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Form 10-Q NexPoint Capital, Inc. For: Jun 30

August 12, 2022 4:37 PM EDT

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED June 30, 2022

OR

 

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

FOR THE TRANSITION PERIOD FROM                      TO                     

COMMISSION FILE NUMBER: 814-01074

 

 

NexPoint Capital, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   38-3926499

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

300 Crescent Court, Suite 700

Dallas, Texas

  75201
(Address of principal executive offices   (Zip Code)

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

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

None

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

Common Stock, par value $0.001 per share

 

 

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

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

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

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
Emerging growth company      Yes  ☐    No  ☒ 

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

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

As of June 30, 2022, the Registrant had 9,863,444 shares of common stock, $0.001 par value, outstanding.

 

 

 


NexPoint Capital, Inc.

Statements of Assets and Liabilities

 

     June 30, 2022
(Unaudited)
    December 31,
2021
 

Assets

 

Unaffiliated investments, at fair value (cost of $41,819,356 and $42,376,505, respectively)

   $ 43,670,720     $ 47,457,661  

Affiliated investments, at fair value (cost of $12,352,234 and $12,394,189, respectively)(1)

     12,797,415       12,778,650  

Cash and cash equivalents

     3,527,160       2,811,171  

Receivable for investments sold

     3,815       990,537  

Dividends and interest receivable

     105,804       440,404  

Receivable from Adviser(2)

     95,565       95,458  

Prepaid expenses

     7,333       13,222  
  

 

 

   

 

 

 

Total assets

     60,207,812       64,587,103  
  

 

 

   

 

 

 

Liabilities

 

Payable for investments purchased

     —         301,369  

Payable to Adviser(2)

     339,454       378,587  

Accrued expenses and other liabilities

     166,176       72,178  

Distributions payable

     887,710       896,061  
  

 

 

   

 

 

 

Total liabilities

     1,393,340       1,648,195  
  

 

 

   

 

 

 

Commitments and contingencies(3)

 

Net assets

 

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

     —         —    

Common stock, $0.001 par value (200,000,000 shares authorized, 9,863,444 and 9,956,228 shares issued and outstanding, respectively)

     9,863       9,956  

Paid-in capital in excess of par

     90,575,030       91,135,719  

Distributable earnings (accumulated loss)

     (31,770,421     (28,206,767
  

 

 

   

 

 

 

Total net assets

   $ 58,814,472     $ 62,938,908  
  

 

 

   

 

 

 

Net asset value per share of common stock

   $ 5.96     $ 6.32  
  

 

 

   

 

 

 

 

(1) 

See Note 9 for a discussion of affiliated investments.

(2) 

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

(3) 

See Note 4 and Note 7 for a discussion of the commitments and contingencies of the Company (as defined in Note 1).

 

See Notes to Financial Statements

1


NexPoint Capital, Inc.

Statements of Operations

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2022     2021     2022     2021  

Investment income:

 

Interest

   $ 486,230     $ 767,493     $ 1,048,837     $ 1,604,389  

Interest paid-in-kind

     28,068       24,965       134,779       48,649  

Dividend income from unaffiliated investments

     312,289       12,400       407,922       13,654  

Dividend income from affiliated investments (1)

     273,309       242,917       522,968       488,561  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     1,099,896       1,047,775       2,114,506       2,155,253  

Expenses:

 

Investment advisory fees (2)

     282,361       304,995       581,631       608,702  

Custodian and accounting service fees

     77,542       76,425       154,289       152,246  

Administration fees (2)

     56,734       59,201       116,335       121,740  

Stock transfer fee

     52,080       52,153       102,263       101,486  

Audit and tax fees

     40,443       41,699       79,917       96,340  

Other expenses

     26,147       9,261       46,377       70,754  

Reports to stockholders

     20,919       15,212       38,714       17,236  

Legal fees

     9,381       18,884       27,599       31,640  

Directors’ fees (2)

     3,982       4,708       7,713       8,765  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     569,589       582,538       1,154,838       1,208,909  

Expenses (waived) or recouped by the Adviser (2)

     (98,950     (68,919     (160,711     (132,365
  

 

 

   

 

 

   

 

 

   

 

 

 

Net expenses

     470,639       513,619       994,127       1,076,544  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

     629,257       534,156       1,120,379       1,078,709  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gains (losses) on investments:

 

Net realized gain (loss) on:

 

Unaffiliated investments

     98,325       243,170       340,033       151,510  

Affiliated investments (1)

     —         —         (74,604     —    

Net change in unrealized appreciation (depreciation) on:

 

Unaffiliated investments

     (1,891,728     1,216,261       (3,229,792     1,938,889  

Affiliated investments (1)

     (1,764,135     1,325,838       60,720       2,424,374  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gains (losses)

     (3,557,538     2,785,269       (2,903,643     4,514,773  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

   $ (2,928,281   $ 3,319,425     $ (1,783,264   $ 5,593,482  
  

 

 

   

 

 

   

 

 

   

 

 

 

Per share information - basic and diluted per common share

 

Net investment income:

   $ 0.06     $ 0.05     $ 0.11     $ 0.10  

Earnings (loss) per share:

   $ (0.29   $ 0.32     $ (0.18   $ 0.54  

Weighted average shares outstanding:

     9,949,487       10,301,897       9,970,028       10,404,696  

 

(1) 

See Note 9 for a discussion of affiliated investments.

(2) 

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

 

See Notes to Financial Statements

2


NexPoint Capital, Inc.

Statements of Changes in Net Assets

(Unaudited)

 

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

Balance at March 31, 2021

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

Increase (decrease) in net assets resulting from operations

 

Net investment income

     —         —         —         534,156       534,156  

Net realized gain (loss) on investments

     —         —         —         243,170       243,170  

Net change in unrealized appreciation (depreciation) on investments

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

Shareholder distributions:

 

Issuance of common stock

     —         —         —         —         —    

Repurchase of common stock

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

Reinvestment of common stock

     53,025       53       331,353       —         331,406  

Distributions to stockholders

     —         —         —         (909,619     (909,619
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2021

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Distributions to stockholders per share

     —       $ —       $ —       $ 0.09     $ 0.09  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2020

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

Increase (decrease) in net assets resulting from operations

 

Net investment income

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

Net realized gain (loss) on investments

     —         —         —         151,510       151,510  

Net change in unrealized appreciation (depreciation) on investments

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

Shareholder distributions:

 

Issuance of common stock

     —         —         —         —         —    

Repurchase of common stock

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

Reinvestment of common stock

     109,360       109       676,628       —         676,737  

Distributions to stockholders

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2021

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Distributions to stockholders per share

     —       $ —       $ —       $ 0.18     $ 0.18  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

See Notes to Financial Statements

3


NexPoint Capital, Inc.

Statements of Changes in Net Assets

(Unaudited)

 

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

(Accumulated
Loss)
    Total
Net Assets
 

Balance at March 31, 2022

     9,918,671     $ 9,919     $ 90,891,788     $ (27,954,430   $ 62,947,277  

Increase (decrease) in net assets resulting from operations

 

Net investment income

     —         —         —         629,257       629,257  

Net realized gain (loss) on investments

     —         —         —         98,325       98,325  

Net change in unrealized appreciation (depreciation) on investments

     —         —         —         (3,655,862     (3,655,862

Shareholder distributions:

 

Issuance of common stock

     —         —         —         —         —    

Repurchase of common stock

     (102,662     (103     (617,924     —         (618,027

Reinvestment of common stock

     47,435       47       301,165       —         301,212  

Distributions to stockholders

     —         —         —         (887,710     (887,710
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total increase (decrease) for the three months ended June 30, 2022

     (55,227     (56     (316,759     (3,815,990     (4,132,805
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2022

     9,863,444     $ 9,863     $ 90,575,029     $ (31,770,420   $ 58,814,472  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Distributions to stockholders per share

     —       $ —       $ —       $ 0.09     $ 0.09  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2021

     9,956,228     $ 9,956     $ 91,135,719     $ (28,206,767   $ 62,938,908  

Increase (decrease) in net assets resulting from operations

 

Net investment income

     —         —         —         1,120,379       1,120,379  

Net realized gain (loss) on investments

     —         —         —         265,429       265,429  

Net change in unrealized appreciation (depreciation) on investments

     —         —         —         (3,169,072     (3,169,072

Shareholder distributions:

 

Issuance of common stock

     —         —         —         —         —    

Repurchase of common stock

     (188,661     (189     (1,167,957     —         (1,168,146

Reinvestment of common stock

     95,877       96       607,268       —         607,364  

Distributions to stockholders

     —         —         —         (1,780,390     (1,780,390
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total increase (decrease) for the six months ended June 30, 2022

     (92,784     (93     (560,689     (3,563,654     (4,124,436
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2022

     9,863,444     $ 9,863     $ 90,575,030     $ (31,770,421   $ 58,814,472  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Distributions to stockholders per share

     —       $ —       $ —       $ 0.18     $ 0.18  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

See Notes to Financial Statements

4


NexPoint Capital, Inc.

Statements of Cash Flows

(Unaudited)

 

     Six Months Ended
June 30,
 
     2022     2021  

Cash flows provided by (used in) operating activities

 

Net increase (decrease) in net assets resulting from operations

   $ (1,783,264   $ 5,593,482  

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

    

Purchases of investment securities

     (8,146,735     (402,261

Payment-in-kind investments

     (134,779     (48,802

Proceeds from sales and principal repayments of investment securities

     9,314,826       7,799,355  

Net realized gain (loss) on investments

     (265,429     (151,510

Net change in unrealized (appreciation) depreciation on investments

     3,169,072       (4,363,263

Amortization of premium/discount, net

     (168,779     (496,345

Change in operating assets and liabilities:

    

(Increase) decrease in receivable for investments sold

     986,722       (21,391

(Increase) decrease in dividends and interest receivable

     334,600       (15,007

(Increase) decrease in receivable from Adviser

     (107     32,623  

(Increase) decrease in prepaid expenses

     5,889       (5,499

Increase (decrease) in payable for investments purchased

     (301,369     —    

Increase (decrease) in payable to Adviser

     (39,133     (59,341

Increase (decrease) in accrued expenses and other liabilities

     93,998       (66,747
  

 

 

   

 

 

 

Net cash flows provided by (used in) operating activities

     3,065,512       7,795,294  
  

 

 

   

 

 

 

Cash flows provided by (used in) financing activities

 

Repurchase of common stock, net of payable

     (1,168,146     (3,028,922

Distributions paid in cash

     (1,181,377     (1,190,167
  

 

 

   

 

 

 

Net cash flows (used in) financing activities

     (2,349,523     (4,219,089
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     715,989       3,576,205  
  

 

 

   

 

 

 

Cash and cash equivalents

 

Beginning of the period

     2,811,171       729,467  
  

 

 

   

 

 

 

End of the period

   $ 3,527,160     $ 4,305,672  
  

 

 

   

 

 

 

Supplemental disclosure and non-cash financing activities

 

Paid-in-kind interest income

   $ 134,779     $ 48,802  

Reinvestment of distributions paid

   $ 607,364     $ 676,737  

Local and excise taxes paid

   $ 36,574     $ 34,999  

 

See Notes to Financial Statements

5


NexPoint Capital, Inc.

Schedule of Investments

As of June 30, 2022

(Unaudited)

 

Portfolio Company(1)(2)

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

Senior Secured Loans – 26.5%(4)

 

Healthcare – 24.8%

                

Auris Luxembourg III S.a.r.l. (First Lien
Term Loan)(5) (6) (7) (8)

   L + 375     1.83%        2/27/2026      $ 1,476,539      $ 1,472,199      $ 1,339,959  

CCS Medical, Inc (First Lien Term Loan)(7) (8) (9)

   13% Fixed        4/7/2026        3,000,000        2,917,930        3,000,000  

CNT Holdings I Corp (Second Lien
Term Loan)(10)

   L + 675     1.19%        10/16/2028        1,500,000        1,493,697        1,451,250  

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

   4% Fixed        7/1/2026        333,333        333,887        314,166  

Covenant Surgical Partners, Inc. (First Lien
Term Loan)(10)

   L + 400     1.62%        7/1/2026        1,621,402        1,624,197        1,528,171  

Envision Healthcare Corp. (First Lien
Term Loan)(10)

   L + 375     1.67%        10/10/2025        4,552,016        3,616,878        1,548,823  

RxBenefits, Inc. (First Lien Term Loan)(5) (7) (8)

   L + 450     2.11%        12/17/2027        3,203,909        3,151,561        2,979,636  

Sound Inpatient Physicians (Second Lien
Term Loan)(10)

   L + 675     1.67%        6/26/2026        1,555,556        1,473,265        1,456,218  

Wellpath Holdings, Inc. (First Lien Term Loan)(9)

   L + 550     1.57%        10/1/2025        989,744        984,580        968,093  
                

 

 

 
                   14,586,316  
                

 

 

 

Telecommunication Services – 1.7%

                

TerreStar Corp. (First Lien Term Loan F)(7) (8)

   11% PIK        2/28/2024        182,654        182,654        181,192  

TerreStar Corp. (First Lien Term Loan H)(7) (8)

   11% PIK        2/28/2024        30,446        30,446        30,203  

TerreStar Corp. (First Lien Term Loan G)(7) (8)

   11% PIK        2/28/2024        32,632        32,632        32,371  

TerreStar Corp. (First Lien Term Loan E)(7) (8)

   11% PIK        2/28/2024        771,526        771,526        765,354  
                

 

 

 
                   1,009,120  
                

 

 

 

Total Senior Secured Loans

                   15,595,436  
                

 

 

 

Asset-Backed Securities – 0.3%

                

Financials – 0.3%

                

Grayson Investor Corp.(6) (7) (8) (11) (12) (13)

             800        218,666        123,304  

PAMCO CLO 1997-1A B(6) (7) (8) (11) (13) (14)

             295,435        169,875        59,349  
                

 

 

 
                   182,653  
                

 

 

 

Total Asset-Backed Securities

                   182,653  
                

 

 

 

Corporate Bonds – 4.9%

                

Healthcare – 4.4%

                

Hadrian Merger Sub, Inc.(11)

   8.500%        5/1/2026        2,728,000        2,428,516        2,597,411  
                

 

 

 

Media/Telecommunications – 0.5%

                

iHeartCommunications, Inc.(6)

   6.375%        5/1/2026        116,808        313,455        108,241  

iHeartCommunications, Inc.(6)

   8.375%        5/1/2027        214,073        584,792        170,578  
                

 

 

 
                   278,819  
                

 

 

 

Total Corporate Bonds

                   2,876,230  
                

 

 

 
                       Shares                

Common Stocks – 38.1%

                

Chemicals – 0.1%

                

MPM Holdings, Inc.(15)

             8,500        17,000        42,500  
                

 

 

 

Energy – 2.4%

                

Quarternorth Energy, Inc.

             11,534        981,428        1,401,381  
                

 

 

 

Financials – 2.8%

                

American Banknote Corp.(7) (8) (15)

             750,000        2,062,500        1,633,439  
                

 

 

 

Healthcare – 0.5%

                

Amryt Pharma, PLC(6) (15) (16)

             40,000        500,000        279,600  
                

 

 

 

Real Estate – 21.3%

                

IQHQ, Inc.(7) (8)

             100,000        1,500,000        2,800,000  

Nexpoint Real Estate Finance, Inc.(17)

             481,670        9,960,591        9,763,443  
                

 

 

 
                   12,563,443  
                

 

 

 

 

 

See Notes to Financial Statements.

6


NexPoint Capital, Inc.

Schedule of Investments (continued)

As of June 30, 2022

(Unaudited)

 

Real Estate Investment Trust (REIT) – 2.5%

                

NexPoint Residential Trust, Inc. (6) (17)

             23,409      $ 725,531      $ 1,463,325  
                

 

 

 

Service – 0.0%

                

Wayne Services Legacy, Inc. (7) (8) (15)

             237        253,404        5,172  
                

 

 

 

Telecommunication Services – 8.5%

                

TerreStar Corp. (7) (8) (15)

             14,035        1,599,990        5,001,793  
                

 

 

 

Total Common Stocks

                   22,390,653  
                

 

 

 

LLC Interests – 7.6%

                

Consumer Products – 4.9%

                

US Gaming, LLC (7) (8) (15)

             2,000        2,000,000        2,910,987  
                

 

 

 

Real Estate – 2.7%

                

SFR WLIF III, LLC (7) (8) (17)

             451,112        451,112        423,336  

NexPoint Capital REIT, LLC (7) (8) (17)

             100        1,215,000        1,147,311  
                

 

 

 
                   1,570,647  
                

 

 

 

Total LLC Interests

                   4,481,634  
                

 

 

 
     Preferred
Dividend
Rate
                                   

Preferred Stocks – 18.4%

                

Financials – 2.6%

                

777 Partners, LLC

     10.000                            750        750,000        750,000  

United Fidelity Bank FSB

     7.000           1,000        1,000,000        770,000  
                

 

 

 
                   1,520,000  
                

 

 

 

Healthcare – 15.8%

                

Apnimed, Inc. (7) (8)

     8.000           135,122        1,199,993        1,199,993  

Sapience Therapeutics, Inc. (Series B Preferred Shares) (7) (8)

     8.000           1,619,048        4,080,000        4,079,999  

Sapience Therapeutics, Inc. (Series B-1 Preferred Shares) (7) (8)

             1,111,111        4,000,000        4,000,000  
                

 

 

 
                   9,279,992  
                

 

 

 

Total Preferred Stocks

                   10,799,992  
                

 

 

 

Warrants – 0.2%

                

Energy – 0.2%

                

QuarterNorth Tranche 1 (15)

          8/27/2029        5,738        16,122        55,946  

QuarterNorth Tranche 2 (15)

          8/27/2029        11,051        5,175        74,594  
                

 

 

 
                   130,540  
                

 

 

 

Media/Telecommunications – 0.0%

                

iHeartMedia, Inc. (6) (15)

          5/1/2039        2,875        52,988        10,997  
                

 

 

 

Total Warrants

                   141,537  
                

 

 

 

Total Investments – 96.0%

              $ 54,171,590      $ 56,468,135  
             

 

 

    

 

 

 

Cash Equivalents – 5.7% (18)

                 $ 3,357,869  

Other Assets & Liabilities, net – (1.7%)

                 $ (1,011,532
                

 

 

 

Net Assets – 100.0%

                 $ 58,814,472  
                

 

 

 

 

(1) 

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

(2) 

All investments are denominated in United States Dollars.

(3) 

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

(4) 

Senior secured loans in which the Company invests generally pay interest at rates which are periodically determined by reference to a base lending rate plus a spread (unless otherwise identified, all senior secured loans carry a variable rate of interest). These base lending rates are generally (i) the Prime Rate offered by one or more major United States banks, (ii) the lending rate offered by one or more European banks such as the London Interbank Offered Rate (“LIBOR”) or (iii) the coupon rate. Rate shown represents the actual rate at June 30, 2022. Senior secured loans, while exempt from registration under the Securities Act of 1933 (the “1933 Act”), contain certain restrictions on resale and cannot be sold publicly. Senior secured floating rate loans often require prepayments from excess cash flow or permit the borrower to repay at its election. The degree to which borrowers repay, whether as a contractual requirement or at their election, cannot be predicted with accuracy. As a result, the actual remaining maturity may be substantially less than the stated maturity shown.

(5) 

The interest rate on these investments is subject to a base rate of 6-Month LIBOR, which at June 30, 2022 was 2.94%. The LIBOR rate used to calculate interest is the higher of the prevailing 6 month LIBOR rate in effect on the date of the semiannual reset, or the LIBOR base rate floor shown.

 

 

See Notes to Financial Statements.

7


NexPoint Capital, Inc.

Schedule of Investments (continued)

As of June 30, 2022

(Unaudited)

 

(6) 

The investment is not a qualifying asset under Section 55 of the 1940 Act. A business development company, such as the Company, may not acquire any asset other than a qualifying asset, unless at the time the acquisition is made, qualifying assets represent at least 70% of the business development company’s total assets. Non-qualifying assets represented 5.9% of the Company’s total assets as of June 30, 2022.

(7) 

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

(8) 

Represents fair value as determined by the Company’s Board of Directors (the “Board”), or its designee in good faith, pursuant to the policies and procedures approved by the Board. The Board considers fair valued securities to be securities for which market quotations are not readily available and these securities may be valued using a combination of observable and unobservable inputs. Securities with a total aggregate value of $31,713,398 or 53.9% of net assets were fair valued under the Company’s valuation procedures as of June 30, 2022.

(9) 

The interest rate on these investments is subject to a base rate of 3-Month LIBOR, which at June 30, 2022 was 2.29%. The LIBOR rate used to calculate interest is the higher of the prevailing 3 month LIBOR rate in effect on the date of the quarterly reset, or the LIBOR base rate floor shown.

(10) 

The interest rate on these investments is subject to a base rate of 1-Month LIBOR, which at June 30, 2022 was 1.79%. The LIBOR rate used to calculate interest is the higher of the prevailing 1 month LIBOR rate in effect on the date of the monthly reset, or the LIBOR base rate floor shown.

(11) 

Securities exempt from registration under Rule 144A of the 1933 Act. These securities may only be resold in transactions exempt from registration to qualified institutional buyers. As of June 30, 2022, these securities amounted to $2,780,064, or 4.7% of net assets.

(12) 

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

(13) 

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

(14) 

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

(15) 

Non-income producing security.

(16) 

Securities exempt from registration under 1933 Act and may be deemed to be “restricted securities” under the Securities Act. As of June 30, 2022, the aggregate fair value of these securities is $279,600 or 0.5% of the Company’s net assets. The acquisition dates of the restricted securities are as follows:

 

Investment

  

Acquition Date

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

 

(17) 

Represents an affiliated issuer. Assets with a total aggregate fair value of $12,797,415, or 21.8% of net assets, were affiliated with the Company as of June 30, 2022 see Note 9.

(18) 

State Street U.S. Government Money Market Fund.

Glossary

 

PIK 

Payment-in-Kind

 

 

See Notes to Financial Statements.

8


NexPoint Capital, Inc.

Schedule of Investments

As of December 31, 2021

 

Portfolio Company(1)(2)

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

Senior Secured Loans – 40.1%(4)

               

Healthcare – 38.6%

               

Auris Luxembourg III S.a.r.l. (First Lien Term
Loan)(5) (6)

   L + 375     0.09     2/27/2026      $ 2,515,096      $ 2,506,780      $ 2,500,169  

BW NHHC Holdco, Inc. (First Lien Term Loan)(7)

   L + 500     0.16     5/15/2025        4,467,593        3,274,720        3,824,818  

CNT Holdings I Corp (Second Lien Term Loan)(7)

   L + 675     0.75     11/16/2028        1,500,000        1,493,315        1,513,125  

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

   4% Fixed       7/1/2026        333,333        333,956        330,027  

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

   L + 400     0.09     7/1/2026        1,629,539        1,632,667        1,613,375  

Envision Healthcare Corp. (First Lien Term Loan)(5)

   L + 375     0.09     10/10/2025        4,580,543        3,578,822        3,700,232  

NMSC Holdings, Inc. (First Lien Term Loan)(5)

   L + 500     1.00     4/19/2023        1,007,994        1,006,001        1,008,246  

RxBenefits, Inc. (First Lien Term Loan)(7)

   L + 500     5.25     12/17/2027        3,211,980        3,155,476        3,222,017  

Sapience Therapeutics, Inc (First Lien Term
Loan) (8)(9)

   8% Fixed       12/9/2023        4,000,000        4,000,000        4,000,000  

Sound Inpatient Physicians (Second Lien Term
Loan)(5)

   L + 675     0.09     6/26/2026        1,555,556        1,464,678        1,559,444  

Wellpath Holdings, Inc. (First Lien Term Loan)(5)

   L + 550     0.09     10/1/2025        994,872        988,966        983,525  
               

 

 

 
                  24,254,978  
               

 

 

 

Telecommunication Services – 1.5%

               

TerreStar Corp. (First Lien Term Loan E)(8) (9)

   11% PIK       2/27/2022        729,979        729,979        729,979  

TerreStar Corp. (First Lien Term Loan F)(8) (9)

   11% PIK       2/28/2022        172,817        172,817        172,817  

TerreStar Corp. (First Lien Term Loan G)(8) (9)

   11% PIK       2/28/2022        30,875        30,875        30,875  

TerreStar Corp. (First Lien Term Loan H)(8) (9)

   11% PIK       2/28/2022        28,807        28,807        28,807  
               

 

 

 
                  962,478  
               

 

 

 

Total Senior Secured Loans

                  25,217,456  
               

 

 

 

Asset-Backed Securities – 0.6%

               

Financials – 0.6%

               

Grayson Investor Corp.(6) (8) (9) (10) (11) (12) (13)

         11/1/2021        800        218,665        304,000  

PAMCO CLO 1997-1A B(6) (8) (9) (10) (12) (13)

            354,096        203,606        101,040  
               

 

 

 
                  405,040  
               

 

 

 

Total Asset-Backed Securities

                  405,040  
               

 

 

 

Corporate Bonds – 10.9%

               

Healthcare – 10.3%

               

Hadrian Merger Sub, Inc.(10)

   8.500%       5/1/2026        2,728,000        2,398,666        2,819,320  

Surgery Center Holdings, Inc.(6) (10)

   6.750%       7/1/2025        3,630,000        3,520,855        3,661,000  
               

 

 

 
                  6,480,320  
               

 

 

 

Media/Telecommunications – 0.6%

               

iHeartCommunications, Inc.(6)

   6.375%       5/1/2026        115,507        313,455        119,965  

iHeartCommunications, Inc.(6)

   8.375%       5/1/2027        214,073        584,792        225,981  
               

 

 

 
                  345,946  
               

 

 

 

Total Corporate Bonds

                  6,826,266  
               

 

 

 
                      Shares                

Common Stocks – 29.1%

               

Chemicals – 0.1%

               

MPM Holdings, Inc. (14)

            8,500        17,000        42,500  
               

 

 

 

Energy – 1.7%

               

Quarternorth Energy, Inc.

            11,534        981,429        1,092,846  
               

 

 

 

Financials – 3.5%

               

American Banknote Corp.(8) (9) (14)

            750,000        2,062,500        2,208,750  
               

 

 

 

Healthcare – 0.7%

               

Amryt Pharma, PLC(6) (14) (15)

            40,000        500,000        432,000  
               

 

 

 

Real Estate – 12.5%

               

IQHQ, Inc.(8) (9)

            100,000        1,500,000        1,823,000  

Nexpoint Real Estate Finance, Inc.(16)

            315,631        6,686,306        6,075,895  
               

 

 

 
                  7,898,895  
               

 

 

 

 

 

See Notes to Financial Statements.

9


NexPoint Capital, Inc.

Schedule of Investments (continued)

As of December 31, 2021

 

Real Estate Investment Trust (REIT) – 3.1%

                

NexPoint Residential Trust, Inc. (6) (16)

             23,173      $ 707,883      $ 1,942,593  
                

 

 

 

Service – 0.0%

                

Wayne Services Legacy, Inc. (8) (9) (14)

             237        253,404        5,172  
                

 

 

 

Telecommunication Services – 7.5%

                

TerreStar Corp. (8) (9) (14)

             14,035        1,599,990        4,706,357  
                

 

 

 

Total Common Stocks

                   18,329,113  
                

 

 

 

LLC Interests – 12.0%

                

Consumer Products – 4.5%

                

US Gaming, LLC (8) (9) (14)

             2,000        2,000,000        2,812,212  
                

 

 

 

Real Estate – 7.5%

                

SFR WLIF II, LLC (8) (9) (16)

             3,348,888        3,348,888        3,196,246  

SFR WLIF III, LLC (8) (9) (16)

             1,651,112        1,651,112        1,563,916  
                

 

 

 
                   4,760,162  
                

 

 

 

Total LLC Interests

                   7,572,374  
                

 

 

 
     Preferred
Dividend
Rate
                                   

Preferred Stocks – 2.7%

                

Financials – 2.7%

                

777 Partners, LLC

        10.000        750        750,000        750,000  

United Fidelity Bank FSB

        7.000        1,000        1,000,000        975,000  
                

 

 

 
                   1,725,000  
                

 

 

 

Total Preferred Stocks

                   1,725,000  
                

 

 

 

Warrants – 0.3%

                

Energy – 0.2%

                

QuarterNorth Tranche 1 (14)

          8/27/2029        5,738        16,122        48,056  

QuarterNorth Tranche 2 (14)

          8/27/2029        11,051        5,175        64,002  
                

 

 

 
                   112,058  
                

 

 

 

Healthcare – 0.0%

                

Gemphire Therapeutics, Inc. (8) (9) (14)

          3/15/2022        4,752        —          —    
                

 

 

 

Media/Telecommunications – 0.1%

                

iHeartMedia, Inc. (6) (14)

          5/1/2039        2,875        52,987        49,004  
                

 

 

 

Total Warrants

                   161,062  
                

 

 

 

Total Investments – 95.7%

              $ 54,770,694      $ 60,236,311  
             

 

 

    

 

 

 

Cash Equivalents – 4.3%(17)

                 $ 2,704,193  

Other Assets & Liabilities, net – 0.0%

                 $ (1,596
                

 

 

 

Net Assets – 100.0%

                 $ 62,938,908  
                

 

 

 

 

(1) 

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

(2) 

All investments are denominated in United States Dollars.

(3) 

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

(4) 

Senior secured loans in which the Company invests generally pay interest at rates which are periodically determined by reference to a base lending rate plus a spread (unless otherwise identified, all senior secured loans carry a variable rate of interest). These base lending rates are generally (i) the Prime Rate offered by one or more major United States banks, (ii) the lending rate offered by one or more European banks such as the London Interbank Offered Rate (“LIBOR”) or (iii) the coupon rate. Rate shown represents the actual rate at December 31, 2021. Senior secured loans, while exempt from registration under the Securities Act of 1933 (the “1933 Act”), contain certain restrictions on resale and cannot be sold publicly. Senior secured floating rate loans often require prepayments from excess cash flow or permit the borrower to repay at its election. The degree to which borrowers repay, whether as a contractual requirement or at their election, cannot be predicted with accuracy. As a result, the actual remaining maturity may be substantially less than the stated maturity shown.

(5) 

The interest rate on these investments is subject to a base rate of 1-Month LIBOR, which at December 31, 2021 was 0.10%. The LIBOR rate used to calculate interest is the higher of the prevailing 1 month LIBOR rate in effect on the date of the monthly reset, or the base rate floor shown.

(6) 

The investment is not a qualifying asset under Section 55 of the 1940 Act. A business development company, such as the Company (“BDC”), may not acquire any asset other than a qualifying asset, unless at the time the acquisition is made, qualifying assets represent at least 70% of the business development company’s total assets. Non-qualifying assets represented 14.8% of the Company’s total assets as of December 31, 2021.

(7) 

The interest rate on these investments is subject to a base rate of 3-Month LIBOR, which at December 31, 2021 was 0.21%. The LIBOR rate used to calculate interest is the higher of the prevailing 3 month LIBOR rate in effect on the date of the quarterly reset, or the base rate floor shown.

 

 

See Notes to Financial Statements.

10


NexPoint Capital, Inc.

Schedule of Investments (continued)

As of December 31, 2021

 

 

 

(8) 

Represents fair value as determined by the Company’s Board of Directors (the “Board”), or its designee in good faith, pursuant to the policies and procedures approved by the Board. The Board considers fair valued securities to be securities for which market quotations are not readily available and these securities may be valued using a combination of observable and unobservable inputs. Securities with a total aggregate value of $21,683,171 or 34.5% of net assets were fair valued under the Company’s valuation procedures as of December 31, 2021.

(9) 

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

(10) 

Securities exempt from registration under Rule 144A of the 1933 Act. These securities may only be resold in transactions exempt from registration to qualified institutional buyers. As of December 31, 2021, these securities amounted to $6,885,360, or 10.9% of net assets.

(11) 

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

(12) 

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

(13) 

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

(14) 

Non-income producing security.

(15) 

Securities exempt from registration under the 1933 Act and may be deemed to be “restricted securities” under the Securities Act. As of December 31, 2021, the aggregate fair value of these securities is $432,000 or 0.7% of the Company’s net assets. The acquisition dates of the restricted securities are as follows:

 

Investment

  

Acquition Date

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

 

(16) 

Represents an affiliated issuer. Assets with a total aggregate fair value of $12,778,650, or 20.3% of net assets, were affiliated with the Company as of December 31, 2021. See Note 9.

(17) 

State Street U.S. Government Money Market Fund.

Glossary

 

PIK 

Payment-in-Kind

 

 

See Notes to Financial Statements.

11


NexPoint Capital, Inc.

Notes to Financial Statements (Unaudited)

Note 1 — Organization

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

The Company was formed in Delaware on September 30, 2013 and formally commenced operations on September 2, 2014 upon satisfying the minimum offering requirement by raising gross proceeds of $10.0 million in connection with a private placement with NexPoint Advisors, L.P. (the “Adviser”), our external advisor. In aggregate as of June 30, 2022, the Adviser controls 2,549,002 total shares of common stock (or 25.8%) of the Company, including reinvestment of dividends, for a net amount of approximately $15.2 million.

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

Note 2 — Summary of Significant Accounting Policies

Basis of Accounting

The accompanying financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Additionally, the accompanying financial statements of the Company and related financial information have been prepared pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ended December 31, 2022. The interim financial data as of June 30, 2022 and for the three and six months ended June 30, 2022 and 2021 is unaudited. In the opinion of management, the interim financial data includes all adjustments, consisting only of the normal recurring adjustments, necessary to a fair statement of the results for the interim periods.

Use of Estimates

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

Statements of Cash Flows

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

 

12


Cash and Cash Equivalents

The Company considers liquid assets deposited with a bank, money market funds, and certain short-term debt instruments with original maturities of three months or less to be cash equivalents. These investments represent amounts held with financial institutions that are readily accessible to pay Company expenses or purchase investments. Cash and cash equivalents are valued at cost plus accrued interest, which approximates fair value. The value of cash equivalents denominated in foreign currencies, if any, is determined by converting to U.S. dollars on the date of the Statements of Assets and Liabilities. As of June 30, 2022 and December 31, 2021, the Company had cash and cash equivalents of $3,527,160 and $2,811,171, respectively. As of June 30, 2022 and December 31, 2021, $3,357,869 and $2,704,193 was held in the State Street U.S. Government Money Market Fund, and $169,291 and $106,978 was held in a custodial account with State Street Bank and Trust Company, respectively.

Securities Sold Short and Restricted Cash

The Company may sell securities short. A security sold short is a transaction in which the Company sells a security it does not own in anticipation that the market price of that security will decline. When the Company sells a security short, it must borrow the security sold short from a broker-dealer and deliver it to the buyer upon conclusion of the transaction. The Company may have to pay a fee to borrow particular securities and is often obligated to pay over any dividends or other payments received on such borrowed securities. Cash held as collateral for securities sold short is classified as restricted cash on the Statements of Assets and Liabilities, when applicable. Securities held as collateral for securities sold short are shown on the Schedules of Investments for the Company, as applicable. As of June 30, 2022 and December 31, 2021, the Company did not have any securities sold short.

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

Other Fee Income

Fee income may consist of origination/closing fees, amendment fees, administrative agent fees, transaction break-up fees and other miscellaneous fees. Origination fees, amendment fees, and other similar fees are non-recurring fee sources. Such fees are received on a transaction by transaction basis and do not constitute a regular stream of income. For the three and six months ended June 30, 2022, the Company recognized $0 and $0 of fee income, respectively. For the three and six months ended June 30, 2021, the Company recognized $0 and $0 of fee income, respectively.

Fair Value of Financial Instruments

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

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

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

 

   

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

 

13


   

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

 

   

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

 

   

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

 

   

Based on this information, the Board discusses valuations and determines the fair value of each investment in the portfolio in good faith pursuant to board-approved policies and procedures.

As of June 30, 2022, the Company held the following investments for which a sufficient level of current, reliable market quotations were not available:

 

Instrument

  

Type

   Fair value  

Grayson Investor Corp.

   Asset-Backed Securities    $ 123,304  

PAMCO CLO 1997-1A B

   Asset-Backed Securities      59,349  

American Banknote Corp.

   Common Stocks      1,633,439  

IQHQ, Inc.

   Common Stocks      2,800,000  

TerreStar Corp.

   Common Stocks      5,001,793  

Wayne Services Legacy, Inc.

   Common Stocks      5,172  

NexPoint Capital REIT, LLC

   LLC Interests      1,147,311  

SFR WLIF III, LLC

   LLC Interests      423,336  

US Gaming, LLC

   LLC Interests      2,910,987  

Apnimed, Inc.

   Preferred Stocks      1,199,993  

Sapience Therapeutics, Inc. (Series B Preferred Shares)

   Preferred Stocks      4,079,999  

Sapience Therapeutics, Inc. (Series B-1 Preferred Shares)

   Preferred Stocks      4,000,000  

Auris Luxembourg III S.a.r.l.

   Senior Secured Loans      1,339,959  

CCS Medical, Inc.

   Senior Secured Loans      3,000,000  

RxBenefits, Inc.

   Senior Secured Loans      2,979,636  

TerreStar Corp.

   Senior Secured Loans      181,192  

TerreStar Corp.

   Senior Secured Loans      30,203  

TerreStar Corp.

   Senior Secured Loans      32,371  

TerreStar Corp.

   Senior Secured Loans      765,354  

 

14


As of December 31, 2021, the Company held the following investments for which a sufficient level of current, reliable market quotations were not available:

 

Instrument

  

Type

   Fair value  

Grayson Investor Corp.

   Asset-Backed Securities    $ 304,000  

PAMCO CLO 1997-1A B

   Asset-Backed Securities      101,040  

American Banknote Corp.

   Common Stocks      2,208,750  

IQHQ, Inc.

   Common Stocks      1,823,000  

TerreStar Corp.

   Common Stocks      4,706,357  

Wayne Services Legacy, Inc.

   Common Stocks      5,172  

SFR WLIF III, LLC

   LLC Interests      1,563,916  

SFR WLIF II, LLC

   LLC Interests      3,196,246  

US Gaming, LLC

   LLC Interests      2,812,212  

Sapience Therapeutics, Inc

   Senior Secured Loans      4,000,000  

TerreStar Corp.

   Senior Secured Loans      729,979  

TerreStar Corp.

   Senior Secured Loans      172,817  

TerreStar Corp.

   Senior Secured Loans      30,875  

TerreStar Corp.

   Senior Secured Loans      28,807  

Gemphire Therapeutics, Inc.

   Warrants      —    

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

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

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

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

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

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

 

15


To the extent that the Company holds investments for which no active secondary market exists and, therefore, no bid and ask prices can be readily obtained, the Valuation Committee and the Board utilize an independent third-party valuation service to value such investments in a manner consistent with the Company’s multistep valuation process previously described.

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

As of June 30, 2022, the Company’s investments consisted of senior secured loans, asset-backed securities, common stocks, LLC interests, preferred stocks, corporate bonds, and warrants, which may be purchased for a fraction of the price of the underlying securities. The fair value of the Company’s loans, bonds and asset-backed securities are generally based on quotes received from brokers or independent pricing services. Loans, bonds and asset-backed securities with quotes that are based on actual trades with a sufficient level of activity on or near the measurement date are classified as Level 2 assets. Loans, bonds and asset-backed securities that are priced using quotes derived from implied values, indicative bids or a limited number of actual trades are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable.

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

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

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

 

 

16


The inputs or methodology used for valuing investments are not necessarily an indication of the risk associated with investing in those investments. The following are summaries of the Company’s investments categorized within the fair value hierarchy as of June 30, 2022 and December 31, 2021:

 

     June 30, 2022  

Investments

   Level 1      Level 2      Level 3      Total  
                             

Assets

 

Senior Secured Loans

 

Healthcare

   $ —        $ 7,266,721      $ 7,319,595      $ 14,586,316  

Telecommunication Services

     —          —          1,009,120        1,009,120  

Asset-Backed Securities

 

Financials

     —          —          182,653        182,653  

Corporate Bonds

 

Healthcare

     —          2,597,411        —          2,597,411  

Media/Telecommunications

     —          278,819        —          278,819  

Common Stocks

 

Chemicals

     —          42,500        —          42,500  

Energy

     —          1,401,381        —          1,401,381  

Financials

     —          —          1,633,439        1,633,439  

Healthcare

     279,600        —          —          279,600  

Real Estate

     9,763,443        —          2,800,000        12,563,443  

Real Estate Investment Trusts (REITs)

     1,463,325        —          —          1,463,325  

Service

     —          —          5,172        5,172  

Telecommunication Services

     —          —          5,001,793        5,001,793  

LLC Interests

 

Consumer Products

     —          —          2,910,987        2,910,987  

Real Estate

     —          —          1,570,647        1,570,647  

Preferred Stocks

 

Financials

     —          1,520,000        —          1,520,000  

Healthcare

     —          —          9,279,992        9,279,992  

Warrants

 

Energy

     —          130,540        —          130,540  

Media/Telecommunications

     —          10,997        —          10,997  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

   $ 11,506,368      $ 13,248,369      $ 31,713,398      $ 56,468,135  
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2021  

Investments

   Level 1      Level 2      Level 3      Total  
                             

Assets

 

Senior Secured Loans

 

Healthcare

   $ —        $ 20,254,978      $ 4,000,000      $ 24,254,978  

Telecommunication Services

     —          —          962,478        962,478  

Asset-Backed Securities

 

Financials

     —          —          405,040        405,040  

Corporate Bonds

 

Healthcare

     —          6,480,320        —          6,480,320  

Media/Telecommunications

     —          345,946        —          345,946  

Common Stocks

 

Chemicals

     —          42,500        —          42,500  

Energy

     —          1,092,846        —          1,092,846  

Financials

     —          —          2,208,750        2,208,750  

Healthcare

     432,000        —          —          432,000  

Real Estate

     6,075,895        —          1,823,000        7,898,895  

Real Estate Investment Trusts (REITs)

     1,942,593        —          —          1,942,593  

Service

     —          —          5,172        5,172  

Telecommunication Services

     —          —          4,706,357        4,706,357  

LLC Interests

 

Consumer Products

     —          —          2,812,212        2,812,212  

Real Estate

     —          —          4,760,162        4,760,162  

Preferred Stocks

 

Financials

     —          1,725,000        —          1,725,000  

Warrants

           

Energy

     —          112,058           112,058  

Healthcare(1)

     —          —          —          —    

Media/Telecommunications

     —          49,004        —          49,004  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

   $ 8,450,488      $ 30,102,652      $ 21,683,171      $ 60,236,311  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Gemphire Therapeutics, Inc. Warrants at zero value.

The table below sets forth a summary of changes in the Company’s Level 3 investments (measured at fair value using significant unobservable inputs) for the six months ended June 30, 2022.

 

17


Investments:

  Balance as of
December 31,
2021
    Transfers
into
Level 3
    Transfers
out of
Level 3
    Net
amortization
(accretion) of
premium/
(discount)
    Distribution
to Return
Capital
    Net
realized
gains/
(losses)
    Net change in
unrealized
gains/
(losses)
    Purchases/
PIK
    (Sales
and
redemptions)
    Balance as of
June 30,
2022
    Change in
unrealized
gain/(loss)
on Level 3
securities still
held at period
end
 
                                                                   

Assets

                     

Senior Secured Loans

                     

Telecommunication Services

  $ 962,478     $ —       $ —       $ —       $ —       $ —       $ (8,137   $ 54,779     $ —       $ 1,009,120     $ (8,137

Healthcare

    4,000,000       4,319,594       —         7,930       —         —         82,071       2,990,000       (4,080,000     7,319,595       82,071  

Asset-Backed Securities

                     

Financials

    405,040       —         —         —         —         24,930       (188,656     —         (58,661     182,653       (188,656

Common Stocks

                     

Financials

    2,208,750       —         —         —         —         —         (575,311     —         —         1,633,439       (575,311

Real Estate

    1,823,000       —         —         —         —         —         977,000       1,500,000       (1,500,000     2,800,000       1,300,000  

Service

    5,172       —         —         —         —         —         —         —         —         5,172       —    

Telecommunication Services

    4,706,357       —         —         —         —         —         295,436       —         —         5,001,793       295,436  

LLC Interests

                     

Consumer Products

    2,812,212       —         —         —         —         —         98,775       —         —         2,910,987       98,775  

Real Estate

    4,760,162       —         —         —         —         (74,604     144,374       1,215,000       (4,474,285     1,570,647       (8,269

Preferred Stocks

                     

Healthcare

    —         —         —         —         —         —         (1     9,279,993       —         9,279,992       —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 21,683,171     $ 4,319,594     $  —     $ 7,930     $  —       $ (49,674   $ 825,550     $ 15,039,772     $ (10,112,946   $ 31,713,398     $ 995,908  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

Investments:

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

Assets

                   

Senior Secured Loans

                   

Telecommunication Services

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

Asset-Backed Securities

                   

Financials

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

Common Stocks

                   

Financials

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

Healthcare

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

Real Estate

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

Retail

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

Service

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

Telecommunication Services

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

LLC Interests

                   

Consumer Products

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

Real Estate

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

Real Estate Investment Trusts (REITs)

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

Warrants

                   

Energy

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

Healthcare

    1       —         —         —         —         —         —         —         1     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investments designated as Level 3 may include investments valued using quotes or indications furnished by brokers which are based on models or estimates and may not be executable prices. In light of the developing market conditions, the Adviser

 

18


continues to search for observable data points and evaluate broker quotes and indications received for investments. Determination of fair values is uncertain because it involves subjective judgments and estimates that are unobservable. Transfers from Level 2 to Level 3 are due to a decrease in market activity (e.g. frequency of trades), which resulted in a decrease of available market inputs to determine price. For the six months ended June 30, 2022, there were 2 transfers from Level 2 to Level 3 due to a decrease in market activity. For the six months ended June 30, 2021, there were no transfers from Level 2 to Level 3. Transfers from Level 3 to Level 2 and from Level 2 to Level 1 are due to an increase in market activity (e.g. frequency of trades), which resulted in an increase of available market inputs to determine price.

The following are summaries of significant unobservable inputs used in the fair valuations of investments categorized within Level 3 of the fair value hierarchy as of June 30, 2022 and December 31, 2021:

 

Investment

   Fair value at
June 30, 2022
     Valuation
technique
     Unobservable
inputs
  Range of input value(s)
(weighted average)
 

LLC Interests

   $ 4,481,634       

Discounted Cash Flow

Multiples Analysis

 

 

   Discount Rate

Multiple of EBITDA

   

1.49% - 5.43% (3.46%)

5.9x - 7.65x (7.125x)

 

 

Preferred Stocks

     9,279,992        Transaction Indication of Value      Cost Price     N/A  

Common Stocks

     9,440,404       

 

Discounted Cash Flow

Multiples Analysis

 

Transaction Indication of Value

Liquidation Analysis

Net Asset Value

 

 

 

 

 

 

   Discount Rate

Multiple of EBITDA

Unadjusted Price/MHz-PoP

Enterprise Value ($mm)

Recovery Rate

N/A

   

1.49% - 15.5% (8.98%)

2.75x - 4.00x (3.37x)

$0.09 - $0.95 ($0.515)

$891

75% - 100% (94%)

$28

 

 

 

 

 

 

Senior Secured Loans

     8,328,715       
Discounted Cash Flow
Transaction Indication of Value
 
 
   Discount Rate

Broker Quote

   

11.5% - 13% (12.5%)

Various

 

 

Asset-Backed Securities

     182,653        Discounted Cash Flow      Discount Rate     21% - 70% (46%)  
  

 

 

         

Total

   $ 31,713,398          
  

 

 

         

Investment

   Fair value at
December 31, 2021
     Valuation
technique
     Unobservable
inputs
  Range of input value(s)
(weighted average)
 

LLC Interest

   $ 7,572,374       

Discounted Cash Flow

Net Asset Value

Multiples Analysis

 

 

 

   Discount Rate

N/A

Multiple of EBITDA

   

1.49% - 5.43% (3.46%)

N/A

6.3x - 8.2x (7.25x)

 

 

 

Common Stock

     8,743,279       

Discounted Cash Flow

Multiples Analysis

Transaction Indication of Value

Liquidation Analysis

 

 

 

 

   Discount Rate

Multiple of EBITDA

Unadjusted Price/MHz-PoP

NAV / sh multiple

Enterprise Value ($mm)

Recovery Rate

   

14.5% - 16.5% (15.5%)

2.75x - 3.75x (3.25x)

$0.09 - $0.95 ($0.52)

0.75x - 1.00x (0.875x)

$841

75% - 100% (94%)

 

 

 

 

 

Senior Secured Loans

     4,962,478       

Discounted Cash Flow

Transaction Indication of Value

 

 

   Discount Rate

Cost Price

   

11.00%

N/A

 

 

Asset-Backed Securities

     405,040       

Discounted Cash Flow

Third Party Indication of Value

 

 

   Discount Rate

Broker Quote

   

21.00%

Various

 

 

Warrants

     —          Black-Scholes Model      Volatility Assumption     181.3%  
  

 

 

         

Total

   $ 21,683,171          
  

 

 

         

The significant unobservable inputs used in the fair value measurement of the Company’s LLC interests are: discount rate and multiples of EBITDA. Significant increases (decreases) in those inputs in isolation could result in a significantly lower (higher)

 

19


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

The significant unobservable inputs used in the fair value measurement of the Company’s asset-backed securities are: discount rate and broker quote indication of value. Significant increases (decreases) in either of those inputs in isolation could result in a significantly lower (higher) fair value measurement. The significant unobservable input used in the fair value measurement of the Company’s warrant securities is: volatility assumption. Significant increases (decreases) in this input in isolation could result in a significantly lower (higher) fair value measurement.

Derivative Transactions

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

Options

The Company purchases options, subject to certain limitations. The Company may invest in options contracts to manage its exposure to the stock and bond markets and fluctuations in foreign currency values. Writing puts and buying calls tend to increase the Company’s exposure to the underlying instrument while buying puts and writing calls tend to decrease the Company’s exposure to the underlying instrument, or economically hedge other Company investments. The Company’s risks in using these contracts include changes in the value of the underlying instruments, nonperformance of the counterparties under the contracts’ terms and changes in the liquidity of the secondary market for the contracts. Options are valued at the last sale price, or if no sales occurred on that day, at the last quoted bid price. As of and during the six months ended June 30, 2022 and 2021, the Company did not hold options.

Investment Transactions

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

Income Recognition

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

 

20


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

Organization and Offering Costs

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

Paid-in Capital

The proceeds from the issuance of common stock as presented on the Company’s Statements of Changes in Net Assets is presented net of selling commissions and fees for the six months ended June 30, 2022 and June 30, 2021. Selling commissions and fees of $0 and $0 were paid for the six months ended June 30, 2022 and June 30, 2021, respectively.

Earnings Per Share

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

 

21


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

 

     For the Three Months Ended
June 30,
     For the Six Months Ended
June 30,
 
                            
     2022      2021      2022     2021  
                            

Net increase (decrease) in net assets resulting from operations

   $ (2,928,281    $ 3,319,425      $ (1,783,264   $ 5,593,482  

Weighted average common shares outstanding

     9,949,487        10,301,897        9,970,028       10,404,696  

Earnings (loss) per common share-basic and diluted

   $ (0.29    $ 0.32      $ (0.18   $ 0.54  

Distributions

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

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

Recent Accounting Pronouncements

In March 2020, the FASB issued Accounting Standards Update (“ASU”) No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” which provides optional exceptions for applying GAAP to contract modifications, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. ASU No. 2020-04 is elective and effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact of ASU No. 2020-04. Please refer to Note 8 for additional information.

 

22


Note 3 — Investment Portfolio

The following table shows the composition of the Company’s invested assets by industry classification at fair value at June 30, 2022:

 

     Fair value      Percentage  

Assets

     

Healthcare

   $ 26,743,319        47.4

Real Estate

     14,134,090        25.0

Telecommunication Services

     6,010,913        10.6

Financials

     3,336,092        5.9

Consumer Products

     2,910,987        5.2

Energy

     1,531,921        2.7

Real Estate Investment Trusts (REITs)

     1,463,325        2.6

Media/Telecommunications

     289,816        0.5

Chemicals

     42,500        0.1

Service

     5,178        0.0
  

 

 

    

 

 

 

Total Assets

   $ 56,468,135        100.0
  

 

 

    

 

 

 

The following table shows the composition of the Company’s invested assets by industry classification at fair value at December 31, 2021:

 

     Fair value      Percentage  

Assets

     

Healthcare

   $ 31,167,298        51.7

Real Estate

     12,659,057        21.0

Telecommunication Services

     5,668,835        9.4

Financials

     4,338,790        7.2

Consumer Products

     2,812,212        4.7

Real Estate Investment Trusts (REITs)

     1,942,593        3.2

Energy

     1,204,904        2.0

Media/Telecommunications

     394,950        0.7

Chemicals

     42,500        0.1

Service

     5,172        0.0
  

 

 

    

 

 

 

Total Assets

   $ 60,236,311        100.0
  

 

 

    

 

 

 

 

23


The following table summarizes the amortized cost and the fair value of the Company’s invested assets by class of financial asset as of June 30, 2022:

 

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

Assets

 

  

Senior Secured Loans - First Lien

   $ 15,118,490      $ 12,687,968        22.5

Senior Secured Loans - Second Lien

     2,966,962        2,907,468        5.1

Asset-Backed Securities

     388,541        182,653        0.3

Corporate Bonds

     3,326,763        2,876,230        5.1

Common Stocks

     17,600,444        22,390,653        39.7

LLC Interests

     3,666,112        4,481,634        7.9

Preferred Stocks

     11,029,993        10,799,992        19.1

Warrants

     74,285        141,537        0.3
  

 

 

    

 

 

    

 

 

 

Total Assets

   $ 54,171,590      $ 56,468,135        100.0
  

 

 

    

 

 

    

 

 

 

The following table summarizes the amortized cost and the fair value of the Company’s invested assets by class of financial asset as of December 31, 2021:

 

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

Assets

 

  

Senior Secured Loans - First Lien

   $ 21,439,866      $ 22,144,887        36.7

Senior Secured Loans - Second Lien

     2,957,993        3,072,569        5.1

Asset-Backed Securities

     422,271        405,040        0.7

Corporate Bonds

     6,817,768        6,826,266        11.3

Common Stocks

     14,308,512        18,329,113        30.4

LLC Interests

     7,000,000        7,572,374        12.6

Preferred Stocks

     1,750,000        1,725,000        2.9

Warrants

     74,284        161,062        0.3
  

 

 

    

 

 

    

 

 

 

Total Assets

   $ 54,770,694      $ 60,236,311        100.0
  

 

 

    

 

 

    

 

 

 

 

24


The following table shows the composition of the Company’s invested assets by geographic classification at June 30, 2022:

 

Geography

   Fair value      Percentage  

Assets

 

Cayman Islands(1)

   $ 182,653        0.3

Luxembourg(1)

     1,339,959        2.4

United Kingdom(1)

     279,600        0.5

United States

     54,665,923        96.8
  

 

 

    

 

 

 

Total Assets

   $ 56,468,135        100.0
  

 

 

    

 

 

 

 

(1) 

Investment denominated in USD.

The following table shows the composition of the Company’s invested assets by geographic classification at December 31, 2021:

 

Geography

   Fair value      Percentage  

Assets

 

Cayman Islands(1)

   $ 405,040        0.7

Great Britain(1)

     432,000        0.7

Luxembourg(1)

     2,500,169        4.1

United States

     56,899,102        94.5
  

 

 

    

 

 

 

Total Assets

   $ 60,236,311        100.0
  

 

 

    

 

 

 

 

(1) 

Investment denominated in USD.

Note 4 — Related Party Transactions and Arrangements

Investment Advisory Fee

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

For the three and six months ended June 30, 2022, the Company incurred investment advisory fees payable to the Adviser of $282,361 and $581,631, respectively. For the three and six months ended June 30, 2021, the Company incurred investment advisory fees payable to the Adviser of $304,995 and $608,702, respectively. Amounts waived for investment advisory fees or administrative fees pertaining to periods prior to June 10, 2016 are not recoupable, but amounts waived for investment advisory fees or administrative fees pertaining to periods from and after June 10, 2016 are subject to recoupment by the Adviser within three years from the date that such fees were otherwise payable, provided that the recoupment will be limited to the amount of such voluntarily waived fees from and after June 10, 2016 and will not cause the sum of the Company’s investment advisory fees, administration fees, Other Expenses (as defined under “Expense Limits and Reimbursements” below), and any recoupment to exceed the annual rate of 3.40% of average gross assets. Effective December 20, 2017, the Adviser ended its voluntary waiver of advisory fees.

Incentive Fee

The incentive fee consists of two parts. The first part, which is referred to as the subordinated incentive fee on income, is calculated and payable quarterly in arrears, and equals 20.0% of “pre-incentive fee net investment income” for the immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on the Company’s net assets, as defined in the Investment Advisory Agreement, equal to 1.875% per quarter. As a result, the Adviser will not earn this incentive fee for any quarter

 

25


until the Company’s pre-incentive fee net investment income for such quarter exceeds the hurdle rate of 1.875%. Once the Company’s pre-incentive fee net investment income in any quarter exceeds the hurdle rate, the Adviser will be entitled to a “catch-up” fee equal to the amount of the pre-incentive fee net investment income in excess of the hurdle rate, until the Company’s pre-incentive fee net investment income for such quarter equals 2.34375% of the Company’s net assets at the end of such quarter. This “catch-up” feature allows the Adviser to recoup the fees foregone as a result of the existence of the hurdle rate in that quarter. Thereafter, the Adviser will receive 20.0% of the Company’s pre-incentive fee net investment income from the quarter.

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

For the three and six months ended June 30, 2022, the Company incurred $0 and recognized a reduction $0 of incentive fees on capital gains, respectively. For the three and six months ended June 30, 2021, the Company incurred $0 and $0 of incentive fees on capital gains, respectively. Since inception, the Company has accrued $0 of incentive fees on capital gains in aggregate. Effective December 20, 2017, the Adviser ended its voluntary waiver of incentive fees. No such fees have been paid with respect to realized gains to the Adviser as of June 30, 2022.

Administration Fee

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

For the three and six months ended June 30, 2022, the Company incurred administration fees payable to the Adviser of $56,734 and $116,335, respectively. For the three and six months ended June 30, 2021, the Company incurred administration fees payable to the Adviser of $59,201 and $121,740, respectively. Amounts waived for management fees or administrative services expenses pertaining to periods prior to June 10, 2016 are not recoupable, but amounts waived for management fees or administrative services, expenses pertaining to periods from and after June 10, 2016 are subject to recoupment by the Adviser within three years from the date that such fees were otherwise payable, provided that the recoupment will be limited to the amount of such voluntarily waived fees from and after June 10, 2016 and will not cause the sum of the Company’s advisory fees, administration fees, Other Expenses, and any recoupment to exceed the annual rate of 3.40% of average gross assets. Effective December 20, 2017, the Adviser ended its voluntary waiver of administration fees.

Organization and Offering Costs

Organization costs include the cost of incorporating, such as the cost of legal services and other fees pertaining to our organization, and are paid by the Adviser. For the three and six months ended June 30, 2022 and June 30, 2021, the Adviser did not incur or pay organization costs on our behalf.

 

26


Offering costs include legal fees, promotional costs and other costs pertaining to the public offering of our shares of common stock, and are capitalized and amortized to expense over one year. The Company’s continuous public offering ended on February 14, 2018.

Organization costs and offering costs are limited to 1% of total gross proceeds raised in the offering and are not due and payable to the Adviser to the extent they exceed that amount. As of June 30, 2022, the cumulative aggregate amount of $5,327,574 of organization and offering costs exceeds 1% of total proceeds raised. Subsequent to the termination of the offering, the Adviser forfeited the right to reimbursement of the remaining $4,305,091 of these costs.

Fees Paid to Officers and Directors

Each director who oversees all of the portfolios in the Fund Complex receives an annual retainer of $150,000 payable in quarterly installments and allocated among each portfolio in the Fund Complex based on relative net assets. The annual retainer for a director who does not oversee all of the portfolios in the Fund Complex is prorated based on the portion of the $150,000 annual retainer allocable to the portfolios overseen by such director. Directors are reimbursed for actual out-of-pocket expenses relating to attendance at meetings. In addition, the Chairman of the Board and the Chairman of the Audit and Qualified Legal Committee each receive an additional payment of $10,000 payable in quarterly installments and allocated among each portfolio in the Fund Complex based on relative net assets. The Directors do not receive any separate compensation in connection with service on Committees or for attending Board or Committee Meetings. They do not have any pension or retirement plan. The “Fund Complex” consists of all of the RICs advised by the Adviser and any affiliates as of the period covered by this report. The Company pays no compensation to any of its officers, all of whom are employed by the Adviser, its affiliates or Skyview Group, Inc. (“Skyview”).

For the three and six months ended June 30, 2022, the Company recorded an expense relating to director fees of $3,982 and $7,713, respectively. For the three and six months ended June 30, 2021, the Company recorded an expense relating to director fees of $4,708 and $8,765, respectively, which represents the allocation of the director fees to the Company. As of June 30, 2022, there were no expenses payable relating to director fees.

Expense Limits and Reimbursements

Pursuant to an expense limitation agreement, the Adviser is contractually obligated to waive fees and, if necessary, pay or reimburse certain other expenses to limit the ordinary “Other Expenses” to 1.0% of the quarter-end value of the Company’s gross assets through the one year anniversary of the effective date of the registration statement (the “Expense Limitation Agreement”). Under the Expense Limitation Agreement, “Other Expenses” are all expenses with the exception of advisor and administration fees, organization and offering costs and the following: (i) interest, taxes, dividends tied to short sales, brokerage commissions, and other expenditures which are capitalized in accordance with GAAP; (ii) expenses incurred indirectly as a result of investments in other investment companies and pooled investment vehicles; (iii) other expenses attributable to, and incurred as a result of, our investments; (iv) expenses payable to the Adviser, as administrator, for providing significant managerial assistance to our portfolio companies; and (v) other extraordinary expenses (including litigation expenses) not incurred in the ordinary course of our business. The obligation will automatically renew for one-year terms unless it is terminated by the Company or the Adviser upon written notice within 60 days of the end of the current term or upon termination of the Investment Advisory Agreement. The Expense Limitation Agreement will continue through at least April 30, 2023.

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

Reimbursable Expenses Table

The cumulative total of fees waived by the Adviser under the Expense Limitation Agreement, which are recoupable as of June 30, 2022 is $838,173. This balance, and the balances in the tables below, only include amounts pertaining to the Expense Limitation Agreement, and do not include waived advisory and administration fees subject to recoupment discussed earlier in Note 4. The following table reflects the fee waivers and expense reimbursements due from the Adviser as of June 30, 2022 and March 31, 2022, which may become subject to recoupment by the Adviser.

 

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Period ended

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

June 30, 2022

   $ 434,019      $ 273,308      $ 160,711      $ 98,950        June 30, 2025  

March 31, 2022

   $ 211,896      $ 150,135      $ 61,761      $ 61,761        March 31, 2025  

The following table reflects the fee waivers and expense reimbursements due from the Adviser as of December 31, 2021, September 30, 2021, June 30, 2021 and March 31, 2021, which may become subject to recoupment by the Adviser.

 

Period ended

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

December 31, 2021

   $ 892,640      $ 597,379      $ 295,261      $ 94,762        December 31, 2024  

September 30, 2021

   $ 664,052      $ 463,553      $ 200,499      $ 68,134        September 30, 2024  

June 30, 2021

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

March 31, 2021

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

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

 

Period ended

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

December 31, 2020

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

September 30, 2020

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

June 30, 2020

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

March 31, 2020

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

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

 

Period ended

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

December 31, 2019

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

September 30, 2019

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

June 30, 2019

     586,411        471,855        114,556        —         Expired  

March 31, 2019

     295,177        256,213        38,964        —         Expired  

During the three and six months ended June 30, 2022, $75,592 and $114,556, respectively, of expense reimbursements that were eligible for recoupment by the Adviser expired.

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

 

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Net Increase from Amounts Committed by Affiliates

For the three and six months ended June 30, 2022 and June 30, 2021, the Adviser did not voluntarily reimburse the Company for unrealized losses sustained. Cumulatively since inception, the Adviser has committed $2,275,000 to voluntarily reimburse the Company for such losses. Had these commitments not been made, since inception, the net asset value (“NAV”) as of June 30, 2022 would have been lower by approximately this amount.

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

Receivable from Adviser / Payable to Adviser

As of June 30, 2022 and December 31, 2021, $95,565 and $95,458 were owed from the Adviser to the Company, respectively, largely related to the expense limitation agreement.

As of June 30, 2022 and December 31, 2021, the Company owed $339,454 and $378,587, respectively, to the Adviser, largely related to advisory fees, and administration fees.

Indemnification

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

Note 5 — U.S. Federal Income Tax Information

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

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

 

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Uncertainty in Income Taxes

The Company will evaluate its tax positions to determine if the tax positions taken meet the minimum recognition threshold in connection with accounting for uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing tax benefits or liabilities in the financial statements. Recognition of a tax benefit or liability with respect to an uncertain tax position is required only when the position is “more likely than not” to be sustained assuming examination by taxing authorities. The Company’s tax returns are subject to examination by the Internal Revenue Service for a period of three fiscal years after they are filed. The Company recognizes interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in the Statements of Operations. During the six months ended June 30, 2022 and June 30, 2021, the Company did not incur any interest or penalties. Furthermore, management of the Company is also not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly change in the next 12 months.

Note 6 — Share Repurchase Program

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

The Company currently intends to limit the number of shares of common stock to be repurchased during any calendar year to the number of shares of common stock it can repurchase with the proceeds it receives from the sale of shares of common stock under its distribution reinvestment plan. At the discretion of the Board, the Company may also use cash on hand, cash available from borrowings and cash from liquidation of securities investments as of the end of the applicable period to repurchase shares of common stock. In addition, the Company will limit the number of shares of common stock to be repurchased in any calendar year to 10.0% of the weighted average number of shares of common stock outstanding in the prior calendar year, or 2.5% in each quarter, though the actual number of shares of common stock that the Company offers to repurchase may be less in light of the limitations noted above. The Company intends to offer to repurchase such shares of common stock at a price (i) not less than the net asset value per share (the “NAV Per Share”) of the Company’s common stock next calculated following the Expiration Date, and (ii) not more than 2.5% greater than the NAV Per Share as of such date. The Board may amend, suspend or terminate the share repurchase program at any time, upon 30 days’ notice.

The Company conducted its quarterly tender offer for the second quarter of 2022 from May 21, 2022, until expiration of June 21, 2022 at 4:00 p.m. New York City time, during which the Company offered to purchase for cash up to 2.5% of its outstanding shares of common stock. During the second quarter tender offer, 102,662 shares of the Company were tendered for repurchase, constituting approximately 1.03% of the Company’s outstanding shares.

For the six months ended June 30, 2022, the Company repurchased 0 shares as part of its death and disability repurchase program.

Note 7 — Economic Dependency and Commitments and Contingencies

The Adviser has entered into a Services Agreement with Skyview, effective February 25, 2021, pursuant to which the Adviser will receive administrative and operational support services to enable it to provide the required advisory services to the Company. The Adviser, and not the Company, will compensate all Adviser and Skyview personnel who provide services to the Company.

From time to time, the Company may be involved in legal proceedings in the normal course of its business. Although the outcome of such litigation cannot be predicted with any clarity, management is of the opinion, based on the advice of legal counsel, that final dispositions of any litigation should not have a material adverse effect on the financial position of the Company as of June 30, 2022.

 

30


Unfunded commitments to provide funds to portfolio companies are not recorded in the Company’s Statements of Assets and Liabilities. Since these commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Company has sufficient liquidity to fund these commitments. As of June 30, 2022, the Company had no unfunded debt commitments.

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

Note 8 — Market and Other Risk Factors

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

Concentration Risk

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

Covenant-Lite Loans Risk

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

Counterparty Credit Risk

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

Credit Risk

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

 

31


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

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

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

Foreign Securities Risk

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

Illiquid Securities Risk

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

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

Interest Rate Risk

Interest Rate risk is the risk that fixed income securities will decline in value because of changes in interest rates. When interest rates decline, the value of fixed rate securities already held by the Company can be expected to rise. Conversely, when interest

 

32


rates rise, the value of existing fixed rate portfolio securities can be expected to decline. A company with a longer average portfolio duration will be more sensitive to changes in interest rates than a fund with a shorter average portfolio duration Recent and potential future changes in government monetary policy may affect the level of interest rates.

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

Investments in Foreign Markets Risk

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

Leverage Risk

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

LIBOR Transition and Associated Risk

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

Due to manipulation allegations in 2012 and reduced activity in the financial markets that it measures, in July 2017, the Financial Conduct Authority (the “FCA”), the United Kingdom financial regulatory body, announced a desire to phase out the use of LIBOR by the end of 2021 and that it will stop encouraging banks to provide the quotations needed to sustain LIBOR. The ICE Benchmark Administration Limited, the administrator of LIBOR, ceased publishing most LIBOR maturities, including some US LIBOR maturities, on December 31, 2021, and is expected to cease publishing the remaining and most liquid US LIBOR maturities on June 30, 2023. It is expected that market participants have or will transition to the use of alternative reference or benchmark rates prior to the applicable LIBOR publication cessation date. Additionally, although regulators have encouraged the development and adoption of alternative rates, such as the Secured Overnight Financing Rate (“SOFR”), the future utilization of LIBOR or of any particular replacement rate remains uncertain.

Although the transition process away from LIBOR has become increasingly well defined in advance of the anticipated discontinuation dates, the impact on certain debt securities, derivatives and other financial instruments remains uncertain. It is expected that market participants will adopt alternative rates such as SOFR or otherwise amend financial instruments referencing LIBOR to include fallback provisions and other measures that contemplate the discontinuation of LIBOR or other similar market disruption events, but neither the effect of the transition process nor the viability of such measures is known. Further, uncertainty and risk remain regarding the willingness and ability of issuers and lenders to include alternative rates and revised provisions in new and existing contracts or instruments. To facilitate the transition of legacy derivatives contracts referencing LIBOR, the International Swaps and Derivatives Association, Inc. launched a protocol to incorporate fallback provisions. While the transition process away from LIBOR has become increasingly well defined in advance of the expected LIBOR cessation dates, there are obstacles to converting certain longer term securities and transactions to a new benchmark or benchmarks and the effectiveness of one alternative

 

33


reference rate versus multiple alternative reference rates in new or existing financial instruments and products has not been determined. Furthermore, the risks associated with the cessation of LIBOR and transition to replacement rates may be exacerbated if an orderly transition to alternative reference rates is not completed in a timely manner. Certain proposed replacement rates to LIBOR, such as SOFR, which is a broad measure of secured overnight US Treasury repo rates, are materially different from LIBOR, and changes in the applicable spread for financial instruments transitioning away from LIBOR will need to be made to accommodate the differences. Furthermore, the risks associated with the expected discontinuation of LIBOR and transition to replacement rates may be exacerbated if an orderly transition to an alternative reference rate is not completed in a timely manner. As market participants transition away from LIBOR, LIBOR’s usefulness may deteriorate and the effects could be experienced until the permanent cessation of the majority of U.S. LIBOR rates in 2023. The transition process may lead to increased volatility and illiquidity in markets that currently rely on LIBOR to determine interest rates. LIBOR’s deterioration may adversely affect the liquidity and/or market value of securities that use LIBOR as a benchmark interest rate.

Operational and Technology Risk

The risk that cyber-attacks, disruptions, or failures that affect the Funds’ service providers, counterparties, market participants, or issuers of securities held by the Funds may adversely affect the Funds and its shareholders, including by causing losses for the Funds or impairing Fund operations.

Options Risk

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

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

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

Pandemics and Associated Economic Disruption Risk

An outbreak of respiratory disease caused by a novel coronavirus was first detected in China in December 2019 and subsequently spread globally. This coronavirus has resulted and may continue to result in the closing of borders, enhanced health screenings, healthcare service preparation and delivery, quarantines, cancellations, disruptions to supply chains and customer activity, as well as general anxiety and economic uncertainty. The impact of this coronavirus may be short-term or may last for an extended period of time and has resulted in a substantial economic downturn. Health crises caused by outbreaks of disease, such as the coronavirus, may exacerbate other pre-existing political, social and economic risks. This outbreak, and other epidemics and pandemics that may arise in the future, could negatively affect the global economy, as well as the economies of individual countries, individual companies and the market in general in significant and unforeseen ways. For example, a widespread health crisis such as a global pandemic could cause substantial market volatility, exchange trading suspensions and closures, impact the Company’s ability to complete tender offer requests, and affect Company performance. Any such impact could adversely affect the Company’s performance, the performance of the issuers in which the Company invests, lines of credit available to the Company and may lead to losses on your investment in the Company. In addition, the increasing interconnectedness of markets around the world may result in many markets being affected by events or conditions in a single country or region or events affecting a single or small number of issuers.

 

34


The United States responded to the coronavirus pandemic and resulting economic distress with fiscal and monetary stimulus packages, including the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) passed in late March 2020. The CARES ACT provides for over $2.2 trillion in resources to small businesses, state and local governments, and individuals adversely impacted by the COVID-19 pandemic. In mid March 2020, the U.S. Federal Reserve (the “Fed”) cut interest rates to historically low levels and announced a new round of quantitative easing, including purchases of corporate and municipal government bonds. The Fed also enacted various programs to support liquidity operations and funding in the financial markets, including expanding its reverse repurchase agreement operations, which added $1.5 trillion of liquidity to the banking system; establishing swap lines with other major central banks to provide dollar funding; establishing a program to support money market funds; easing various bank capital buffers; providing funding backstops for businesses to provide bridging loans for up to four years; and providing funding to help credit flow in asset-backed securities markets. In addition, the Fed extended credit to small and medium-sized businesses. As the Fed “tapers” or reduces the amount of securities it purchases pursuant to quantitative easing, and/or if the Fed raises the federal funds rate, there is a risk that interest rates will rise, which could expose fixed-income and related markets to heightened volatility and could cause the value of a fund’s investments, and the fund’s NAV, to decline, potentially suddenly and significantly. As a result, the fund may experience high redemptions and, as a result, increased portfolio turnover, which could increase the costs that the Fund incurs and may negatively impact the fund’s performance. There is no assurance that the U.S. government’s support in response to COVID-19 economic distress will offset the adverse impact to securities in which the Funds may invest and future governmental support is not guaranteed.

Senior Loans Risk

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

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

Structured Finance Securities Risk

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

 

35


Short-Selling Risk

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

Valuation Risk

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

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

Note 9 — Affiliated Investments

Under Section 2(a)(3) of the 1940 Act, a portfolio company is defined as “affiliated” if a fund owns five percent or more of its outstanding voting securities or if the portfolio company is under common control. The table below shows affiliated issuers of the Company as of June 30, 2022:

 

Affiliated investments

  Shares
at
December 31,
2021
    Fair value
as of
December 31,
2021
    Transfers
in (at cost)
    Purchases     Sales     Realized
gains
(losses)
    Change in
unrealized
appreciation
(depreciation)
    Fair value
as of
June 30,
2022
    Shares
at
June 30,
2022
    Affiliated
Dividend
income
 

NexPoint Residential Trust, Inc.

    23,173     $ 1,942,593     $ —       $ 17,648     $ —       $ —       $ (496,916   $ 1,463,325       23,409     $ 17,726  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NexPoint Capital REIT, LLC

    —         —         —         1,215,000       —         —         (67,689     1,147,311       100       —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NexPoint Real Estate Finance, Inc.

    315,631       6,075,895       —         3,274,285       —         —         413,263       9,763,443       481,670       481,669  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

SFR WLIF III, LLC

    1,651,112       1,563,916       —         —         (1,200,000     —         59,420       423,336       451,112       23,573  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

SFR WLIF II, LLC

    3,348,888       3,196,246       —         1       (3,274,285 )(1)      (74,604     152,642       —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total affiliated investments

    5,338,804     $ 12,778,650     $ —       $ 4,506,934     $ (4,474285   $ (74,604   $ 60,720     $ 12,797,415       956,291     $ 522,968  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Denotes SFR II’s LLC Interests conversion into NREF common shares.

 

36


Note 10 — Financial Highlights

Selected data for a share outstanding throughout the six months ended June 30, 2022 and June 30, 2021 is as follows:

 

     For the Six Months
Ended
June 30, 2022
(Unaudited)
    For the Six Months
Ended
June 30, 2021
(Unaudited)
 

Common shares per share operating performance:

 

Net asset value, beginning of period

   $ 6.32     $ 6.13  

Income from investment operations:

 

Net investment income(1)

     0.11       0.10  

Net realized and unrealized gain (loss)

     (0.29     0.44  
  

 

 

   

 

 

 

Total from investment operations

     (0.18     0.54  
  

 

 

   

 

 

 

Less distribution declared to common shareholders:

 

From net investment income

     (0.18     (0.18
  

 

 

   

 

 

 

Total distributions declared to common shareholders

     (0.18     (0.18
  

 

 

   

 

 

 

Capital share transaction

 

Issuance of common stock(2)

     —         —    

Shares tendered(1)

     —         —    

Net asset value, end of period

   $ 5.96     $ 6.49  

Net asset value total return(3)(4)

     (2.92 %)      8.93

Ratio and supplemental data:

    

Net assets, end of period (in 000’s)

   $ 58,814     $ 65,597  

Shares outstanding, end of period

     9,863,444       10,106,783  

Common share information at end of period:

 

Ratios based on weighted average net assets of common shares:

 

Gross operating expenses(5)

     3.73     3.73

Fees and expenses waived or reimbursed(5)

     (0.52 )%      (0.41 )% 

Net operating expenses(5)

     3.21     3.32

Net investment income (loss) before fees waived or reimbursed(5)

     3.10     2.92

Net investment income (loss) after fees waived or reimbursed(5)

     3.62     3.33

Portfolio turnover rate(4)

     13     1

Asset coverage ratio

     —       —  

Weighted average commission rate paid(6)

   $ —       $ —    

 

(1) 

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

(2) 

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

(3) 

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

(4) 

Not annualized.

(5) 

Annualized.

(6) 

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

Note 11 — Subsequent Events

Effective July 12th, 2022, several teams of Skyview became dual-employees of NexPoint Services, Inc., a wholly-owned subsidiary of the Investment Adviser. The same services are being performed by the dual-employees. The Investment Adviser, and not the Funds, will compensate all Investment Adviser, Skyview, and dual-employee personnel who provide services to the Fund.

 

37


Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The information contained in this section should be read in conjunction with our unaudited financial statements and related notes thereto included elsewhere in this quarterly report on Form 10-Q. In this report, “we,” “us” and “our” refer to NexPoint Capital, Inc.

Forward-Looking Statements

Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements because they relate to future events or our future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q may include statements as to:

 

   

our future operating results;

 

   

changes in healthcare technologies, finance and regulations adversely affecting our portfolio companies or financing model;

 

   

changes in political, economic or industry conditions, the interest rate environment or conditions affecting the financial and capital markets, which could result in changes to the value of our assets;

 

   

our business prospects and the prospects of the companies in which we may invest;

 

   

the impact of the investments that we expect to make;

 

   

the impact of increased competition;

 

   

our contractual arrangements and relationships with third parties;

 

   

the dependence of our future success on the general economy and its impact on the industries in which we may invest;

 

   

the ability of our portfolio companies to achieve their objectives;

 

   

impact and effects of the recent outbreak of COVID-19 on the future financial performance of the Company;

 

   

the relative and absolute performance of our Adviser;

 

   

our current and expected financings and investments;

 

   

our ability to make distributions to our stockholders;

 

   

the adequacy of our cash resources, financing sources and working capital;

 

   

the timing and amount of cash flows, distributions and dividends, if any, from our portfolio companies;

 

   

our use of financial leverage;

 

   

the ability of the Adviser to locate suitable investments for us and to monitor and administer our investments;

 

   

the ability of the Adviser or its affiliates to attract and retain highly talented professionals;

 

   

our ability to maintain our qualification as a regulated investment company, or RIC, and as a BDC;

 

   

the impact on our business of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations issued thereunder;

 

   

the effect of changes to tax legislation and our tax position; and

 

   

the tax status of the enterprises in which we may invest.

Such forward-looking statements may include statements preceded by, followed by or that otherwise include the words “may,” “might,” “will,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “estimate,” “anticipate,” “predict,” “potential,” “plan” or similar words. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth elsewhere in this quarterly report on Form 10-Q and as “Risk Factors” in the prospectus relating to the continuous public offering of our common stock.

We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q. Except as required by the federal securities laws, we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise. Stockholders are advised to consult any additional disclosures that we may make directly to stockholders or through reports that we may file in the future with the U.S. Securities and Exchange Commission (the “SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The forward-looking statements and projections contained in this quarterly report on

 

38


Form 10-Q are excluded from the safe harbor protection provided by Section 27A of the 1933 Act, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This quarterly report on Form 10-Q may contain statistics and other data that have been obtained from or compiled from information made available by third-party service providers. We have not independently verified such statistics or data.

Overview

We were formed in Delaware on September 30, 2013 and formally commenced operations on September 2, 2014. We are an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a BDC under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, for U.S. federal income tax purposes, we have elected to be treated as a RIC under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”) with retroactive effect to the date we elected to be treated as a BDC. As a BDC, we are also subject to certain constraints, including limitations imposed by the 1940 Act and the Code.

NexPoint Advisors, L.P. (the “Adviser”), which serves as the adviser of the Company, is registered with the SEC as an adviser under the Investment Advisers Act of 1940, as amended. Under the general supervision of our board of directors (the “Board”) the Adviser will carry out the investment and reinvestment of the net assets of the Company, will furnish continuously an investment program with respect to the Company, and determine which securities should be purchased, sold or exchanged. In addition, the Adviser will supervise and provide oversight of the Company’s service providers.

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

Our investment objective is to generate high current income and long-term capital appreciation. We seek to achieve our objective by using the experience of the healthcare, credit and structured products teams of the Adviser and its affiliates to source, evaluate and structure investments, identify attractive investment opportunities that are primarily debt investments that generate high income without creating undue risk for the portfolio, make equity investments where we believe there will be attractive risk-adjusted returns that compensate for the lack of current income, and make investments in debt and equity tranches of collateralized loan obligations, or CLOs, that deliver income and high relative value. We will focus on companies that are stable, have positive cash flow and the ability to grow their business model.

Our investment policy is to invest, under normal circumstances, at least 80% of our total assets in debt and equity of middle-market companies, with an emphasis on healthcare companies, syndicated floating rate debt of large public and nonpublic companies and mezzanine and equity tranches of CLOs. Middle-market companies include companies with annual revenues between $50,000,000 and $2,500,000,000 and syndicated floating rate debt refers to loans and other instruments originated by a bank to a corporation that are sold off, or syndicated, to investors in pieces. We consider a healthcare company to be a company that is engaged in the design, development, production, sale, management or distribution of products, services or facilities used for or in connection with the healthcare industry. Additionally, we consider companies that are materially impacted by the healthcare industry (such as a contractor that derives significant revenue or profit from the construction of hospitals) as being engaged in the healthcare industry. We may invest without limit in companies that are not in the healthcare sector.

We will leverage the expertise of our Adviser with regard to distressed investing and restructuring to make opportunistic investments in distressed companies. We will utilize the Adviser’s credit underwriting capability to identify the types of companies we believe will provide high current income and/or long-term capital appreciation. In addition to the investments in the healthcare industry, we may invest a portion of our capital in other opportunistic investments in which the Adviser has expertise and where we believe an opportunity exists to achieve above average risk adjusted yields and returns. These types of opportunities may include: (1) direct lending or origination investments, (2) investments in stressed or distressed situations, (3) structured product investments, (4) equity investments and (5) other investment opportunities not typically available in other BDCs. Opportunistic investments may range from broadly syndicated deals to direct lending deals in both private and public companies and may include foreign investments. We believe this is the best approach to achieving our dual mandate of attempting to generate a high yield while also attempting to produce capital appreciation.

We seek to invest primarily in securities deemed by the Adviser to be high income generating debt investments and income generating equity securities of privately held companies in the United States. We expect the portfolio will be concentrated primarily in senior floating rate debt securities, although we may invest without limit in securities which rank lower than senior secured instruments and may invest without limit in investments with a fixed rate of interest. We will buy syndicated loans, various tranches of CLOs and other debt instruments in the secondary market as well as originate debt so we can tailor the investment parameters more precisely to our needs. We also intend to invest a portion of the portfolio in equity securities that are non-income producing, when

 

39


doing so will help us achieve our objective of long-term capital appreciation. We expect the size of our positions will range from less than $1,000,000 to $20,000,000, although investments may be larger as our asset base increases. We may selectively make investments in amounts larger than $20,000,000 in some of our portfolio companies. While our asset base increases, we may make smaller investments. We may invest up to 15% of our net assets in entities that are excluded from registration under the 1940 Act by virtue of section 3(c)(1) and 3(c)(7) of the 1940 Act (such as private equity funds or hedge funds). This limitation does not apply to any CLOs, certain of which may rely on Section 3(c)(1) or 3(c)(7) of the 1940 Act.

We expect that many of the securities in which we invest will be rated below investment grade by independent rating agencies or would be rated below investment grade if they were rated. These securities, which may be referred to as “junk”, have predominantly speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal. In addition, we expect that many of our debt investments will include floating interest rates that reset on a periodic basis and typically will not require the borrowers to pay down the outstanding principal of such debt prior to maturity.

We and the Adviser have obtained an exemptive order dated April 19, 2016 from the SEC to permit co-investments among the Company and certain other accounts managed by the Adviser or its affiliates, subject to certain conditions.

Public Offering

As a result of a series of private placements to the Adviser, we successfully satisfied the minimum offering requirement and officially commenced operations on September 2, 2014. In connection with the satisfaction of the minimum offering requirement and the commencement of our operations, the Investment Advisory Agreement became effective and the base management fee and any incentive fees, as applicable, payable to the Adviser under the Investment Advisory Agreement began to accrue. In aggregate as of June 30, 2022, the Adviser controls 2,549,002 total shares of common stock of the Company, including reinvestment of dividends, for a net amount of approximately $15.2 million. In February 2018, we closed our continuous public offering of shares of common stock.

Revenues

We generate a significant portion of our total revenue in the form of interest on the debt securities that we hold. We expect that the senior debt we invest in will generally have stated terms of 3 to 5 years and that the subordinated debt we invest in will generally have stated terms of 5 to 7 years. Our senior and subordinated debt investments bear interest at a fixed or floating rate. Interest on debt securities is generally payable monthly, quarterly or semiannually. In addition, some of our investments provide for deferred interest payments or payment-in-kind, or PIK, interest. We may also generate revenues in the form of dividends and other distributions on the equity or other securities we may hold. In addition, we may generate revenues in the form of commitment, closing, origination, structuring or diligence fees, monitoring fees, fees for providing managerial assistance, consulting fees, prepayment fees and performance-based fees. Any such fees generated in connection with our investments will be recognized as earned.

Expenses

We expect that our primary operating expenses will include the payment of fees to the Adviser under the Investment Advisory Agreement, our allocable portion of overhead expenses under the Administration Agreement and other operating costs described below. Prior to December 20, 2017, the Adviser was waiving most fees, subject to possible recoupment for expenses pertaining to periods from and after June 10, 2016. Effective December 20, 2017, the Adviser ended its voluntary waiver of advisory and administration fees. We bear all out-of-pocket costs and expenses of our operations and transactions, including:

 

   

our organization (expenses initially paid by the Adviser until sufficient equity proceeds are raised);

 

   

calculating our net asset value and net asset value per share (including the costs and expenses of independent valuation firms);

 

   

fees and expenses, including travel expenses, incurred by the Adviser or payable to third parties in performing due diligence on prospective portfolio companies, monitoring our investments and, if necessary, enforcing our rights;

 

   

interest payable on debt, if any, incurred to finance our investments;

 

   

the costs of this and all future offerings of common shares and other securities, and other incurrence of debt;

 

   

the base management fee and any incentive fee;

 

   

distributions on our shares;

 

   

administration fees payable to the Adviser under the Administration Agreement;

 

   

transfer agent and custody fees and expenses;

 

40


   

the actual costs incurred by the Adviser as our administrator in providing managerial assistance to those portfolio companies that request it;

 

   

amounts payable to third parties relating to, or associated with, evaluating, making and disposing of investments;

 

   

brokerage fees and commissions;

 

   

registration fees;

 

   

listing fees;

 

   

taxes;

 

   

director fees and expenses;

 

   

costs associated with our reporting and compliance obligations under the 1940 Act and applicable U.S. federal and state securities laws;

 

   

the costs of any reports, proxy statements or other notices to our stockholders, including printing costs;

 

   

costs of holding stockholder meetings;

 

   

our fidelity bond;

 

   

directors and officers/errors and omissions liability insurance, and any other insurance premiums;

 

   

litigation, indemnification and other non-recurring or extraordinary expenses;

 

   

direct costs and expenses of administration and operation, including audit and legal costs;

 

   

fees and expenses associated with marketing efforts, including deal sourcing fees and marketing to financial sponsors;

 

   

dues, fees and charges of any trade association of which we are a member; and

 

   

all other expenses reasonably incurred by us or the Adviser in connection with administering our business.

During periods of asset growth, we expect our general and administrative expenses to be relatively stable or decline as a percentage of total assets and increase during periods of asset declines.

Expense Limitation

Pursuant to an expense limitation agreement (the “Expense Limitation Agreement”), the Adviser is contractually obligated to waive fees and, if necessary, pay or reimburse certain other expenses to limit ordinary “Other Expenses” to 1.0% of the quarter-end value of the Company’s gross assets through the one-year anniversary of the effective date of the registration statement. Under the Expense Limitation Agreement, “Other Expenses” are all expenses with the exception of advisor and administration fees, organization and offering costs and the following: (i) interest, taxes, dividends tied to short sales, brokerage commissions, and other expenditures which are capitalized in accordance with GAAP; (ii) expenses incurred indirectly as a result of investments in other investment companies and pooled investment vehicles; (iii) other expenses attributable to, and incurred as a result of, our investments; (iv) expenses payable to the Adviser, as administrator, for providing significant managerial assistance to our portfolio companies; and (v) other extraordinary expenses (including litigation expenses) not incurred in the ordinary course of our business. The obligation will automatically renew for one-year terms unless it is terminated by the Company or the Adviser upon written notice within 120 days of the end of the current term or upon termination of the Investment Advisory Agreement. The Expense Limitation Agreement will continue through at least April 30, 2023.

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

Reimbursable Expenses Table

The cumulative total of fees waived by the Adviser under the Expense Limitation Agreement which are recoupable as of June 30, 2022, are $838,173. This balance, and the balances in the tables below, only include amounts pertaining to the Expense Limitation Agreement, and do not include waived advisory and administration fees subject to recoupment discussed elsewhere herein. The following table reflects the 2022 quarterly fee waivers and expense reimbursements due from the Adviser as of June 30, 2022, which are subject to recoupment by the Adviser.

 

41


Quarter Ended

   Yearly Cumulative
Other Expenses
     Yearly
Expense
Limitation
     Yearly Cumulative
Expense
Reimbursement
     Quarterly
Recoupable/
(Recouped)
Amount
     Recoupment
Eligibility Expiration
 

June 30, 2022

   $ 434,019      $ 273,308      $ 160,711      $ 98,950        June 30, 2025  

March 31, 2022

   $ 211,896      $ 150,135      $ 61,761      $ 61,761        March 31, 2025  

The following table reflects the 2021 quarterly fee waivers and expense reimbursements due from the Adviser as of December 31, 2021, which are subject to recoupment by the Adviser.

 

Quarter Ended

   Yearly Cumulative
Other Expenses
     Yearly
Expense
Limitation
     Yearly Cumulative
Expense
Reimbursement
     Quarterly
Recoupable/
(Recouped)
Amount
     Recoupment
Eligibility Expiration
 

December 31, 2021

   $ 892,640      $ 597,379      $ 295,261      $ 94,762        December 31, 2024  

September 30, 2021

   $ 664,052      $ 463,553      $ 200,499      $ 68,134        September 30, 2024  

June 30, 2021

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

March 31, 2021

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

The following table reflects the 2020 quarterly fee waivers and expense reimbursements due from the Adviser as of December 31, 2020, which are subject to recoupment by the Adviser.

 

Quarter Ended

   Yearly Cumulative
Other Expenses
     Yearly
Expense
Limitation
     Yearly Cumulative
Expense
Reimbursement
     Quarterly
Recoupable/
(Recouped)
Amount
    Recoupment
Eligibility Expiration
 

December 31, 2020

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

September 30, 2020

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

June 30, 2020

     445,585