put option at a price greater than the market price of the stock at the time of exercise plus the put premium the Company received when it wrote the option. While the Company’s potential gain in writing a covered put option is limited to distributions earned on the liquid assets securing the put option plus the premium received from the purchaser of the put option, the Company risks a loss equal to the entire exercise price of the option minus the put premium.

 

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Pandemics and Associated Economic Disruption Risk

An outbreak of respiratory disease caused by a novel coronavirus was first detected in China in December 2019 and subsequently spread internationally. This coronavirus has resulted in the closing of borders, enhanced health screenings, healthcare service preparation and delivery, quarantines, cancellations, disruptions to supply chains and customer activity, as well as general anxiety and economic uncertainty. It is not known how long any negative impacts, or any future impacts of other significant events such as a substantial economic downturn, will last. Health crises caused by outbreaks of disease, such as the coronavirus, may exacerbate other pre-existing political, social and economic risks. This outbreak, and other epidemics and pandemics that may arise in the future, could negatively affect the global economy, as well as the economies of individual countries, individual companies and the market in general in significant and unforeseen ways. For example, a widespread health crisis such as a global pandemic could cause substantial market volatility, exchange trading suspensions and closures, impact the Company’s ability to complete tender offer requests, and affect Company performance. Any such impact could adversely affect the Company’s performance, the performance of the issuers in which the Company invests, lines of credit available to the Company and may lead to losses on your investment in the Company. In addition, the increasing interconnectedness of markets around the world may result in many markets being affected by events or conditions in a single country or region or events affecting a single or small number of issuers.

Senior Loans Risk

The risk that the issuer of a senior loan may fail to pay interest or principal when due, and changes in market interest rates may reduce the value of the senior loan or reduce the Company’s returns. The risks associated with senior loans are similar to the risks of high yield debt securities. Senior loans and other debt securities are also subject to the risk of price declines and to increases in interest rates, particularly long-term rates. Senior loans are also subject to the risk that, as interest rates rise, the cost of borrowing increases, which may increase the risk of default. In addition, the interest rates of floating rate loans typically only adjust to changes in short-term interest rates; long-term interest rates can vary dramatically from short-term interest rates. Therefore, senior loans may not mitigate price declines in a long-term interest rate environment. The Company’s investments in senior loans are typically below investment grade and are considered speculative because of the credit risk of their issuers.

LIBOR is the average offered rate for various maturities of short-term loans between major international banks who are members of the British Bankers Association. LIBOR is the most common benchmark interest rate index used to make adjustments to variable-rate loans. It is used throughout global banking and financial industries to determine interest rates for a variety of financial instruments (such as debt instruments and derivatives) and borrowing arrangements. Due to manipulation allegations in 2012 and reduced activity in the financial markets that it measures, in July 2017, the Financial Conduct Authority, the United Kingdom financial regulatory body, announced a desire to phase out the use of LIBOR by the end of 2021. Please refer to “LIBOR Transition and Associated Risk” for more information.

Structured Finance Securities Risk

A portion of the Company’s investments may consist of equipment trust certificates, collateralized mortgage obligations, collateralized bond obligations, collateralized loan obligations (“CLO”) or similar instruments. Such structured finance securities are generally backed by an asset or a pool of assets, which serve as collateral. Depending on the type of security, the collateral may take the form of a portfolio of mortgage loans or bonds or other assets. The Company and other investors in structured finance securities ultimately bear the credit risk of the underlying collateral. In some instances, the structured finance securities are issued in multiple tranches, offering investors various maturity and credit risk characteristics, often categorized as senior, mezzanine and subordinated/equity according to their degree of risk. The riskiest securities are the equity tranche, which bears the bulk of defaults from the bonds or loans serving as collateral, and thus may protect the other, more senior tranches from default. If there are defaults or the relevant collateral otherwise underperforms, scheduled payments to senior tranches of such securities take precedence over those of mezzanine tranches, and scheduled payments to mezzanine tranches take precedence over those to subordinated/equity tranches. A senior tranche typically has higher ratings and lower yields than the underlying securities, and may be rated investment grade. Despite the protection from the equity tranche, other tranches can experience substantial losses due to actual defaults, increased sensitivity to defaults due to previous defaults and the disappearance of protecting tranches, market anticipation of defaults and aversion to certain structured finance securities as a class.

Short-Selling Risk

Short sales by the Company that are not made where there is an offsetting long position in the asset that it is being sold short theoretically involve unlimited loss potential since the market price of securities sold short may continuously increase. Short selling

 

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allows the Company to profit from declines in market prices to the extent such decline exceeds the transaction costs and costs of borrowing the securities. However, since the borrowed securities must be replaced by purchases at market prices in order to close out the short position, any appreciation in the price of the borrowed securities would result in a loss. Purchasing securities to close out the short position can itself cause the price of securities to rise further, thereby exacerbating the loss. The Company may mitigate such losses by replacing the securities sold short before the market price has increased significantly. Under adverse market conditions, the Company might have difficulty purchasing securities to meet margin calls on its short sale delivery obligations, and might have to sell portfolio securities to raise the capital necessary to meet its short sale obligations at a time when fundamental investment considerations would not favor such sales. Further, if other short positions of the same security are closed out at the same time, a “short squeeze” can occur where demand exceeds the supply for the security sold short. A short squeeze makes it more likely that the Adviser will need to replace the borrowed security at an unfavorable price.

Valuation Risk

Certain of the Company’s assets are fair valued, including the Company’s investment in equity issued by TerreStar Corporation (“TerreStar”). TerreStar does not currently generate revenue and primarily derives its value from holding licenses of two wireless spectrum assets. The license with respect to one such spectrum asset was previously terminated by the FCC and subsequently restored on April 30, 2020 on a limited conditional basis. The restoration of such license requires TerreStar to meet certain deployment milestones for wireless medical telemetry service (“WMTS”) during a 39-month period. Upon satisfaction of the deployment milestones, TerreStar will be able use such spectrum for other services besides WMTS as long as those services do not interfere with WMTS and TerreStar continues to provide WMTS.

If TerreStar is unsuccessful in satisfying such deployment milestones, or if other services cannot be implemented in a manner that does not interfere with WMTS, the value of the TerreStar equity would likely be materially negatively impacted. In determining the fair value of TerreStar, the Adviser has assigned a high probability of success on both conditions based on consultation with the company and its consultants.

Note 10 — Affiliated Investments

Under Section 2(a)(3) of the 1940 Act, a portfolio company is defined as “affiliated” if a fund owns five percent or more of its outstanding voting securities or if the portfolio company is under common control. The table below shows affiliated issuers of the Company as of June 30, 2021:

 

Affiliated investments

  Shares
at
December 31,
2020
    Fair value
as of
December 31,
2020
    Transfers
in (at cost)
    Purchases     Sales     Realized
gains
(losses)
    Change in
unrealized
appreciation
(depreciation)
    Fair value
as of
June 30,
2021
    Shares
at
June 30,
2021
    Affiliated
Dividend
income
 

NexPoint Residential Trust, Inc.

    22,640     $ 957,898     $ —       $ 15,509     $ —       $ —       $ 288,054     $ 1,261,461       22,944     $ 15,531  

NexPoint Capital REIT, LLC(1)

    100       228,215       —         —         —         —         (18,100     210,115       100       —    

NexPoint Real Estate Finance Operating Partnership, LP

    315,631       5,214,223       —         —         —         —         1,379,307       6,593,530       315,631       299,849  

SFR WLIF III, LLC

    1,651,112       1,493,629       —         —         —         —         49,536       1,543,165       1,651,112       40,350  

SFR WLIF II, LLC

    3,348,888       2,742,974       —         —         —         —         725,577       3,468,551       3,348,888       132,831  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total affiliated investments

    5,338,371     $ 10,636,939     $ —       $ 15,509     $ —       $ —       $ 2,424,374     $ 13,076,822       5,338,675     $ 488,561  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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(1) 

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”.

 

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Note 11 — Financial Highlights

Selected data for a share outstanding throughout the six months ended June 30, 2021 and June 30, 2020 is as follows:

 

     For the Six Months
Ended

June 30, 2021
(Unaudited)
    For the Six Months
Ended

June 30, 2020
(Unaudited)
 

Common shares per share operating performance:

 

Net asset value, beginning of period

   $ 6.13     $ 8.53  

Income from investment operations:

 

Net investment income(1)

     0.10       0.15  

Net realized and unrealized gain (loss)

     0.44       (2.64
  

 

 

   

 

 

 

Total from investment operations

     0.54       (2.49
  

 

 

   

 

 

 

Less distribution declared to common shareholders:

 

From net investment income

     (0.18     (0.24
  

 

 

   

 

 

 

Total distributions declared to common shareholders

     (0.18     (0.24
  

 

 

   

 

 

 

Capital share transactions

 

Issuance of common stock(2)

     —         0.00  

Shares tendered(1)

     —         0.00 (3) 

Net asset value, end of period

   $ 6.49     $ 5.80  

Net asset value total return(4)(5)

     8.93     (29.42 )% 

Ratio and supplemental data:

 

Net assets, end of period (in 000’s)

   $ 65,597     $ 61,203  

Shares outstanding, end of period

     10,106,783       10,545,693  

Common share information at end of period:

 

Ratios based on weighted average net assets of common shares:

 

Gross operating expenses(6)

     3.73     4.15

Fees and expenses waived or reimbursed(6)

     (0.41 )%      (0.46 )% 

Net operating expenses(6)

     3.32     3.68

Net investment income (loss) before fees waived or reimbursed(6)

     2.92     4.18

Net investment income (loss) after fees waived or reimbursed(6)

     3.33     4.64

Ratio of interest and credit facility expenses to average net assets(6)

     —       0.53

Portfolio turnover rate(5)

     1     60

Asset coverage ratio

     —       —  

Weighted average commission rate paid(7)

   $ —       $ 0.0328  

 

(1) 

Per share data was calculated using weighted average shares outstanding during the period.

(2) 

The continuous issuance of common stock may cause an incremental increase in net asset value per share due to the sale of shares at the then prevailing public offering price and the receipt of net proceeds per share by the Company in excess of net asset value per share on each subscription closing date. The per share data was derived by computing (i) the sum of (A) the number of shares issued in connection with subscriptions and/or distribution reinvestment on each share transaction date times (B) the differences between the net proceeds per share and the net asset value per share on each share transaction date, divided by (ii) the total shares outstanding at the end of the period. The Company’s continuous public offering ended on February 14, 2018.

(3) 

Amount rounds to less than $0.005 per share.

(4) 

Total returns are historical and assume changes in share price and reinvestment of dividends and capital gains distributions, and assume no sales charge. Distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the Company’s Dividend Reinvestment Plan. Had the Adviser not absorbed a portion of expenses, total returns would have been lower.

(5) 

Not annualized.

(6) 

Annualized.

(7) 

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

 

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