Notes to Consolidated Financial Statements (unaudited)
September 30, 2022
Note 1.
Organization
Investcorp Credit Management BDC, Inc. (ICMB or the Company), a Maryland corporation formed in
May 2013, is a closed-end, externally managed, non-diversified 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), and has elected to be treated as a regulated investment company (RIC) under Subchapter M of the Internal Revenue Code (the
Code) for U.S. federal income tax purposes. The Company is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (FASB) Accounting
Standard Codification (ASC) Topic 946 Financial Services Investment Companies.
On February 11, 2014, the
Company completed its initial public offering (the Offering), selling 7,666,666 shares of its common stock, par value $0.001, including the underwriters over-allotment, at a price of $15.00 per share with net proceeds of
approximately $111.5 million.
CM Finance LLC, a Maryland limited liability company, commenced operations in March 2012. Immediately
prior to the Offering, CM Finance LLC was merged with and into the Company (the Merger). In connection with the Merger, the Company issued 6,000,000 shares of common stock and $39.8 million in debt to the pre-existing CM Finance LLC investors, consisting of funds managed by Cyrus Capital Partners, L.P. (the Original Investors or the Cyrus Funds). The Company had no assets or operations prior
to completion of the Merger and, as a result, the books and records of CM Finance LLC became the books and records of the Company, as the surviving entity. Immediately after the Merger, the Company issued 2,181,818 shares of its common stock to
Stifel Venture Corp. (Stifel) in exchange for $32.7 million in cash. The Company used all of the proceeds of the sale of shares to Stifel to repurchase 2,181,818 shares of common stock from the Original Investors. Immediately after
the completion of the Offering, the Company had 13,666,666 shares outstanding. The Company used a portion of the net proceeds of the Offering to repay 100% of the debt issued to the Original Investors in connection with the Merger.
CM Investment Partners LLC (the Adviser) serves as the Companys investment adviser. On August 30, 2019, Investcorp
Credit Management US LLC (Investcorp), a subsidiary of Investcorp Bank Holdings B.S.C., acquired the interests in the Adviser, which were previously held by the Cyrus Funds and Stifel and paid off certain debt owed by the Adviser,
resulting in Investcorp having a majority ownership interest in the Adviser (the Investcorp Transaction). On August 30, 2019, the Company changed its name to Investcorp Credit Management BDC, Inc.
The Company has entered into an investment advisory agreement (the Advisory Agreement) and an administration agreement (the
Administration Agreement) with the Adviser, as its investment adviser and administrator, respectively.
The Companys
primary investment objective is to maximize total return to stockholders in the form of current income and capital appreciation by investing directly in debt and related equity of privately held middle-market companies to help these companies fund
acquisitions, growth or refinancing. The Company invests primarily in middle-market companies in the form of standalone first and second lien loans, unitranche loans and mezzanine loans. The Company may also invest in unsecured debt, bonds and in
the equity of portfolio companies through warrants and other instruments.
As a BDC, the Company is required to comply with certain
regulatory requirements. For instance, as a BDC, the Company must not acquire any assets other than qualifying assets, as defined in Section 55(a) of the
14
1940 Act unless, at the time the acquisition is made, at least 70% of total assets are qualifying assets. Qualifying assets generally include investments in eligible portfolio
companies, which, under the 1940 Act, are generally defined as any issuer that (1) is organized under the laws of, and has its principal place of business, in the United States; (2) is not an investment company (other than a small
business investment company wholly-owned by the BDC) or a company that would be an investment company but for certain exclusions under the 1940 Act; and (3) either does not have any class of securities listed on a national securities exchange
or has any class of securities listed on a national securities exchange with less than a $250 million market capitalization.
The
outbreak of the coronavirus (COVID-19) and subsequent global pandemic began significantly impacting the U.S. and global financial markets and economies in March 2020. The worldwide spread of COVID-19 has created significant uncertainty in the global economy. The full duration and extent of the impact of the COVID-19 pandemic over the long term cannot be reasonably
estimated at this time. There have been no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may continue to have on the Companys financial
performance. The extent to which the COVID-19 pandemic may continue to impact the Companys business, financial condition, liquidity, the Companys portfolio companies results of operations and
by extension the Companys operating results will depend on future developments, which remain highly uncertain and unpredictable.
From time-to-time, the Company may form taxable subsidiaries
that are taxed as corporations for U.S. federal income tax purposes (the Taxable Subsidiaries). At September 30, 2022 and June 30, 2022, the Company had no Taxable Subsidiaries. The Taxable Subsidiaries, if any, allow the
Company to hold equity securities of portfolio companies organized as pass-through entities while continuing to satisfy the requirements applicable to a RIC under the Code.
Note 2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Company.
a. Basis of Presentation
The
accompanying consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Articles 6, 10 and 12 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with U.S. GAAP are omitted.
The unaudited financial statements and notes should be read in conjunction with the audited financial statements and notes thereto for the year ended June 30, 2022. All values are stated in U.S. dollars, unless noted otherwise. The financial
statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the periods included herein as required by U.S. GAAP. These adjustments are normal and recurring in nature.
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that
affect the fair value of investments and other amounts reported in the consolidated financial statements and accompanying notes. Management believes that the estimates utilized in preparing the Companys consolidated financial statements are
reasonable and prudent. Actual results could differ materially from these estimates. All material inter-company balances and transactions have been eliminated.
As permitted under Regulation S-X and ASC Topic 946, the Company will generally not consolidate its
investment in a portfolio company other than an investment company subsidiary or a controlled operating company whose business consists of providing all or substantially all of its services to the Company. Accordingly, the Company consolidated the
results of the Companys wholly-owned subsidiaries, CM Finance SPV Ltd. (SPV), CM Finance SPV LLC (LLC) and Investcorp Credit Management BDC SPV, LLC (SPV
15
LLC), which are special purpose vehicles used to finance certain investments in its consolidated financial statements. The effects of all material intercompany balances and transactions
have been eliminated in consolidation.
The Company reclassified prior period affiliate information in the accompanying consolidated
income statements to conform to its current period presentation. These reclassifications had no effect on the Companys consolidated financial position or the consolidated results of operations as previously reported.
b. Revenue Recognition, Security Transactions, and Realized/Unrealized Gains or Losses
Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis. Origination, closing,
commitment, and amendment fees, and purchase and original issue discounts (OID) associated with loans to portfolio companies are accreted into interest income over the respective terms of the applicable loans. Accretion of discounts or
premiums is calculated by the effective interest or straight-line method, which approximates the effective interest method as of the purchase date and adjusted only for material amendments or prepayments. Upon the prepayment of a loan or debt
security, any prepayment penalties are included in other fee income and unamortized fees and discounts are recorded as interest income and are non-recurring in nature.
Structuring fees and similar fees are recognized as income as earned, usually when received. Structuring fees, excess deal deposits, net
profits interests and overriding royalty interests are included in other fee income.
Management reviews all loans that become 90 days or
more past due on principal or interest or when there is reasonable doubt that principal or interest will be collected for possible placement on non-accrual status. Accrued and unpaid interest is generally
reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon
managements judgment regarding collectability. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in managements judgment, are likely to remain
current, although management may make exceptions to this general rule if the loan has sufficient collateral value and is in the process of collection. As of September 30, 2022, the Company had seven loans on
non-accrual status, 1888 Industrial Services, LLC Term A, Term C and Revolver, DSG Entertainment Services, Inc, and the American Teleconferencing Services, Ltd. (d/b/a Premiere Global Services, Inc.)
First and Second Lien Loans and Revolver, which collectively represented 1.3% of the Companys portfolio at fair value. As of June 30, 2022, the Company had six loans on non-accrual status, 1888
Industrial Services, LLC Term A and Revolver, DSG Entertainment Services, Inc, and the American Teleconferencing Services, Ltd. (d/b/a Premiere Global Services, Inc.) First and Second lien loans and Revolver, which collectively represented
1.1% of the Companys portfolio at fair value.
Dividend income is recorded on the
ex-dividend date.
Origination, closing, commitment, and amendment fees, and purchase and OID
associated with loans to portfolio companies are accreted into interest income over the respective terms of the applicable loans. Accretion of discounts or premiums is calculated by the effective interest or straight-line method, which approximates
the effective interest method as of the purchase date and adjusted only for material amendments or prepayments. Upon the prepayment of a loan or debt security, any prepayment penalties are included in other fee income and unamortized fees and
discounts are recorded in interest income and are non-recurring in nature. During the three months ended September 30, 2022, $155,038 of prepayment penalties and unamortized discounts upon prepayment were
recorded as investment income. During the three months ended September 30, 2021, $275,250 of prepayment penalties and unamortized discounts upon prepayment were recorded as interest income.
Investment transactions are accounted for on a trade-date basis. Realized gains or losses on investments are determined by calculating the
difference between the net proceeds from the disposition and the amortized
16
cost basis of the investments, without regard to unrealized gains or losses previously recognized. Realized gains or losses on the sale of investments are calculated using the specific
identification method. The Company reports changes in fair value of investments as a component of the net change in unrealized appreciation (depreciation) on investments in the Unaudited Consolidated Statements of Operations.
The Company holds debt investments in its portfolio that contain a
payment-in-kind (PIK) interest provision. PIK interest, which represents contractually deferred interest added to the investment balance that is generally
due at maturity, is recorded on an accrual basis to the extent that such amounts are expected to be collected. PIK interest is not accrued if the Company does not expect the issuer to be able to pay all principal and interest when due. The Company
earned PIK interest of $348,187 during the three months ended September 30, 2022. The Company earned PIK interest of $79,114 during the three months ended September 30, 2021.
The Company may hold equity investments in its portfolio that contain a PIK dividend provision. PIK dividends, which represent contractual
dividend payments added to the investment balance, are recorded on an accrual basis to the extent that such amounts are expected to be collected. The Company earned no PIK dividends during the three months ended September 30, 2022 and
September 30, 2021, respectively.
c. Paid In Capital
The Company records the proceeds from the sale of its common stock to common stock and additional
paid-in capital, net of commissions and marketing support fees.
d. Net Increase in Net Assets Resulting from
Operations per Share
The net increase in net assets resulting from operations per share is calculated based upon the weighted average
number of shares of common stock outstanding during the reporting period.
e. Distributions
Dividends and distributions to common stockholders are recorded on the ex-dividend date. The amount to
be paid out as a dividend or distribution is determined by the Companys board of directors each quarter and is generally based upon the earnings estimated by management. Net realized capital gains, if any, are generally distributed annually,
although the Company may decide to retain such capital gains for investment.
The Company has adopted a dividend reinvestment plan that
provides for reinvestment of any distributions the Company declares in cash on behalf of the Companys stockholders, unless a stockholder elects to receive cash. As a result, if the Companys board of directors authorizes, and the Company
declares, a cash distribution, then the Companys stockholders who have not opted out of the Companys dividend reinvestment plan will have their cash distributions automatically reinvested in additional shares of the
Companys common stock, rather than receiving the cash distribution.
f. Cash and Restricted Cash
Cash and restricted cash consist of bank demand deposits. The Company deposits its cash in financial institutions and, at times, such balance
may be in excess of the Federal Deposit Insurance Corporation insurance limits. All of the Companys cash deposits are held at what management believes to be large established high credit quality financial institutions and management believes
that the risk of loss associated with any uninsured balances is remote. The Company has restrictions on the uses of the cash held by SPV, LLC and SPV LLC based on the terms of the relevant financing arrangement. For more information on the
Companys financing arrangements and borrowings, see Note 5.
17
g. Deferred Offering Costs
Deferred offering costs consist of fees and expenses incurred in connection with the offer and sale of the Companys common stock and
bonds, including legal, accounting, printing fees, and other related expenses, as well as costs incurred in connection with the filing of a shelf registration statement. These costs are capitalized when incurred and recognized as a reduction of
offering proceeds when the offering is completed.
h. Investment Transactions and Expenses
Purchases of loans, including revolving credit agreements, are recorded on a fully committed basis until the funded and unfunded portions are
known or estimable, which in many cases may not be until settlement.
Expenses are accrued as incurred.
Deferred debt issuance costs and deferred financing costs, incurred in connection with the Companys financing arrangements and
borrowings, are amortized using the straight-line method which approximates the effective interest method over the life of the debt.
i. Investment
Valuation
The Company applies fair value accounting to all of its financial instruments in accordance with the 1940 Act and ASC Topic
820 Fair Value Measurements and Disclosures (ASC 820). ASC 820 defines fair value, establishes a framework used to measure fair value and requires disclosures for fair value measurements. In accordance with ASC 820, the Company
has categorized its investments and financial instruments carried at fair value, based on the priority of the valuation technique, into a three-level fair value hierarchy as discussed in Note 4. Fair value is a market-based measure considered
from the perspective of the market participant who holds the financial instrument rather than an entity specific measure. Therefore, when market assumptions are not readily available, the Companys own assumptions are set to reflect those that
management believes market participants would use in pricing the financial instrument at the measurement date.
Fair value is defined as
the price that would be received upon a sale of an asset in an orderly transaction between market participants at the measurement date. Market participants are buyers and sellers in the principal (or most advantageous) market for the asset that
(a) are independent of us, (b) are knowledgeable, having a reasonable understanding about the asset based on all available information (including information that might be obtained through due diligence efforts that are usual and
customary), (c) are able to transact for the asset, and (d) are willing to transact for the asset or liability (that is, they are motivated but not forced or otherwise compelled to do so).
Securities that are traded on securities exchanges (including such securities traded in the afterhours market) are valued on the basis of the
closing price on the valuation date (if such prices are available). Securities that are traded on more than one securities exchange are valued at the closing price on the primary securities exchange on which such securities are traded on the
valuation date (or if reported on the consolidated tape, then their last sales price on the consolidated tape). Listed options for which the last sales price falls between the last bid and ask prices for such options are
valued at their last sales price on the date of the valuation on the primary securities exchange on which such options are traded. Options for which the last sales price on the valuation date does not fall between the last bid and
ask prices are valued at the average of the last bid and ask prices for such options on that date. To the extent these securities are actively traded, and valuation adjustments are not applied, they are
categorized in Level 1 of the fair value hierarchy. The Company held no Level 1 investments as of September 30, 2022 or June 30, 2022.
Investments that are not traded on securities exchanges but are traded on the
over-the-counter (OTC) markets (such as term loans, notes and warrants) are valued using various techniques, which may consider recently executed
transactions in securities of the issuer or comparable issuers, market price quotations (when
18
observable) and fundamental data relating to the issuer. These investments are categorized in Level 2 of the fair value hierarchy, or in instances when lower relative weight is placed on
transaction prices, quotations, or similar observable inputs, they are categorized in Level 3.
Investments for which market
quotations are not readily available or may be considered unreliable are fair valued, in good faith, using a method determined to be appropriate in the given circumstances. The valuation methods used include the Cost Approach, the Market Approach
and the Income Approach. Inputs used in these approaches may include, but are not limited to, interest rate yield curves, credit spreads, recovery rates, comparable company transactions, trading multiples, and volatilities. The valuation method the
Company uses may change as changes in the underlying portfolio company dictates, such as moving from the Cost Approach to Market Approach when underlying conditions change at the company. Because of the inherent uncertainty of valuation in these
circumstances, the fair values for the aforementioned investments may differ significantly from values that would have been used had a ready and liquid market for such investments existed or from the amounts that might ultimately be realized, and
such differences could be material.
The Adviser seeks to ensure that the Companys valuation policies and procedures, as approved by
the Companys board of directors, are consistently applied across all investments of the Company and approved by the Companys board of directors. The valuations are continuously monitored and the valuation process for Level 3
investments is completed on a quarterly basis and is designed to subject the valuation of Level 3 investments to an appropriate level of consistency, oversight and review. The valuation process begins with each portfolio company or investment
being initially valued by the investment professionals of the Adviser responsible for the portfolio investment. These investment professionals prepare the preliminary valuations based on their evaluation of financial and operating data, company
specific developments, market valuations of comparable securities from the same company or that of comparable companies as well as any other relevant factors including recent purchases and sales that may have occurred preceding month-end.
Valuation models are typically calibrated upon initial funding and are re-calibrated as necessary upon subsequent material events (including, but not limited to additional financing activity, changes in comparable companies, and recent trades). The preliminary valuation conclusions are
then documented and discussed with senior management of the Adviser. On a periodic basis and at least once annually, one or more third-party independent valuation firm(s) engaged by the Company conduct independent appraisals and review the
Advisers preliminary valuations and make their own independent assessment. The Valuation Committee of the Companys board of directors then reviews the preliminary valuations of the Adviser and, as applicable, that of any independent
valuation firms. The Valuation Committee discusses the valuations and makes a recommendation to the Companys board of directors regarding the fair value of each investment in good faith based on the input of the Adviser and the independent
valuation firm(s). Upon recommendation by the Valuation Committee and a review of the valuation materials of the Adviser and the third-party independent valuation firm(s), the board of directors of the Company determines, in good faith, the fair
value of each investment.
Rule 2a-5 under the 1940 Act was recently adopted by the SEC and
establishes requirements for determining fair value in good faith for purposes of the 1940 Act. Our board of directors has adopted valuation policies and procedures that are intended to comply with Rule 2a-5.
For more information on the classification of the Companys investments by major categories, see Note 4.
The fair value of the Companys assets and liabilities that qualify as financial instruments under U.S. GAAP approximates the carrying
amounts presented in the Unaudited Consolidated Statements of Assets and Liabilities.
j. Income Taxes
The Company has elected to be treated, for U.S. federal income tax purposes, as a RIC under Subchapter M of the Code. To maintain qualification
as a RIC, the Company must, among other things, meet
19
certain source of income and asset diversification requirements and distribute to stockholders, for each taxable year, at least 90% of the Companys investment company taxable
income, which is generally the Companys net ordinary income plus the excess, if any, of realized net short-term capital gains over realized net long-term capital losses. If the Company continues to qualify as a RIC and continues to
satisfy the annual distribution requirement, the Company will not have to pay corporate level U.S. federal income taxes on any income that the Company distributes to its stockholders. The Company intends to make distributions in an amount sufficient
to maintain RIC status each year and to avoid any federal income taxes on income. The Company will also be subject to nondeductible U.S. federal excise taxes if the Company does not distribute to its stockholders at least 98% of net ordinary income,
98.2% of capital gains, if any, and any recognized and undistributed income from prior years for which it paid no U.S. federal income taxes. Additionally, certain of the Companys consolidated subsidiaries are subject to U.S. federal and state
income taxes. At September 30, 2022, June 30, 2022 and September 30, 2021, the Company had no Taxable Subsidiaries. The Company incurred excise tax expenses, which are included in the provision for tax expense of $44,330 for the three
months ended September 30, 2022. There were no excise tax expenses incurred for the three months ended September 30, 2021.
Book
and tax basis differences that are permanent differences are reclassified among the Companys capital accounts, as appropriate at year-end. Additionally, the tax character of distributions is determined
in accordance with the Code, which differs from U.S. GAAP.
During the three months ended September 30, 2022, the Company recorded
distributions of $2.2 million. During the three months ended September 30, 2021, the Company recorded distributions of $2.2 million. For certain periods, the tax character of a portion of distributions may be return of capital.
U.S. GAAP requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Companys tax returns to
determine whether the tax positions are more-likely-than-not of being sustained by the applicable tax authority. Tax positions not deemed to meet a
more-likely-than-not threshold would be recorded as a tax expense in the current year. The Companys policy is to recognize accrued interest and penalties associated with uncertain tax positions as part
of the tax provision.
The Company has analyzed such tax positions and has concluded that no unrecognized tax benefits should be recorded
for uncertain tax positions for any tax year since inception. Each of the tax years since inception remains subject to examination by taxing authorities. This conclusion may be subject to review and adjustment at a later date based on factors,
including but not limited to, ongoing analysis and changes to laws, regulations, and interpretations thereof.
Permanent differences
between investment company taxable income and net investment income for financial reporting purposes are reclassified among capital accounts in the financial statements to reflect their tax character. Differences in classification may also result
from the treatment of short-term gains as ordinary income for U.S. federal income tax purposes. During the year ended June 30, 2022, the Company reclassified for book purposes amounts arising from permanent book/tax differences related to the
different tax treatment of paydown gains and losses, Taxable Subsidiary partnership investments, nondeductible taxes paid and income/(loss) from wholly owned subsidiaries as follows:
|
|
|
|
|
|
|
As of June 30, 2022 |
|
Additional paid-in capital |
|
$ |
(264,971) |
|
Distributable earnings |
|
|
264,971 |
|
The tax character of all distributions paid by the Company during the year ended June 30, 2022 was
ordinary income.
20
At June 30, 2022, the components of distributable earnings on a tax basis were as follows:
|
|
|
|
|
|
|
As of June 30, 2022 |
|
Undistributed net investment income |
|
$ |
9,342,951 |
|
Accumulated capital gains (losses) and other |
|
|
(15,703,257 |
) |
Capital loss carryover |
|
|
(57,692,925 |
) |
Unrealized appreciation (depreciation) |
|
|
(43,884,017 |
) |
Distributions payable |
|
|
(2,157,872 |
) |
|
|
|
|
|
Distributable earnings (loss) |
|
$ |
(110,095,120 |
) |
|
|
|
|
|
For U.S. federal income tax purposes, net realized capital losses may be carried over to offset future capital
gains, if any. These capital losses can be carried forward for an indefinite period and will retain their character as either short-term or long-term capital losses. As of June 30, 2022, the Company had a net short-term capital loss
carryforward of $1,844,656 and a net long-term capital loss carryforward of $55,848,269 available to be carried forward for an indefinite period.
A RIC may elect to defer any capital losses incurred after October 31 of a taxable year (post-October) to the beginning of
the following fiscal year. As of June 30, 2022, the Company had a post-October short-term capital loss deferral of $126,039 and a post-October long-term capital loss deferral of $15,395,122. These losses are deemed to arise on July 1,
2022.
k. Capital Gains Incentive Fee
Under the Advisory Agreement, the Company has agreed to pay the Adviser a fee for investment advisory and management services consisting of two
components: a base management fee (the Base Management Fee) and an incentive fee (the Incentive Fee). The Incentive Fee has two components: one based on the Companys pre-Incentive
Fee net investment income (the Income-Based Fee) and one based on capital gains (the Capital Gains Fee). Under U.S. GAAP, the Company calculates the Capital Gains Fee payable to the Adviser as if the Company had realized all
investments at their fair values as of the reporting date. Accordingly, the Company accrues a provisional Capital Gains Fee taking into account any unrealized gains or losses. As the provisional Capital Gains Fee is subject to the performance of
investments until there is a realization event, the amount of provisional Capital Gains Fee accrued at a reporting date may vary from the incentive fee that is ultimately realized and the differences could be material.
Under the Advisory Agreement, the Capital Gains Fee is determined and payable in arrears as of the end of each fiscal year (or upon
termination of the Advisory Agreement, as of the termination date) commencing with the Companys fiscal year ending on June 30, 2021, and is calculated at the end of each applicable year by subtracting (1) the sum of the
Companys cumulative aggregate realized capital losses and aggregate unrealized capital depreciation from (2) the Companys cumulative aggregate realized capital gains, in each case calculated from June 30, 2020. If the amount so
calculated is positive, then the Capital Gains Fee for such year is equal to 20% of such amount, less the aggregate amount of Capital Gains Fees paid in all prior years under the Advisory Agreement. If such amount is negative, then no Capital Gains
Fee will be payable for such year. Under the Advisory Agreement, the Capital Gains Fee was not charged until the fiscal year ending June 30, 2022. As of September 30, 2022 and June 30, 2022, there was no Capital Gains Fee payable to
the Adviser under the Advisory Agreement.
Note 3. Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that are adopted by the Company as of
the specified effective date. The Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial statements upon adoption.
21
Note 4. Investments
The Companys investments, at any time, may include securities and other financial instruments, including, without limitation, corporate
and government bonds, convertible securities, collateralized loan obligations, term loans, revolvers and delayed draw facilities, trade claims, equity securities, privately negotiated securities, direct placements, working interests, warrants and
investment derivatives (such as credit default swaps, recovery swaps, total return swaps, options, forward contracts, and futures) (all of the foregoing collectively referred to in these financial statements as investments).
a. Certain Risk Factors
In the ordinary
course of business, the Company manages a variety of risks including market risk, liquidity risk and credit risk. The Company identifies, measures and monitors risk through various control mechanisms, including trading limits and diversifying
exposures and activities across a variety of instruments, markets and counterparties.
Market risk is the risk of potential adverse
changes to the value of financial instruments because of changes in market conditions, including as a result of changes in the credit quality of a particular issuer, credit spreads, interest rates, and other movements and volatility in security
prices or commodities. In particular, the Company may invest in issuers that are experiencing or have experienced financial or business difficulties (including difficulties resulting from the initiation or prospect of significant litigation or
bankruptcy proceedings), which involves significant risks. The Company manages its exposure to market risk through the use of risk management strategies and various analytical monitoring techniques.
With respect to liquidity risk, the Companys assets may, at any time, include securities and other financial instruments or obligations
that are illiquid or thinly traded, making the purchase or sale of such securities and financial instruments at desired prices or in desired quantities difficult. Furthermore, the sale of any such investments may be possible only at substantial
discounts, and it may be extremely difficult to value any such investments accurately.
Credit risk is the potential loss the Company may
incur from a failure of an issuer to make payments according to the terms of a contract. The Company is subject to credit risk because of its strategy of investing in the debt of leveraged companies and its involvement in derivative instruments. The
Companys exposure to credit risk on its investments is limited to the fair value of the investments. With regard to derivatives, the Company attempts to limit its credit risk by considering its counterpartys (or its guarantors)
credit rating.
b. Investments
Investment purchases, sales and principal payments/paydowns are summarized below for the three months ended September 30, 2022 and
September 30, 2021, respectively. These purchase and sale amounts exclude derivative instruments as well as non-cash restructurings.
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
|
2022 |
|
|
2021 |
|
Investment purchases, at cost (including PIK interest) |
|
$ |
22,147,855 |
|
|
$ |
19,488,132 |
|
Investment sales and repayments |
|
|
16,476,699 |
|
|
|
21,537,261 |
|
22
The composition of the Companys investments as of September 30, 2022, by investment
type, as a percentage of the total portfolio, at amortized cost and fair value, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment at Amortized Cost |
|
|
Percentage |
|
|
Investments at Fair Value |
|
|
Percentage |
|
Senior Secured First Lien Debt Investments |
|
$ |
239,923,468 |
|
|
|
84.56 |
% |
|
$ |
219,533,195 |
|
|
|
91.79 |
% |
Senior Secured Second Lien Debt Investments |
|
|
17,374,608 |
|
|
|
6.12 |
|
|
|
|
|
|
|
|
|
Equity, Warrants and Other Investments |
|
|
26,442,100 |
|
|
|
9.32 |
|
|
|
19,644,366 |
|
|
|
8.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
283,740,176 |
|
|
|
100.00 |
% |
|
$ |
239,177,561 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The composition of the Companys investments as of June 30, 2022, by investment type, as a
percentage of the total portfolio, at amortized cost and fair value, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment at Amortized Cost |
|
|
Percentage |
|
|
Investments at Fair Value |
|
|
Percentage |
|
Senior Secured First Lien Debt Investments |
|
$ |
234,117,747 |
|
|
|
84.35 |
% |
|
$ |
214,858,037 |
|
|
|
91.94 |
% |
Senior Secured Second Lien Debt Investments |
|
|
17,374,608 |
|
|
|
6.26 |
|
|
|
|
|
|
|
|
|
Equity, Warrants and Other Investments |
|
|
26,075,650 |
|
|
|
9.39 |
|
|
|
18,825,949 |
|
|
|
8.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
277,568,005 |
|
|
|
100.00 |
% |
|
$ |
233,683,986 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
The Company uses Global Industry Classification Standard (GICS) codes to identify the
industry groupings in its portfolio. The following table shows the portfolio composition by industry grouping at fair value at September 30, 2022:
|
|
|
|
|
|
|
|
|
Industry Classification |
|
Investments at Fair Value |
|
|
Percentage of Total Portfolio |
|
Professional Services |
|
$ |
32,825,339 |
|
|
|
13.72 |
% |
IT Services |
|
|
22,835,809 |
|
|
|
9.55 |
|
Internet & Direct Marketing Retail |
|
|
20,346,669 |
|
|
|
8.51 |
|
Trading Companies & Distributors |
|
|
19,698,517 |
|
|
|
8.24 |
|
Commercial Services & Supplies |
|
|
15,305,497 |
|
|
|
6.40 |
|
Chemicals |
|
|
14,106,407 |
|
|
|
5.90 |
|
Distributors |
|
|
12,578,352 |
|
|
|
5.26 |
|
Consumer Finance |
|
|
11,432,000 |
|
|
|
4.78 |
|
Energy Equipment & Services |
|
|
8,766,083 |
|
|
|
3.67 |
|
Software |
|
|
8,728,137 |
|
|
|
3.65 |
|
Entertainment |
|
|
7,951,914 |
|
|
|
3.32 |
|
Household Durables |
|
|
7,935,233 |
|
|
|
3.32 |
|
Food & Staples Retailing |
|
|
7,900,150 |
|
|
|
3.30 |
|
Auto Components |
|
|
7,870,364 |
|
|
|
3.29 |
|
Containers & Packaging |
|
|
6,772,924 |
|
|
|
2.83 |
|
Diversified Consumer Services |
|
|
6,721,706 |
|
|
|
2.81 |
|
Specialty Retail |
|
|
5,742,000 |
|
|
|
2.40 |
|
Machinery |
|
|
4,981,936 |
|
|
|
2.08 |
|
Building Products |
|
|
4,715,313 |
|
|
|
1.97 |
|
Food Products |
|
|
4,512,500 |
|
|
|
1.89 |
|
Industrial Machinery |
|
|
4,506,918 |
|
|
|
1.88 |
|
Electronic Equipment, Instruments & Components |
|
|
2,943,793 |
|
|
|
1.23 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
239,177,561 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
24
The following table shows the portfolio composition by industry grouping at fair value at
June 30, 2022:
|
|
|
|
|
|
|
|
|
Industry Classification |
|
Investments at Fair Value |
|
|
Percentage of Total Portfolio |
|
Professional Services |
|
$ |
26,984,194 |
|
|
|
11.55 |
% |
IT Services |
|
|
21,608,522 |
|
|
|
9.25 |
|
Internet & Direct Marketing Retail |
|
|
21,070,294 |
|
|
|
9.02 |
|
Household Durables |
|
|
17,330,053 |
|
|
|
7.42 |
|
Trading Companies & Distributors |
|
|
15,706,496 |
|
|
|
6.72 |
|
Commercial Services & Supplies |
|
|
15,482,455 |
|
|
|
6.62 |
|
Chemicals |
|
|
14,030,222 |
|
|
|
6.00 |
|
Energy Equipment & Services |
|
|
13,055,904 |
|
|
|
5.59 |
|
Distributors |
|
|
12,300,418 |
|
|
|
5.26 |
|
Consumer Finance |
|
|
11,375,840 |
|
|
|
4.87 |
|
Software |
|
|
8,800,751 |
|
|
|
3.77 |
|
Entertainment |
|
|
7,954,388 |
|
|
|
3.40 |
|
Auto Components |
|
|
7,934,024 |
|
|
|
3.39 |
|
Food & Staples Retailing |
|
|
7,920,000 |
|
|
|
3.39 |
|
Containers & Packaging |
|
|
7,247,557 |
|
|
|
3.10 |
|
Diversified Consumer Services |
|
|
6,721,225 |
|
|
|
2.88 |
|
Specialty Retail |
|
|
5,940,000 |
|
|
|
2.54 |
|
Building Products |
|
|
4,720,312 |
|
|
|
2.02 |
|
Food Products |
|
|
4,547,812 |
|
|
|
1.95 |
|
Electronic Equipment, Instruments & Components |
|
|
2,953,519 |
|
|
|
1.26 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
233,683,986 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
The following table shows the portfolio composition by geographic grouping at fair value at September 30,
2022:
|
|
|
|
|
|
|
|
|
|
|
Fair Value |
|
|
Total Portfolio |
|
U.S. Northeast |
|
$ |
97,064,987 |
|
|
|
40.58 |
% |
U.S. West |
|
|
47,796,974 |
|
|
|
19.99 |
|
U.S. Midwest |
|
|
36,598,164 |
|
|
|
15.30 |
|
U.S. Southwest |
|
|
21,878,954 |
|
|
|
9.15 |
|
U.S. Southeast |
|
|
18,257,239 |
|
|
|
7.63 |
|
U.S. Mid-Atlantic |
|
|
17,549,329 |
|
|
|
7.34 |
|
International |
|
|
31,914 |
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
239,177,561 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
The following table shows the portfolio composition by geographic grouping at fair value at June 30,
2022:
|
|
|
|
|
|
|
|
|
|
|
Fair Value |
|
|
Total Portfolio |
|
U.S. Northeast |
|
$ |
105,824,484 |
|
|
|
45.29 |
% |
U.S. West |
|
|
48,352,026 |
|
|
|
20.69 |
|
U.S. Midwest |
|
|
31,898,956 |
|
|
|
13.65 |
|
U.S. Mid-Atlantic |
|
|
17,507,192 |
|
|
|
7.49 |
|
U.S. Southwest |
|
|
15,685,215 |
|
|
|
6.71 |
|
U.S. Southeast |
|
|
14,381,725 |
|
|
|
6.16 |
|
International |
|
|
34,388 |
|
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
233,683,986 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
25
The Companys primary investment objective is to maximize total return to stockholders in
the form of current income and capital appreciation by investing directly in debt and related equity of privately held middle-market companies to help these companies fund acquisitions, growth or refinancing. During the three months ended
September 30, 2022, the Company made investments in new portfolio companies of approximately $19.3 million, to which it was not previously contractually committed to provide financial support. During the three months ended
September 30, 2022, the Company made investments of approximately $2.5 million in companies to which it was previously committed to provide financial support through the terms of the revolvers and delayed draw term loans. The details of
the Companys investments have been disclosed on the Unaudited Consolidated Schedule of Investments.
c. Derivatives
Derivative contracts include total return swaps and embedded derivatives in the Companys borrowings. The Company may enter into
derivative contracts as part of its investment strategies. On October 28, 2020, the SEC adopted a rule that modifies the conditions by which BDCs can enter into, or cover open positions pursuant to, certain derivatives contracts
that involve potential future payment obligations (the Derivatives Rule). The Derivatives Rule requires a BDC entering into a derivatives contract to develop and implement a derivatives risk management program, to comply with an outer
limit on asset coverage ratio based on the VaR (value-at-risk) test, and to report its derivative activity to its board of directors on a
regular basis. The Derivatives Rule also contains exceptions to these conditions for any fund that limits its exposure to derivatives positions to 10 percent of its net assets. At September 30, 2022 and June 30, 2022, the Company held
no derivative contracts.
d. Fair Value Measurements
ASC 820 defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction
between market participants at the measurement date. ASC 820 also establishes a framework for measuring fair value and a valuation hierarchy that prioritizes the inputs used in the valuation of an asset or liability based upon their transparency.
The valuation hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Classification within the hierarchy is based
upon the lowest level of input that is significant to the fair value measurement. The Companys assets and liabilities measured at fair value have been classified in the following three categories:
Level 1 valuation is based on unadjusted quoted prices in active markets for identical assets or liabilities that
the Company has the ability to access at the measurement date.
Level 2 valuation is based on inputs other than
quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as (a) quoted prices for similar assets or liabilities in active markets; (b) quoted prices for identical or
similar assets or liabilities in markets that are not active, that is, markets in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market
makers, or in which little information is released publicly; (c) inputs other than quoted prices that are observable for the asset or liability; or (d) inputs that are derived principally from or corroborated by observable market data by
correlation or other means.
Level 3 valuation is based on unobservable inputs for the asset or liability.
Unobservable inputs are used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. However,
the fair value measurement objective remains the same, that is, an exit price from the perspective of a market participant that holds the asset or owes the liability. Therefore, unobservable inputs reflect the Companys own assumptions about
the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. Unobservable
26
inputs are developed based on the best information available under the circumstances, which might include the Companys own data. The Companys own data used to develop unobservable
inputs is adjusted if information is reasonably available without undue cost and effort that indicates that market participants would use different assumptions.
The availability of observable inputs can vary from security to security and is affected by a wide variety of factors, including, for example,
the type of security, whether the security is new and not yet established in the marketplace, the liquidity of the market and other characteristics particular to the security. To the extent that valuation is based on models or inputs that are less
observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.
Estimates of fair value for cash and restricted cash are measured using observable, quoted market prices, or Level 1 inputs. All other
fair value significant estimates are measured using unobservable inputs, or Level 3 inputs.
The following table summarizes the
classifications within the fair value hierarchy of the Companys assets measured at fair value as of September 30, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured First Lien Debt Investments |
|
$ |
|
|
|
$ |
|
|
|
$ |
219,533,195 |
|
|
$ |
219,533,195 |
|
Senior Secured Second Lien Debt Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity, Warrants and Other Investments |
|
|
|
|
|
|
|
|
|
|
19,644,366 |
|
|
|
19,644,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments |
|
|
|
|
|
|
|
|
|
$ |
239,177,561 |
|
|
$ |
239,177,561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the classifications within the fair value hierarchy of the Companys
assets measured at fair value as of June 30, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured First Lien Debt Investments |
|
$ |
|
|
|
$ |
|
|
|
$ |
214,858,036 |
|
|
$ |
214,858,036 |
|
Senior Secured Second Lien Debt Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity, Warrants and Other Investments |
|
|
|
|
|
|
|
|
|
|
18,825,950 |
|
|
|
18,825,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments |
|
|
|
|
|
|
|
|
|
$ |
233,683,986 |
|
|
$ |
233,683,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
The following table provides a reconciliation of the beginning and ending balances for
investments that use Level 3 inputs for the three months ended September 30, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured First Lien Debt Investments |
|
|
Senior Secured Second Lien Debt Investments |
|
|
Unsecured Debt Investments |
|
|
Equity, Warrants and Other Investments |
|
|
Total Investments |
|
Fair value at June 30, 2022 |
|
$ |
214,858,036 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
18,825,950 |
|
|
$ |
233,683,986 |
|
Purchases (including PIK interest) |
|
|
21,781,406 |
|
|
|
|
|
|
|
|
|
|
|
366,449 |
|
|
|
22,147,855 |
|
Sales |
|
|
(16,476,699 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,476,699 |
) |
Amortization |
|
|
501,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
501,016 |
|
Net realized gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers out |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized (depreciation) appreciation |
|
|
(1,130,564 |
) |
|
|
|
|
|
|
|
|
|
|
451,967 |
|
|
|
(678,597 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at September 30, 2022 |
|
$ |
219,533,195 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
19,644,366 |
|
|
$ |
239,177,561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized appreciation (depreciation) relating to assets still held as of
September 30, 2022 |
|
$ |
(1,022,903 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
451,968 |
|
|
$ |
(570,935 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides a reconciliation of the beginning and ending balances for investments that use
Level 3 inputs for the three months ended September 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured First Lien Debt Investments |
|
|
Senior Secured Second Lien Debt Investments |
|
|
Unsecured Debt Investments |
|
|
Equity, Warrants and Other Investments |
|
|
Total Investments |
|
Fair value at June 30, 2021 |
|
$ |
230,351,618 |
|
|
$ |
6,240,000 |
|
|
$ |
|
|
|
$ |
9,264,002 |
|
|
$ |
245,855,620 |
|
Purchases (including PIK interest) |
|
|
18,330,775 |
|
|
|
|
|
|
|
|
|
|
|
1,157,357 |
|
|
|
19,488,132 |
|
Sales |
|
|
(21,537,261 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,537,261 |
) |
Amortization |
|
|
744,069 |
|
|
|
6,273 |
|
|
|
|
|
|
|
|
|
|
|
750,342 |
|
Net realized gains (losses) |
|
|
761,463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
761,463 |
|
Transfers in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers out |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized (depreciation) appreciation |
|
|
(969,924 |
) |
|
|
553,727 |
|
|
|
|
|
|
|
413,342 |
|
|
|
(2,855 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at September 30, 2021 |
|
$ |
227,680,740 |
|
|
$ |
6,800,000 |
|
|
$ |
|
|
|
$ |
10,834,701 |
|
|
$ |
245,315,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized appreciation (depreciation) relating to assets still held as of
September 30, 2021 |
|
$ |
(816,575 |
) |
|
$ |
553,727 |
|
|
$ |
|
|
|
$ |
413,342 |
|
|
$ |
150,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers into Level 3 during or at the end of the reporting period are reported under Level 1 or
Level 2 as of the beginning of the period. Transfers out of Level 3 during or at the end of the reporting period are reported under Level 3 as of the beginning of the period. Changes in unrealized gains (losses) relating to
Level 3 instruments are included in net change in unrealized (depreciation) appreciation on investments and derivatives on the Unaudited Consolidated Statements of Operations.
28
During the three months ended September 30, 2022 and September 30, 2021, the Company
did not transfer any investments among Levels 1, 2 and 3.
The following tables provide quantitative information regarding the
Companys Level 3 fair value measurements as of September 30, 2022 and June 30, 2022. This information presents the significant unobservable inputs that were used in the valuation of each type of investment. These inputs are not
representative of the inputs that could have been used in the valuation of any one investment. For example, the highest market yield presented in the table for senior secured notes is appropriate for valuing a specific investment but may not be
appropriate for valuing any other investment. Accordingly, the ranges of inputs presented below do not represent uncertainty in, or possible ranges of, fair value measurements of the Companys Level 3 investments. In addition to the
techniques and inputs noted in the tables below, according to our valuation policy we may also use other valuation techniques and methodologies when determining our fair value measurements. The below tables are not intended to be all-inclusive, but rather provide information on the significant unobservable inputs as they relate to the Companys determination of fair values.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of September 30, 2022 |
|
|
Valuation Methodology |
|
Unobservable Input(s) |
|
|
Weighted Average |
|
|
Range |
|
Senior Secured First Lien Debt Investments |
|
$ |
182,258,503 |
|
|
Yield Analysis |
|
|
Market Yields |
|
|
|
12.7 |
% |
|
|
9.4% - 38.1% |
|
Senior Secured First Lien Debt Investments |
|
|
7,056,332 |
|
|
Market Comparable Approach |
|
|
EBITDA Multiple |
|
|
|
8.6x |
|
|
|
4.4x 9.3x |
|
Senior Secured First Lien Debt Investments |
|
|
2,757,334 |
|
|
Market Comparable Approach |
|
|
Revenue Multiple |
|
|
|
0.4x |
|
|
|
0.3x 0.4x |
|
Senior Secured First Lien Debt Investments |
|
|
27,108,889 |
|
|
Recent Transaction |
|
|
Recent Transaction |
|
|
|
N/A |
|
|
|
N/A |
|
Senior Secured First Lien Debt Investments |
|
|
352,137 |
|
|
Recovery Analysis |
|
|
Recovery Amount |
|
|
|
N/A |
|
|
|
N/A |
|
Equity, Warrants and Other Investments |
|
|
5,449,401 |
|
|
Yield Analysis |
|
|
Market Yields |
|
|
|
12.5 |
% |
|
|
12.5% |
|
Equity, Warrants and Other Investments |
|
|
13,994,965 |
|
|
Market Comparable
Approach |
|
|
EBITDA Multiple |
|
|
|
6.8x |
|
|
|
4.4x 17.5x |
|
Equity, Warrants and Other Investments |
|
|
|
|
|
Market Comparable
Approach |
|
|
Revenue Multiple |
|
|
|
0.4x |
|
|
|
0.3x 0.4x |
|
Equity, Warrants and Other Investments |
|
|
200,000 |
|
|
Recent Transaction |
|
|
Recent Transaction |
|
|
|
N/A |
|
|
|
N/A |
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value as of June 30, 2022 |
|
|
Valuation Methodology |
|
|
Unobservable Input(s) |
|
|
Weighted Average |
|
|
Range |
Senior Secured First Lien Debt Investments |
|
$ |
164,896,036 |
|
|
|
Yield Analysis |
|
|
|
Market Yields |
|
|
|
10.8 |
% |
|
8.0% - 24.6% |
Senior Secured First Lien Debt Investments |
|
|
7,203,875 |
|
|
|
Market Comparable Approach |
|
|
|
EBITDA Multiple |
|
|
|
6.7x |
|
|
4.4x 7.0x |
Senior Secured First Lien Debt Investments |
|
|
2,712,779 |
|
|
|
Market Comparable Approach |
|
|
|
Revenue Multiple |
|
|
|
0.4x |
|
|
0.3x 0.4x |
Senior Secured First Lien Debt Investments |
|
|
39,551,804 |
|
|
|
Recent Transaction |
|
|
|
Recent Transaction |
|
|
|
N/A |
|
|
N/A |
Senior Secured First Lien Debt Investments |
|
|
493,542 |
|
|
|
Recovery Analysis |
|
|
|
Recovery Amount |
|
|
|
N/A |
|
|
N/A |
Equity, Warrants and Other Investments |
|
|
17,825,950 |
|
|
|
Market Comparable Approach |
|
|
|
EBITDA Multiple |
|
|
|
6.6x |
|
|
4.2x 12.3x |
Equity, Warrants and Other Investments |
|
|
|
|
|
|
Market Comparable Approach |
|
|
|
Revenue Multiple |
|
|
|
0.4x |
|
|
0.3x 0.4x |
Equity, Warrants and Other Investments |
|
|
1,000,000 |
|
|
|
Recent Transaction |
|
|
|
Recent Transaction |
|
|
|
N/A |
|
|
N/A |
Fair value measurements categorized within Level 3 are sensitive to changes in the assumptions or
methodology used to determine fair value and such changes could result in a significant increase or decrease in the fair value. Significant increases in illiquidity discounts, PIK discounts and market yields would result in significantly lower fair
value measurements.
Note 5. Borrowings
The Company, through SPV, was previously party to a $122.0 million financing transaction (as amended, the Term Financing) due
December 5, 2021 with UBS AG, London Branch (together with its affiliates UBS). The Term Financing was collateralized by the portion of the Companys assets held by SPV (the SPV Assets). The Company subsequently repaid
$20.0 million of the Term Financing on April 15, 2020. Borrowings under the Term Financing, as amended, bore interest with respect to the $102.0 million (i) at a rate per annum equal to
one-month London Interbank Offered Rate (LIBOR) plus 3.55% from December 5, 2019 through December 4, 2020, and (ii) at a rate per annum equal to
one-month LIBOR plus 3.15% from December 5, 2020 through December 4, 2021. On November 19, 2021, the Company repaid the Term Financing in full in accordance with the terms of the Term Financing.
On November 20, 2017, as subsequently amended, the Company entered into a $50 million revolving financing facility with UBS, which was
subsequently amended on June 21, 2019 to reduce the size of the facility to $30.0 million and extend the maturity date (as amended, the Revolving Financing). On September 30, 2020, the Company amended the Revolving Financing to
reduce the size of the Revolving Financing to $20.0 million and extend the maturity date to December 5, 2021. Borrowings under the Revolving Financing generally bore interest at a rate per annum equal to
one-month LIBOR plus 3.15%. The Company paid a fee on any undrawn amounts of 0.75% per annum. Any amounts borrowed under the Revolving Financing would mature, and all accrued and unpaid interest was due and
payable, on the same day as the Term Financing, which was December 5, 2021. On November 19, 2021, the Company satisfied all obligations under the Revolving Financing and the agreement was terminated.
On August 23, 2021, the Company, through SPV LLC entered into a five-year, $115 million senior secured revolving credit facility
(the Capital One Revolving Financing) with Capital One, N.A. (Capital One), which is secured by collateral consisting primarily of loans in the Companys investment portfolio. The Capital One Revolving Financing, which
will expire on August 22, 2026 (the Maturity Date), features a three-year reinvestment period and a two-year amortization period.
30
Borrowings under the Capital One Revolving Financing will generally bear interest at a rate per
annum equal to LIBOR plus 2.35%. The default interest rate will be equal to the interest rate then in effect plus 2.00%. The Capital One Revolving Financing required the payment of an upfront fee of 1.125% ($1.3 million) of the available borrowings
under the Capital One Revolving Financing at the closing, and requires the payment of an unused fee of (i) 0.75% annually for any undrawn amounts below 50% of the Capital One Revolving Financing, (ii) 0.50% annually for any undrawn amounts between
50% and 75% of the Capital One Revolving Financing, and (iii) 0.25% annually for any undrawn amounts above 75% of the Capital One Revolving Financing. Borrowings under the Capital One Revolving Financing are based on a borrowing base. The Capital
One Revolving Financing generally requires payment of interest and fees on a quarterly basis. All outstanding principal is due on the Maturity Date. The Capital One Revolving Financing also requires mandatory prepayment of interest and principal
upon certain events.
As of September 30, 2022 and June 30, 2022, there were $89.5 million and $84.0 million in
borrowings outstanding under the Capital One Revolving Financing, respectively.
Restricted cash (as shown on the Unaudited Consolidated
Statements of Assets and Liabilities) is held by the trustee of the Capital One Revolving Financing and is restricted to purchases of investments by SPV LLC that must meet certain eligibility criteria identified by the loan, security and investment
management agreement governing the Capital One Revolving Financing. As of September 30, 2022, SPV LLC had a notional amount of $204.3 million, which included $198.9 million of the Companys portfolio investments at fair value, no
accrued interest receivable and $6.5 million in cash held by the trustees of the Capital One Revolving Financing. As of June 30, 2022, SPV and LLC had a notional amount of $188.6 million in assets with a fair value of
$183.5 million, no accrued interest receivable and $6.6 million in cash held by the trustee of the Capital One Revolving Financing. For the three months ended September 30, 2022, the weighted average outstanding debt balance and the
stated interest rate under the Capital One Revolving Financing was $81.9 million and 4.56%, respectively. For the three months ended September 30, 2021, the weighted average outstanding debt balance and the weighted average stated interest
rate under the Term Financing, the Revolving Financing, and the Capital One Revolving Financing, in aggregate was $102.0 million and 3.25%, respectively.
The fair value of the Companys borrowings is estimated based on the rate at which similar credit facilities or debentures would be
priced. At September 30, 2022 and June 30, 2022, the fair value of the Companys total borrowings under the Capital One Revolving Financing, was estimated at $89.5 million and $84.0 million respectively, which the Company
concluded was a Level 3 fair value.
On March 31, 2021, the Company closed the public offering of $65 million in aggregate
principal amount of 4.875% notes due 2026 (the 2026 Notes). The total net proceeds to the Company from the sale of the 2026 Notes, after deducting the underwriting discounts and commissions of approximately $1.3 million and
estimated offering expenses of approximately $215,000, were approximately $63.1 million.
The 2026 Notes will mature on April 1,
2026, unless previously redeemed or repurchased in accordance with their terms, and bear interest at a rate of 4.875%. The 2026 Notes are direct unsecured obligations and rank pari passu, which means equal in right of payment, with all
outstanding and future unsecured, unsubordinated indebtedness issued by the Company. Because the 2026 Notes are not secured by any of the Companys assets, they are effectively subordinated to all of the Companys existing and future
secured unsubordinated indebtedness (or any indebtedness that is initially unsecured as to which the Company subsequently grants a security interest), to the extent of the value of the assets securing such indebtedness. The 2026 Notes are
structurally subordinated to all existing and future indebtedness and other obligations of any of the Companys subsidiaries and financing vehicles, including, without limitation, borrowings under the Capital One Revolving Financing. The 2026
Notes are obligations exclusively of the Company and not of any of the Companys subsidiaries. None of the Companys subsidiaries is a guarantor of the 2026 Notes and the 2026 Notes will not be required to be guaranteed by any subsidiary
the Company may acquire or create in the future.
31
The 2026 Notes may be redeemed in whole or in part at any time or from time to time at the
Companys option, upon not less than 30 days nor more than 60 days written notice by mail prior to the date fixed for redemption thereof, at a redemption price (as determined by the Company) equal to the greater of the following amounts, plus,
in each case, accrued and unpaid interest to, but excluding, the redemption date: (1) 100% of the principal amount of the 2026 Notes to be redeemed or (2) the sum of the present values of the remaining scheduled payments of principal and
interest (exclusive of accrued and unpaid interest to the date of redemption) on the 2026 Notes to be redeemed, discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of
twelve 30-day months) using the applicable Treasury Rate plus 50 basis points; provided, however, that if the Company redeems any 2026 Notes on or after January 1, 2026 (the date falling three months
prior to the maturity date of the 2026 Notes), the redemption price for the 2026 Notes will be equal to 100% of the principal amount of the 2026 Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the date of
redemption; provided, further, that no such partial redemption shall reduce the portion of the principal amount of a 2026 Note not redeemed to less than $2,000. Interest on the 2026 Notes is payable semi-annually on April 1 and October 1
of each year, commencing October 1, 2021. The Company may from time to time repurchase 2026 Notes in accordance with the 1940 Act and the rules promulgated thereunder.
As of September 30, 2022, the carrying amount of the 2026 Notes was $64.8 million on an aggregate principal balance of
$65.0 million at a weighted average effective yield of 5.95%. As of September 30, 2022, the fair value of the 2026 Notes was $53.3 million. The Company concluded that this was Level 3 fair value under ASC 820.
Long-Term Debt Maturities
Set forth
below is the aggregate principal amount of our long-term debt as of September 30, 2022 (excluding unamortized premiums, net, unamortized debt issuance costs and note payable) maturing during the following years:
|
|
|
|
|
2023 |
|
$ |
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
154,500,000 |
|
|
|
|
|
|
Total long-term debt |
|
$ |
154,500,000 |
|
|
|
|
|
|
Note 6. Indemnification, Guarantees, Commitments and Contingencies
In the normal course of business, the Company enters into contracts that provide a variety of representations and warranties and general
indemnifications. Such contracts include those with certain service providers, brokers and trading counterparties. Any exposure to the Company under these arrangements is unknown as it would involve future claims that may be made against the
Company; however, based on the Companys experience, the risk of loss is remote and no such claims are expected to occur. As such, the Company has not accrued any liability in connection with such indemnifications.
The Companys board of directors declared the following quarterly distributions during the three months ended September 30, 2022:
|
|
|
|
|
|
|
|
|
|
|
Declared |
|
Ex-Date |
|
Record Date |
|
Pay Date |
|
Amount |
|
Fiscal Quarter |
August 25, 2022 |
|
September 22, 2022 |
|
September 23, 2022 |
|
October 14, 2022 |
|
$0.1500 |
|
1st 2023 |
Loans purchased by the Company may include revolving credit agreements or other financing commitments
obligating the Company to advance additional amounts on demand. The Company generally sets aside sufficient liquid assets to cover its unfunded commitments, if any.
32
The following table details the Companys unfunded commitments to portfolio companies as of
September 30, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
Unfunded Commitment |
|
|
Fair Value |
|
|
Annual Non-use Fee |
|
|
Expiration Date |
|
1888 Industrial Services, LLC Revolver |
|
$ |
149,599 |
|
|
$ |
|
|
|
|
0.50 |
% |
|
|
5/1/23 |
|
Altern Marketing, LLC Revolver |
|
|
2,631,579 |
|
|
|
|
|
|
|
0.50 |
% |
|
|
10/7/24 |
|
Ameriquip, LLC Revolver |
|
|
967,742 |
|
|
|
|
|
|
|
0.50 |
% |
|
|
8/31/27 |
|
American Teleconferencing Services, Ltd. Revolver |
|
|
211,747 |
|
|
|
|
|
|
|
0.50 |
% |
|
|
12/16/22 |
|
Arborworks Acquisition LLC Revolver |
|
|
621,118 |
|
|
|
|
|
|
|
0.50 |
% |
|
|
11/9/26 |
|
Archer Systems, LLC Revolver |
|
|
535,317 |
|
|
|
|
|
|
|
0.50 |
% |
|
|
8/11/27 |
|
Evergreen North America Acquisitions, LLC Revolver |
|
|
389,737 |
|
|
|
|
|
|
|
0.50 |
% |
|
|
8/13/26 |
|
NWN Parent Holdings LLC Revolver |
|
|
660,000 |
|
|
|
|
|
|
|
0.50 |
% |
|
|
5/7/26 |
|
South Coast Terminals LLC Revolver |
|
|
967,742 |
|
|
|
|
|
|
|
0.50 |
% |
|
|
12/10/26 |
|
Xenon Arc, Inc. Revolver |
|
|
1,000,000 |
|
|
|
|
|
|
|
0.50 |
% |
|
|
12/17/26 |
|
Xenon Arc, Inc. Delayed Draw |
|
|
3,000,000 |
|
|
|
|
|
|
|
0.50 |
% |
|
|
12/17/27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Unfunded Commitments |
|
$ |
11,134,581 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table details the Companys unfunded commitments to portfolio companies as of June 30,
2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
Unfunded Commitment |
|
|
Fair Value |
|
|
Annual Non-use Fee |
|
|
Expiration Date |
|
1888 Industrial Services, LLC Revolver |
|
$ |
327,817 |
|
|
$ |
|
|
|
|
0.50 |
% |
|
|
5/1/23 |
|
Altern Marketing, LLC Revolver |
|
|
2,631,579 |
|
|
|
|
|
|
|
0.50 |
% |
|
|
10/7/24 |
|
American Teleconferencing Services, Ltd. Revolver |
|
|
206,103 |
|
|
|
|
|
|
|
0.50 |
% |
|
|
6/8/23 |
|
Arborworks Acquisition LLC Revolver |
|
|
1,118,012 |
|
|
|
|
|
|
|
0.50 |
% |
|
|
11/9/26 |
|
Empire Office Inc. Delayed Draw |
|
|
3,448,276 |
|
|
|
|
|
|
|
0.50 |
% |
|
|
4/12/24 |
|
NWN Parent Holdings LLC Revolver |
|
|
1,200,000 |
|
|
|
|
|
|
|
0.50 |
% |
|
|
5/7/26 |
|
South Coast Terminals LLC Revolver |
|
|
967,742 |
|
|
|
|
|
|
|
0.50 |
% |
|
|
12/10/26 |
|
Xenon Arc, Inc. Revolver |
|
|
1,000,000 |
|
|
|
|
|
|
|
0.50 |
% |
|
|
12/17/26 |
|
Xenon Arc, Inc. Delayed Draw |
|
|
3,000,000 |
|
|
|
|
|
|
|
0.50 |
% |
|
|
12/17/27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Unfunded Commitments |
|
$ |
13,899,529 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7. Agreements and Related Party Transactions
Advisory Agreement
The Company is party
to the Advisory Agreement with the Adviser. Under the Advisory Agreement, the Base Management Fee is calculated at an annual rate of 1.75% of the Companys gross assets, including assets purchased with borrowed funds or other forms of leverage
and excluding cash and cash equivalents (such amount, Gross Assets).
For the three months ended September 30, 2022,
$1,103,981 in Base Management Fees were earned by the Adviser, of which $94,146 was voluntarily waived. As of September 30, 2022, $2,063,898 of such fees were payable. For the three months ended September 30, 2021, $1,128,504 in Base
Management Fees were earned by the Adviser, of which $116,936 was voluntarily waived. As of September 30, 2021, $1,011,569 of such fees were payable. There is no guarantee that the Adviser will waive Base Management Fees in the future. Any
portion of the Base Management Fee waived is not subject to recapture.
33
The Base Management Fee is calculated based on the average value of the Companys Gross
Assets at the end of the two most recently completed fiscal quarters prior to the quarter for which such fees are being calculated. The Base Management Fee is payable quarterly in arrears and the Base Management Fees for any partial month or quarter
will be appropriately pro-rated.
Under the Advisory Agreement, the Income-Based Fee is calculated
and payable quarterly in arrears based on the Companys Pre-Incentive Fee Net Investment Income (as defined below) for the immediately preceding fiscal quarter, subject to a total return requirement (the
Total Return Requirement) and deferral of non-cash amounts, and is 20.0% of the amount, if any, by which the Companys Pre-Incentive Fee
Net Investment Income, expressed as a rate of return on the value of our net assets attributable to its common stock, for the immediately preceding fiscal quarter, exceeds a 2.0% (which is 8.0% annualized) hurdle rate and a catch-up provision measured as of the end of each fiscal quarter. Under this provision, in any fiscal quarter, the Adviser receives no Income-Based Fee until the Companys Pre-Incentive Fee Net Investment Income exceeds the hurdle rate of 2.0%, but then receives, as a catch-up, 100% of the Companys Pre-Incentive Fee Net Investment Income with respect to that portion of such Pre-Incentive Fee Net Investment Income, if any, that exceeds the hurdle rate but is less than
2.5% (which is 10.0% annualized). The effect of the catch-up provision is that, subject to the Total Return Requirement and deferral provisions discussed below, if
Pre-Incentive Fee Net Investment Income exceeds 2.5% in any fiscal quarter, the Adviser receives 20.0% of our Pre-Incentive Fee Net Investment Income as if a hurdle rate
did not apply.
Pre-Incentive Fee Net Investment Income means interest
income, dividend income and any other income (including any other fees, such as commitment, origination, structuring, diligence, managerial assistance and consulting fees or other fees that we receive from portfolio companies) accrued during the
fiscal quarter, minus the Companys operating expenses for the quarter (including the Base Management Fee, expenses payable under the Administration Agreement and any interest expense and any distributions paid on any issued and outstanding
preferred stock, but excluding the Incentive Fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as OID, debt
instruments with PIK interest and zero coupon securities), accrued income that we have not yet received in cash.
Pre-Incentive Fee Net Investment Income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation.
No Income-Based Fee is payable under the Advisory Agreement except to the extent 20.0% of the cumulative net increase in net assets resulting
from operations over the fiscal quarter for which fees are being calculated and the Lookback Period (as defined below) exceeds the cumulative Incentive Fees accrued and/or paid for the Lookback Period. The cumulative net increase in net assets
resulting from operations is the amount, if positive, of the sum of Pre-Incentive Fee Net Investment Income, realized gains and losses and unrealized appreciation and depreciation of
the Company for the then current fiscal quarter and the Lookback Period. The Lookback Period means (1) through June 30, 2022, the period that commences on the last day of the fiscal quarter in which the Advisory Agreement
became effective and ends on the last day of the fiscal quarter immediately preceding the fiscal quarter for which the Income-Based Fee is being calculated, and (2) after June 30, 2022, the eleven fiscal quarters immediately preceding the
fiscal quarter for which the Income-Based Fee is being calculated.
For the three months ended September 30, 2022, the Company wrote
off $147,145 in previously deferred Income-Based Fees and incurred no additional Income-Based Fees. As of September 30, 2022, $34,950 in Income-Based Fees incurred by the Company were generated from deferred interest (i.e. PIK and certain
discount accretion) and are not payable until such amounts are received in cash. For the three months ended September 30, 2021, the Company incurred no Income-Based Fees. As of September 30, 2021, $647,885 of Income-Based Fees incurred by
the Company were generated from deferred interest (i.e. PIK and certain discount accretion) and are not payable until such amounts are received in cash. Any voluntary waivers of the incentive fee in no way implies that the Adviser will agree to
waive any incentive fee in any future period. Any portion of the incentive fees waived are not subject to recapture.
34
Under the Advisory Agreement, the Capital Gains Fee is determined and payable in arrears as of
the end of each fiscal year (or upon termination of the Advisory Agreement, as of the termination date) and is equal to 20.0% of our cumulative aggregate realized capital gains, net of the Companys aggregate cumulative realized capital losses
and aggregate cumulative unrealized capital depreciation, in each case calculated from June 30, 2020 through the end of such year, less the aggregate amount of any previously paid Capital Gains Fees. If such amount is negative, then no Capital
Gains Fee will be payable for such year. Additionally, if the Advisory Agreement is terminated as of a date that is not a fiscal year end, the termination date will be treated as though it were a fiscal year end for purposes of calculating and
paying the Capital Gains Fee. Under the Advisory Agreement, the Capital Gains Fee was not charged until the fiscal year ending June 30, 2022.
Under U.S. GAAP, the Company calculates the Capital Gains Fee as if it had realized all assets at their fair values as of the reporting date.
Accordingly, the Company accrues a provisional Capital Gains Fee taking into account any unrealized gains or losses. As the provisional Capital Gains Fee is subject to the performance of investments until there is a realization event, the amount of
the provisional Capital Gains Fee accrued at a reporting date may vary from the Capital Gains Fee that is ultimately realized and the differences could be material.
As of September 30, 2022, there was no Capital Gains Fee accrued, earned or payable to the Adviser under the Advisory Agreement. As of
June 30, 2022, there was no Capital Gains Fee accrued, earned or payable to the Adviser under the Advisory Agreement.
The Advisory
Agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of the Advisers duties or by reason of the reckless disregard of its duties and obligations under the Advisory Agreement, the Adviser and its
officers, managers, partners, agents, employees, controlling persons and members, and any other person or entity affiliated with it, are entitled to indemnification from the Company for any damages, liabilities, costs and expenses (including
reasonable attorneys fees and amounts reasonably paid in settlement) arising from the rendering of the Advisers services under the Advisory Agreement or otherwise as the Adviser.
Administration Agreement
Pursuant to the
Administration Agreement, the Adviser furnishes the Company with office facilities and equipment and provides it with the clerical, bookkeeping, recordkeeping and other administrative services necessary to conduct day-to-day operations. Under the Administration Agreement, the Adviser performs, or oversees the performance of the Companys required administrative services, which includes, among other things, being
responsible for the financial records which it is required to maintain and preparing reports to its stockholders and reports filed with the SEC. In addition, the Adviser assists the Company in determining and publishing its net asset value, oversees
the preparation and filing of its tax returns and the printing and dissemination of reports and other materials to its stockholders, and generally oversees the payment of its expenses and the performance of administrative and professional services
rendered to it by others. Under the Administration Agreement, the Adviser also provides managerial assistance on the Companys behalf to those portfolio companies that have accepted its offer to provide such assistance. In addition, the Adviser
may satisfy certain of its obligations to the Company under the Administration Agreement through the services agreement with Investcorp International Inc., an affiliate of Investcorp, including supplying the Company with accounting and back-office
professionals upon the request of the Adviser. The Company incurred costs of $375,900 under the Administration Agreement for the three months ended September 30, 2022. The Company incurred costs of $351,700 under the Administration Agreement
for the three months ended September 30, 2021.
As of September 30, 2022 and June 30, 2022, the Company recorded no
accrued expenses or other liabilities for reimbursement of expenses owed to the Adviser under the Administration Agreement.
35
Stock Purchase Agreement
In connection with the Investcorp Transaction, on June 26, 2019, the Company entered into a definitive stock purchase and transaction
agreement with Investcorp BDC Holdings Limited (Investcorp BDC), an affiliate of Investcorp (the Stock Purchase Agreement), pursuant to which Investcorp BDC was required by August 30, 2021, to purchase (i) 680,985 newly
issued shares of the Companys common stock, at the most recently determined net asset value per share of the Companys common stock at the time of such purchase, as adjusted as necessary to comply with Section 23 of the 1940 Act, and
(ii) 680,985 shares of the Companys common stock in open-market or secondary transactions. Investcorp BDC completed all remaining required purchases under the Stock Purchase Agreement during the quarter ended September 30, 2021.
Co-investment Exemptive Relief
On July 20, 2021, the SEC issued an order, which superseded a prior order issued on March 19, 2019, granting the Companys
application for exemptive relief to co-invest, subject to the satisfaction of certain conditions, in certain private placement transactions with other funds managed by the Adviser or its affiliates
and any future funds that are advised by the Adviser or its affiliated investment advisers (the Exemptive Relief). Under the terms of the Exemptive Relief, in order for the Company to participate in
a co-investment transaction a required majority (as defined in Section 57(o) of the 1940 Act) of the directors who are not interested persons of the Company, as defined
in Section 2(a)(19) of the 1940 Act (each, an Independent Director) must conclude that (i) the terms of the proposed transaction, including the consideration to be paid, are reasonable and fair to the Company and its
stockholders and do not involve overreaching in respect of the Company or its stockholders on the part of any person concerned, and (ii) the proposed transaction is consistent with the interests of the Companys stockholders and is
consistent with the Companys investment objectives and strategies.
License Agreement
The Company has entered into a license agreement with the Adviser under which the Adviser has agreed to grant the Company a non-exclusive, royalty-free license to use the name Investcorp. Under this agreement, the Company has a right to use the Investcorp name for so long as the Adviser or one of its
affiliates remains the Companys investment adviser. Other than with respect to this limited license, the Company has no legal right to the Investcorp name. This license agreement will remain in effect for so long as the Advisory
Agreement with the Adviser is in effect and Investcorp is the majority owner of the Adviser.
Note 8. Directors Fees
Each Independent Director receives (i) an annual fee of $75,000, and (ii) $2,500 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending in person or telephonically each regular board of directors meeting and each special telephonic meeting. Each
Independent Director also receives $1,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with each committee meeting attended in person
and each telephonic committee meeting. The chairperson of the audit committee receives an additional annual fee of $7,500. The chairperson(s) of the valuation committee, the nominating and corporate governance committee and the compensation
committee receives an additional annual fee of $2,500, $2,500 and $2,500, respectively. The Company has obtained directors and officers liability insurance on behalf of the Companys directors and officers. For the three months
ended September 30, 2022, the Company recorded directors fees of $75,625, of which $19,905 were payable at September 30, 2022. For the three months ended September 30, 2021, the Company recorded directors fees of $75,625,
of which $24,984 were payable at September 30, 2021.
Note 9. Net Change in Net Assets Resulting from Operations Per Share
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.
36
The following table sets forth the computation of the weighted average basic and diluted net
increase in net assets per share from operations:
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
|
2022 |
|
|
2021 |
|
Net increase (decrease) in net assets resulting from operations |
|
$ |
1,657,507 |
|
|
$ |
3,286,448 |
|
Weighted average shares of common stock outstanding |
|
|
14,386,809 |
|
|
|
14,066,370 |
|
Basic/diluted net increase (decrease) in net assets from operations per share |
|
$ |
0.12 |
|
|
$ |
0.23 |
|
On September 3, 2021, the Company issued 453,985 shares of common stock, par value $0.001 per share to
Investcorp BDC at a price of $6.92 per share for an aggregate offering price of $3,141,576. The sale of the Companys common stock to Investcorp BDC was made pursuant to the Stock Purchase Agreement and the issuance of the Companys common
stock was exempt from the registration requirements of the Securities Act, pursuant to Section 4(a)(2) thereof and Regulation D thereunder. Investcorp BDC is an accredited investor as that term is defined in Rule 501(a) of
Regulation D under the Securities Act.
37
Note 10. Distributions
The following table reflects the distributions declared on shares of the Companys common stock since the Offering in February 2014.
Stockholders of record as of each respective record date were entitled to receive the distribution:
|
|
|
|
|
|
|
|
|
Declaration Date |
|
Record Date |
|
Payment Date |
|
Amount Per Share |
|
March 14, 2014 |
|
March 24, 2014 |
|
March 31, 2014 |
|
$ |
0.1812 |
|
May 14, 2014 |
|
June 16, 2014 |
|
July 1, 2014 |
|
$ |
0.3375 |
|
September 4, 2014 |
|
September 18, 2014 |
|
October 1, 2014 |
|
$ |
0.3375 |
|
November 6, 2014 |
|
December 18, 2014 |
|
January 5, 2015 |
|
$ |
0.3375 |
|
January 28, 2015 |
|
March 18, 2015 |
|
April 2, 2015 |
|
$ |
0.3469 |
|
May 6, 2015 |
|
June 8, 2015 |
|
July 5, 2015 |
|
$ |
0.3469 |
|
June 10, 2015# |
|
September 1, 2015 |
|
September 15, 2015 |
|
$ |
0.4300 |
|
June 10, 2015 |
|
September 18, 2015 |
|
October 2, 2015 |
|
$ |
0.3469 |
|
November 3, 2015 |
|
December 18, 2015 |
|
January 5, 2016 |
|
$ |
0.3469 |
|
February 2, 2016 |
|
March 18, 2016 |
|
April 7, 2016 |
|
$ |
0.3516 |
|
April 28, 2016 |
|
June 17, 2016 |
|
July 7, 2016 |
|
$ |
0.3516 |
|
August 25, 2016 |
|
September 16, 2016 |
|
October 6, 2016 |
|
$ |
0.3516 |
|
November 3, 2016 |
|
December 16, 2016 |
|
January 5, 2017 |
|
$ |
0.3516 |
|
November 3, 2016 |
|
March 17, 2017 |
|
April 6, 2017 |
|
$ |
0.2500 |
|
May 2, 2017 |
|
June 16, 2017 |
|
July 6, 2017 |
|
$ |
0.2500 |
|
August 24, 2017 |
|
September 8, 2017 |
|
October 5, 2017 |
|
$ |
0.2500 |
|
November 7, 2017 |
|
March 16, 2018 |
|
April 5, 2018 |
|
$ |
0.2500 |
|
May 2, 2018 |
|
June 15, 2018 |
|
July 5, 2018 |
|
$ |
0.2500 |
|
August 23, 2018 |
|
September 18, 2018 |
|
October 5, 2018 |
|
$ |
0.2500 |
|
November 6, 2018 |
|
December 14, 2018 |
|
January 3, 2019 |
|
$ |
0.2500 |
|
February 5, 2019 |
|
March 15, 2019 |
|
April 4, 2019 |
|
$ |
0.2500 |
|
May 1, 2019 |
|
June 14, 2019 |
|
July 5, 2019 |
|
$ |
0.2500 |
|
August 28, 2019 |
|
September 26, 2019 |
|
October 16, 2019 |
|
$ |
0.2500 |
|
November 6, 2019 |
|
December 13, 2019 |
|
January 2, 2020 |
|
$ |
0.2500 |
|
February 4, 2020 |
|
March 13, 2020 |
|
April 2, 2020 |
|
$ |
0.2500 |
|
May 7, 2020 |
|
June 19, 2020 |
|
July 10, 2020 |
|
$ |
0.1500 |
|
May 7, 2020* |
|
June 19, 2020 |
|
July 10, 2020 |
|
$ |
0.0300 |
|
August 26, 2020 |
|
September 25, 2020 |
|
October 15, 2020 |
|
$ |
0.1500 |
|
August 26, 2020* |
|
September 25, 2020 |
|
October 15, 2020 |
|
$ |
0.0300 |
|
November 3, 2020 |
|
December 10, 2020 |
|
January 4, 2021 |
|
$ |
0.1500 |
|
November 3, 2020* |
|
December 10, 2020 |
|
January 4, 2021 |
|
$ |
0.0300 |
|
February 3, 2021 |
|
March 12, 2021 |
|
April 1, 2021 |
|
$ |
0.1500 |
|
February 3, 2021* |
|
March 12, 2021 |
|
April 1, 2021 |
|
$ |
0.0300 |
|
May 6, 2021 |
|
June 18, 2021 |
|
July 9, 2021 |
|
$ |
0.1500 |
|
August 25, 2021 |
|
September 24, 2021 |
|
October 14, 2021 |
|
$ |
0.1500 |
|
November 3, 2021 |
|
December 10, 2021 |
|
January 4, 2022 |
|
$ |
0.1500 |
|
February 3, 2022 |
|
March 11, 2022 |
|
March 31, 2022 |
|
$ |
0.1500 |
|
May 5, 2022 |
|
June 17, 2022 |
|
July 8, 2022 |
|
$ |
0.1500 |
|
August 25, 2022 |
|
September 23, 2022 |
|
October 14, 2022 |
|
$ |
0.1500 |
|
* |
Supplemental distribution |
38
The following table reflects, for U.S. federal income tax purposes, the sources of the cash
dividend distributions that the Company has paid on its common stock during the three months ended September 30, 2022 and September 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
|
2022 |
|
|
2021 |
|
|
|
Distribution Amount |
|
|
Percentage |
|
|
Distribution Amount |
|
|
Percentage |
|
Ordinary income and short-term capital gains |
|
$ |
2,158,042 |
|
|
|
100 |
% |
|
$ |
2,157,501 |
|
|
|
100 |
% |
Long-term capital gains |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,158,042 |
|
|
|
100 |
% |
|
$ |
2,157,501 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The 2022-23 figures in the above table are estimates based on the Companys year-to-date activity. The tax status of distributions for a tax year depends on the Companys total amount of taxable income for the entire
year, therefore, the tax status cannot be confirmed until after the end of the tax year. Accordingly, the Companys distributions for the tax year may be re-characterized later based upon
subsequent events. As applicable, the Company reports the actual tax character of its distributions for U.S. federal income tax purposes annually to stockholders on Internal Revenue Service
Form 1099-DIV issued after the end of the year. The Companys Form 10-K for the year ending June 30, 2023 will also include information
regarding the actual components and tax treatment of all the Companys distributions for the fiscal year 2022-23. Because each stockholders tax status is unique, stockholders should
consult their tax advisor regarding this distribution notice.
Note 11. Share Transactions
The following table summarizes the total shares issued for the three months ended September 30, 2022 and September 30, 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
|
2022 |
|
|
2021 |
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
Balance at beginning of period |
|
|
14,385,810 |
|
|
$ |
205,790,502 |
|
|
|
13,921,767 |
|
|
$ |
202,592,833 |
|
Issuance of common shares |
|
|
|
|
|
|
|
|
|
|
453,985 |
|
|
|
3,141,576 |
|
Reinvestments of stockholder distributions |
|
|
1,135 |
|
|
|
4,763 |
|
|
|
7,588 |
|
|
|
43,752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
|
14,386,945 |
|
|
$ |
205,795,265 |
|
|
|
14,383,340 |
|
|
$ |
205,778,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
Note 12. Financial Highlights
The following represents the per share data and the ratios to average net assets for the Company:
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, |
|
|
|
2022 |
|
|
2021 |
|
Per Share Data:(1) |
|
|
|
|
|
|
|
|
Net asset value, beginning of period |
|
$ |
6.50 |
|
|
$ |
6.92 |
|
Net investment income |
|
|
0.16 |
|
|
|
0.18 |
|
Net realized and unrealized gains (losses) |
|
|
(0.04) |
|
|
|
0.05 |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from operations |
|
|
0.12 |
|
|
|
0.23 |
|
Capital transactions(2) |
|
|
|
|
|
|
|
|
Dividends from net investment income |
|
|
(0.15) |
|
|
|
(0.15) |
|
Distributions from net realized gains |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in net assets resulting from capital transactions |
|
|
(0.15) |
|
|
|
(0.15) |
|
Offering costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of period |
|
$ |
6.47 |
|
|
$ |
7.00 |
|
|
|
|
|
|
|
|
|
|
Market value per share, end of period |
|
$ |
3.58 |
|
|
$ |
5.45 |
|
Total return based on market
value(3)(4) |
|
|
(11.94)% |
|
|
|
3.85% |
|
Shares outstanding at end of period |
|
|
14,386,945 |
|
|
|
14,383,340 |
|
Ratio/Supplemental Data: |
|
|
|
|
|
|
|
|
Net assets, at end of period |
|
$ |
93,013,620 |
|
|
$ |
100,670,124 |
|
Ratio of total expenses to average net
assets(5) |
|
|
17.30% |
|
|
|
16.05% |
|
Ratio of net expenses to average net
assets(5) |
|
|
16.90% |
|
|
|
15.59% |
|
Ratio of interest expense and fees and amortization of deferred debt issuance costs to average net
assets(5) |
|
|
8.38% |
|
|
|
7.26% |
|
Ratio of net investment income before fee waiver to average net assets(5) |
|
|
10.37% |
|
|
|
10.42% |
|
Ratio of net investment income after fee waiver to average net assets(5) |
|
|
9.96% |
|
|
|
9.96% |
|
Total Borrowings |
|
|
154,500,000 |
|
|
|
164,566,111 |
|
Asset Coverage Ratio(6) |
|
|
1.60 |
|
|
|
1.61 |
|
Portfolio Turnover Rate(4) |
|
|
7% |
|
|
|
8% |
|
(1) |
All per share data activity is calculated based on the weighted average shares outstanding for the relevant
period, except net increase (decrease) in net assets from capital share transactions, which is based on the common shares outstanding as of the relevant balance sheet date. |
(2) |
The per share data for dividends and distributions declared reflects the actual amount of the dividends and
distributions declared per share during the period. |
(3) |
Total returns are historical and are calculated by determining the percentage change in the market value with
all dividends distributions, if any, reinvested. Dividends and distributions are assumed to be reinvested at prices obtained under the companys dividend reinvestment plan. Total investment return does not reflect sales load.
|
(6) |
Asset coverage ratio is equal to (i) the sum of (A) net assets at the end of the period and
(B) debt outstanding at the end of the period, divided by (ii) total debt outstanding at the end of the period. |
40
Total return is calculated based on a time-weighted rate of return methodology for the
stockholders and is not annualized. Total return is reflected after all investment-related and operating expenses. An individual stockholders return may vary from these returns based on the timing of capital transactions.
The ratios to average stockholders capital are calculated based on the monthly average stockholders capital during the period.
Credit facility related expenses include interest expense and amortization of deferred debt issuance costs.
Note 13. Other Fee Income
The other fee income consists of structuring fee income, amendment fee income and royalty income. The following tables summarize the
Companys other fee income for the three months ended September 30, 2022 and September 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, |
|
|
|
2022 |
|
|
2021 |
|
Loan Amendment/Consent Fee |
|
$ |
361,850 |
|
|
$ |
104,284 |
|
|
|
|
|
|
|
|
|
|
Other Fee Income |
|
$ |
361,850 |
|
|
$ |
104,284 |
|
|
|
|
|
|
|
|
|
|
Note 14. Tax Information
As of September 30, 2022, the Companys aggregate investment unrealized appreciation and depreciation based on cost for U.S. federal
income tax purposes were as follows:
|
|
|
|
|
Tax cost |
|
$ |
283,740,176 |
|
|
|
|
|
|
Gross unrealized appreciation |
|
|
3,438,559 |
|
Gross unrealized depreciation |
|
|
(48,001,174) |
|
|
|
|
|
|
Net unrealized investment depreciation |
|
$ |
(44,562,615) |
|
|
|
|
|
|
As of June 30, 2022, the Companys aggregate investment unrealized appreciation and depreciation
based on cost for U.S. federal income tax purposes were as follows:
|
|
|
|
|
Tax cost |
|
$ |
277,568,005 |
|
|
|
|
|
|
Gross unrealized appreciation |
|
|
2,879,273 |
|
Gross unrealized depreciation |
|
|
(46,763,292) |
|
|
|
|
|
|
Net unrealized investment depreciation |
|
$ |
(43,884,019) |
|
|
|
|
|
|
Note 15. Subsequent Events
The Company has evaluated the need for disclosures and/or adjustments resulting from subsequent events through the date the consolidated
financial statements were issued.
From October 1, 2022 through November 14, 2022, the Company invested $2.5 million in one
new portfolio company.
The Companys dividend framework provides a quarterly base dividend and may be supplemented, at the
discretion of the Companys board of directors, by additional dividends as determined to be available by the Companys net investment income and performance during the quarter.
41
On November 11, 2022, the Companys board of directors declared a distribution for the
quarter ended December 31, 2022 of $0.13 per share payable on January 10, 2023 to stockholders of record as of December 16, 2022 and a supplemental distribution of $0.02 per share, payable on January 10, 2023, to stockholders of
record as of December 16, 2022.