QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices) |
(Zip Code) |
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
Non-accelerated filer |
☒ | Smaller reporting company | ||||
| Emerging growth company | Yes ☐ No | |||||
Item 1. |
Financial Statements |
September 30, 2023 (Unaudited) |
December 31, 2022 (Unconsolidated) |
|||||||
Assets |
||||||||
Unaffiliated investments, at fair value (cost of $ |
$ | $ | ||||||
Affiliated investments, at fair value (cost of $ (1) |
||||||||
Cash and cash equivalents |
||||||||
Receivable for investments sold |
||||||||
Dividends and interest receivable |
||||||||
Receivable from Adviser (2) |
||||||||
Prepaid expenses |
||||||||
Total assets |
||||||||
Liabilities |
||||||||
Payable for investments purchased |
||||||||
Payable to Adviser (2) |
||||||||
Accrued expenses and other liabilities |
||||||||
Distributions payable |
||||||||
Total liabilities |
||||||||
Commitments and contingencies (3) |
||||||||
Net assets |
||||||||
Preferred stock, $ |
||||||||
Common stock, $ |
||||||||
Paid-in capital in excess of par |
||||||||
Distributable earnings (accumulated loss) |
( |
) | ( |
) | ||||
Total net assets |
$ | $ | ||||||
Net asset value per share of common stock |
$ | $ | ||||||
(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). |
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2023 |
2022 (Unconsolidated) |
2023 |
2022 (Unconsolidated) |
|||||||||||||
Investment income: |
||||||||||||||||
Interest |
$ | $ | $ | $ | ||||||||||||
Interest paid-in-kind |
||||||||||||||||
Dividend income from unaffiliated investments |
||||||||||||||||
Dividend income from affiliated investments (1) |
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Total investment income |
||||||||||||||||
Expenses: |
||||||||||||||||
Investment advisory fees (2) |
||||||||||||||||
Custodian and accounting service fees |
||||||||||||||||
Administration fees (2) |
||||||||||||||||
Stock transfer fee |
||||||||||||||||
Audit and tax fees |
||||||||||||||||
Other expenses |
||||||||||||||||
Reports to stockholders |
||||||||||||||||
Legal fees |
||||||||||||||||
Directors’ fees (2) |
( |
) | ||||||||||||||
Total expenses |
||||||||||||||||
Expenses (waived) or recouped by the Adviser (2) |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
Net expenses |
||||||||||||||||
Net investment income |
||||||||||||||||
Net realized and unrealized gains (losses) on investments: |
||||||||||||||||
Net realized gain (loss) on: |
||||||||||||||||
Unaffiliated investments |
( |
) | ( |
) | ||||||||||||
Affiliated investments (1) |
( |
) | ||||||||||||||
Net change in unrealized appreciation (depreciation) on: |
||||||||||||||||
Unaffiliated investments |
( |
) | ( |
) | ||||||||||||
Affiliated investments (1) |
( |
) | ( |
) | ( |
) | ||||||||||
Net realized and unrealized gains (losses) |
( |
) | ( |
) | ( |
) | ||||||||||
Net increase (decrease) in net assets resulting from operations |
( |
) |
( |
) |
( |
) | ||||||||||
Per share information - basic and diluted per common share |
||||||||||||||||
Net investment income: |
$ | $ | $ | $ | ||||||||||||
Earnings (loss) per share: |
$ | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||
Weighted average shares outstanding: |
||||||||||||||||
(1) |
See Note 9 for a discussion of affiliated investments. |
(2) |
See Note 4 for a discussion of related party transactions and arrangements. |
Common Stock |
||||||||||||||||||||
Shares |
Par Amount |
Paid in Capital in Excess of Par |
Distributable Earnings |
Total Net Assets |
||||||||||||||||
| Balance at June 30, 2023 |
$ | $ | $ | ( |
) | $ | ||||||||||||||
| Increase (decrease) in net assets resulting from operations |
| |||||||||||||||||||
| Net investment income |
— | — | — | |||||||||||||||||
| Net realized gain (loss) on investments |
— | — | — | ( |
) | ( |
) | |||||||||||||
| Net change in unrealized appreciation (depreciation) on investments |
— | — | — | |||||||||||||||||
| Shareholder distributions: |
| |||||||||||||||||||
| Issuance of common stock |
— | — | — | — | — | |||||||||||||||
| Repurchase of common stock |
( |
) | ( |
) | ( |
) | — | ( |
) | |||||||||||
| Reinvestment of common stock |
— | |||||||||||||||||||
| Distributions to stockholders |
— | — | — | ( |
) | ( |
) | |||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Total increase (decrease) for the three months ended September 30, 2023 |
( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Balance at September 30, 2023 |
$ | $ | $ | ( |
) | $ | ||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Distributions to stockholders per share |
— | $ | — | $ | — | $ | $ | |||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Balance at December 31, 2022 |
$ | $ | $ | ( |
) | $ | ||||||||||||||
| Increase (decrease) in net assets resulting from operations |
| |||||||||||||||||||
| Net investment income |
— | — | — | |||||||||||||||||
| Net realized gain (loss) on investments |
— | — | — | ( |
) | ( |
) | |||||||||||||
| Net change in unrealized appreciation (depreciation) on investments |
— | — | — | |||||||||||||||||
| Shareholder distributions: |
| |||||||||||||||||||
| Issuance of common stock |
— | — | — | — | — | |||||||||||||||
| Repurchase of common stock |
( |
) | ( |
) | ( |
) | — | ( |
) | |||||||||||
| Reinvestment of common stock |
— | |||||||||||||||||||
| Distributions to stockholders |
— | — | — | ( |
) | ( |
) | |||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Total increase (decrease) for the nine months ended September 30, 2023 |
( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Balance at September 30, 2023 |
$ | $ | $ | ( |
) | $ | ||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Distributions to stockholders per share |
— | $ | — | $ | — | $ | $ | |||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
Common Stock |
||||||||||||||||||||
Shares |
Par Amount |
Paid in Capital in Excess of Par |
Distributable Earnings |
Total Net Assets |
||||||||||||||||
| Balance at June 30, 2022 |
$ | $ | $ | ( |
) | $ | ||||||||||||||
| Increase (decrease) in net assets resulting from operations |
| |||||||||||||||||||
| Net investment income |
— | — | — | |||||||||||||||||
| Net realized gain (loss) on investments |
— | — | — | |||||||||||||||||
| Net change in unrealized appreciation (depreciation) on investments |
— | — | — | ( |
) | ( |
) | |||||||||||||
| Shareholder distributions: |
| |||||||||||||||||||
| Issuance of common stock |
— | — | — | — | — | |||||||||||||||
| Repurchase of common stock |
( |
) | ( |
) | ( |
) | — | ( |
) | |||||||||||
| Reinvestment of common stock |
— | |||||||||||||||||||
| Distributions to stockholders |
— | — | — | ( |
) | ( |
) | |||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Total increase (decrease) for the three months ended September 30, 2022 |
( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Balance at September 30, 2022 |
$ | $ | $ | ( |
) | $ | ||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Distributions to stockholders per share |
— | $ | — | $ | — | $ | $ | |||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Balance at December 31, 2021 |
$ | $ | $ | ( |
) | $ | ||||||||||||||
| Increase (decrease) in net assets resulting from operations |
| |||||||||||||||||||
| Net investment income |
— | — | — | |||||||||||||||||
| Net realized gain (loss) on investments |
— | — | — | |||||||||||||||||
| Net change in unrealized appreciation (depreciation) on investments |
— | — | — | ( |
) | ( |
) | |||||||||||||
| Shareholder distributions: |
| |||||||||||||||||||
| Issuance of common stock |
— | — | — | — | — | |||||||||||||||
| Repurchase of common stock |
( |
) | ( |
) | ( |
) | — | ( |
) | |||||||||||
| Reinvestment of common stock |
— | |||||||||||||||||||
| Distributions to stockholders |
— | — | — | ( |
) | ( |
) | |||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Total increase (decrease) for the nine months ended September 30, 2022 |
( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Balance at September 30, 2022 |
$ | $ | $ | ( |
) | $ | ||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Distributions to stockholders per share |
— | $ | — | $ | — | $ | $ | |||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
Nine Months Ended September 30, |
||||||||
2023 |
2022 (Unconsolidated) |
|||||||
| Cash flows provided by (used in) operating activities |
| |||||||
| Net decrease in net assets resulting from operations |
$ | ( |
) | $ | ( |
) | ||
| 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 |
( |
) | ( |
) | ||||
| Payment-in-kind |
( |
) | ( |
) | ||||
| Proceeds from sales and principal repayments of investment securities |
||||||||
| Net realized (gain) loss on investments |
( |
) | ||||||
| Net change in unrealized (appreciation) depreciation on investments |
( |
) | ||||||
| Amortization of premium/discount, net |
( |
) | ( |
) | ||||
| Change in operating assets and liabilities: |
||||||||
| (Increase) decrease in receivable for investments sold |
( |
) | ||||||
| (Increase) decrease in dividends and interest receivable |
||||||||
| (Increase) decrease in receivable from Adviser |
( |
) | ( |
) | ||||
| (Increase) decrease in prepaid expenses |
||||||||
| Increase (decrease) in payable for fund shares repurchased |
||||||||
| Increase (decrease) in payable for investments purchased |
( |
) | ||||||
| Increase (decrease) in payable to Adviser |
( |
) | ( |
) | ||||
| Increase (decrease) in accrued expenses and other liabilities |
( |
) | ||||||
| |
|
|
|
|||||
| Net cash flows provided by (used in) operating activities |
||||||||
| |
|
|
|
|||||
| Cash flows provided by (used in) financing activities |
| |||||||
| Repurchase of common stock, net of payable |
( |
) | ( |
) | ||||
| Distributions paid in cash |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Net cash flows (used in) financing activities |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Net increase (decrease) in cash and cash equivalents |
( |
) | ||||||
| |
|
|
|
|||||
| Cash and cash equivalents |
| |||||||
| Beginning of the period |
||||||||
| |
|
|
|
|||||
| End of the period |
$ | $ | ||||||
| |
|
|
|
|||||
| Supplemental disclosure and non-cash financing activities |
| |||||||
| Paid-in-kind |
$ | $ | ||||||
| Reinvestment of distributions paid |
$ | $ | ||||||
| Local and excise taxes paid |
$ | $ | ||||||
Portfolio Company (1)(2) |
Interest Rate |
Base Rate Floor |
Maturity Date |
Principal Amount |
Amortized Cost (3) |
Fair Value |
||||||||||||||||||
Senior Secured Loans – 21.3% (4) |
||||||||||||||||||||||||
Bioplastics – 4.1% |
||||||||||||||||||||||||
PlantSwitch, Inc. Convertible Promissory Note (First Lien Term Loan) (9) (10) |
$ | $ | $ | |||||||||||||||||||||
Healthcare – 13.9% |
||||||||||||||||||||||||
Auris Luxembourg III S.a.r.l. (First Lien Term Loan) (5) (6) |
SOFR + |
% | ||||||||||||||||||||||
Carestream Health, Inc. (First Lien Term Loan) (7) |
SOFR + |
% | ||||||||||||||||||||||
CCS Medical, Inc (First Lien Term Loan) (9) (10) |
% | |||||||||||||||||||||||
Covenant Surgical Partners, Inc. (First Lien Delayed Draw Term Loan) (7) |
SOFR + |
% | ||||||||||||||||||||||
Covenant Surgical Partners, Inc. (First Lien Term Loan) (7) |
SOFR + |
% | ||||||||||||||||||||||
Sound Inpatient Physicians (Second Lien Term Loan) (7) |
SOFR + |
% | ||||||||||||||||||||||
Wellpath Holdings, Inc. (First Lien Term Loan) (7) |
SOFR + |
% | ( |
) | ||||||||||||||||||||
Real Estate – 0.9% |
||||||||||||||||||||||||
NexPoint Capital REIT, LLC (First Lien Term Loan) (9) (10) (11) |
PRIME | % | ||||||||||||||||||||||
Telecommunication Services – 2.4% |
||||||||||||||||||||||||
MidWave Wireless, Inc. (fka Terrestar Corp.) (First Lien Term Loan G) (9) (10) |
% | |||||||||||||||||||||||
MidWave Wireless, Inc. (fka Terrestar Corp.) (First Lien Term Loan H) (9) (10) |
% | |||||||||||||||||||||||
MidWave Wireless, Inc. (fka Terrestar Corp.) (First Lien Term Loan E) (9) (10) |
% | |||||||||||||||||||||||
MidWave Wireless, Inc. (fka Terrestar Corp.) (First Lien Term Loan F) (9) (10) |
% | |||||||||||||||||||||||
Total Senior Secured Loans |
||||||||||||||||||||||||
Asset-Backed Securities – 0.1% |
||||||||||||||||||||||||
Financials – 0.1% |
||||||||||||||||||||||||
Grayson Investor Corp. (5) (9) (10) (12) (13) (14) |
||||||||||||||||||||||||
PAMCO CLO 1997-1A B (5) (9) (10) (12) (14) (15) |
||||||||||||||||||||||||
Total Asset-Backed Securities |
||||||||||||||||||||||||
Corporate Bonds – 0.5% |
||||||||||||||||||||||||
Media/Telecommunications – 0.5% |
||||||||||||||||||||||||
iHeartCommunications, Inc. (5) |
||||||||||||||||||||||||
iHeartCommunications, Inc. (5) |
||||||||||||||||||||||||
Total Corporate Bonds |
||||||||||||||||||||||||
Shares |
||||||||||||||||||||||||
Common Stocks – 28.9% |
||||||||||||||||||||||||
Chemicals – 0.1% |
||||||||||||||||||||||||
MPM Holdings, Inc. (9) (10) |
||||||||||||||||||||||||
Energy – 4.5% |
||||||||||||||||||||||||
Quarternorth Energy, Inc. |
||||||||||||||||||||||||
Financials – 3.5% |
||||||||||||||||||||||||
American Banknote Corp. (9) (10) (16) |
||||||||||||||||||||||||
Real Estate – 9.2% |
||||||||||||||||||||||||
Nexpoint Real Estate Finance, Inc. (11) |
||||||||||||||||||||||||
IQHQ, Inc. (9) (10) |
||||||||||||||||||||||||
Real Estate Investment Trust (REIT) – 1.5% |
||||||||||||||||||||||||
NexPoint Residential Trust, Inc. (5) (11) |
||||||||||||||||||||||||
Service – 0.0% |
||||||||||||||||||||||||
Wayne Services Legacy Inc. (9) (10) (16) |
||||||||||||||||||||||||
| Telecommunication Services – 10.1% |
||||||||||||||||||||||||
| MidWave Wireless, Inc. (fka Terrestar Corp.) (9) (10) (16) |
$ | $ | ||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| Total Common Stocks |
||||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| LLC Interests – 21.4% |
||||||||||||||||||||||||
| Consumer Products – 5.9% |
||||||||||||||||||||||||
| US Gaming, LLC (9) (10) (16) |
||||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| Real Estate – 15.5% |
||||||||||||||||||||||||
| SFR WLIF III, LLC (9) (10) (11) |
||||||||||||||||||||||||
| NexPoint Capital REIT, LLC (9) (10) (11) |
||||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| Total LLC Interests |
||||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| Preferred Dividend Rate |
||||||||||||||||||||||||
| Preferred Stocks – 24.4% |
||||||||||||||||||||||||
| Financials – 2.8% |
||||||||||||||||||||||||
| 777 Partners, LLC |
% | |||||||||||||||||||||||
| United Fidelity Bank FSB |
% | |||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| Healthcare – 21.6% |
||||||||||||||||||||||||
| Apnimed, Inc. (9) (10) |
% | |||||||||||||||||||||||
| Apnimed, Inc. (Series C-2) (9) (10) |
% | |||||||||||||||||||||||
| Sapience Therapeutics, Inc. (Series B Preferred Shares) (9) (10) (17) |
% | |||||||||||||||||||||||
| Sapience Therapeutics, Inc. (Series B-1 PreferredShares) (9) (10) (17) |
% | |||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| Total Preferred Stocks |
||||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| Warrants – 0.5% |
||||||||||||||||||||||||
| Energy – 0.5% |
||||||||||||||||||||||||
| QuarterNorth Tranche 1 (16) |
||||||||||||||||||||||||
| QuarterNorth Tranche 2 (16) |
||||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| Media/Telecommunications – 0.0% |
||||||||||||||||||||||||
| iHeartMedia, Inc. (5) (16) |
||||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| Total Warrants |
||||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| Total Investments- 97.1% |
$ |
$ |
||||||||||||||||||||||
| |
|
|
|
|||||||||||||||||||||
| Cash Equivalents –4.3% (18) |
$ | |||||||||||||||||||||||
| Other Assets & Liabilities, net- (1.3%) |
$ | ( |
) | |||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| Net Assets- 100.0% |
$ |
|||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
(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 |
(2) |
All investments are denominated in United States Dollars. |
(3) |
Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on investments. |
(4) |
Senior secured loans in which the Company invests generally pay interest at rates which are periodically determined by reference to a base lending rate plus a spread (unless otherwise identified, all senior secured loans carry a variable rate of interest). These base lending rates are generally (i) the Prime Rate offered by one or more major United States banks, (ii) the lending rate offered by one or more European banks such as the London Interbank Offered Rate (“LIBOR”) or (iii) the coupon rate. Rate shown represents the actual rate at September 30, 2023. Senior secured loans, while exempt from registration under the Securities Act of 1933 (the “1933 Act”), contain certain restrictions on resale and cannot be sold publicly. Senior secured floating rate loans often require prepayments from excess cash flow or permit the borrower to repay at its election. The degree to which borrowers repay, whether as a contractual requirement or at their election, cannot be predicted with accuracy. As a result, the actual remaining maturity may be substantially less than the stated maturity shown. |
(5) |
The investment is 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 Non-qualifying assets represented |
(6) |
The interest rate on these investments is subject to a base rate of 6-Month SOFR which at September 30, 2023 was SOFR rate used to calculate interest is the higher of the prevailing 6 month SOFR rate in effect on the date of the semiannual reset, or the SOFR base rate floor shown. |
(7) |
The interest rate on these investments is subject to a base rate of 3-Month SOFR, which at September 30, 2023 was |
(8) |
The interest rate on these investments is subject to a base rate of 3-Month LIBOR, which at September 30, 2023 was |
(9) |
Represents fair value as determined by the Adviser pursuant to the policies and procedures approved by the Board of Trustees (the “Board”). The Board has designated the Adviser as “valuation designee” for the Company pursuant to Rule 2a-5 of the 1940 Act. The Adviser 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 $ |
(10) |
Classified as Level 3 within the three-tier fair value hierarchy. Please see Note 2 for an explanation of this hierarchy, as well as a list of unobservable inputs used in the valuation of these instruments. |
(11) |
Represents an affiliated issuer. Assets with a total aggregate fair market value of $ |
(12) |
Securities exempt from registration under Rule 144A of the 1933 Act. These securities may only be resold in transactions exempt from registration to qualified institutional buyers. As of September 30, 2023, these securities amounted to $ |
(13) |
The investment is considered to be the equity tranche of the issuer. |
(14) |
Securities of collateralized loan obligations where an affiliate of the Adviser serves as collateral manager. |
(15) |
The issuer is in default of its payment obligation, or is in danger of default. |
(16) |
Non-income producing security. |
(17) |
All o r a portion of this security is held through BDC Sapience Holdco, LLC (See Note 1). |
(18) |
State Street U.S. Government Money Market Fund. |
PIK |
Payment-in-Kind |
| 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 – 24.5% |
||||||||||||||||||||||||
| Auris Luxembourg III S.a.r.l. (First Lien Term Loan) (5) (6) |
L + |
% |
$ |
$ |
$ |
|||||||||||||||||||
| Carestream Health, Inc. (First Lien Term Loan) (7) |
L + |
% |
||||||||||||||||||||||
| CCS Medical, Inc (First Lien Term Loan) (7) (8) (9) |
||||||||||||||||||||||||
| CNT Holdings I Corp (Second Lien Term Loan) (7) |
L + |
% |
||||||||||||||||||||||
| Covenant Surgical Partners, Inc. (First Lien Delayed Draw Term Loan) |
||||||||||||||||||||||||
| Covenant Surgical Partners, Inc. (First Lien Term Loan) (10) |
L + |
% |
||||||||||||||||||||||
| Envision Healthcare Corp. (First Lien Term Loan) (10) |
L + |
% |
||||||||||||||||||||||
| RxBenefits, Inc. (First Lien Term Loan) (6) |
L + |
% |
||||||||||||||||||||||
| Sound Inpatient Physicians (Second Lien Term Loan) (10) |
L + |
% |
||||||||||||||||||||||
| Wellpath Holdings, Inc. (First Lien Term Loan) (7) |
L + |
% |
||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| Telecommunication Services – 2.0% |
||||||||||||||||||||||||
| Terrestar Corp. (First Lien Term Loan H) (8) (9) |
||||||||||||||||||||||||
| Terrestar Corp. (First Lien Term Loan F) (8) (9) |
||||||||||||||||||||||||
| Terrestar Corp. (First Lien Term Loan E) (8) (9) |
||||||||||||||||||||||||
| Terrestar Corp. (First Lien Term Loan G) (8) (9) |
||||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| Total Senior Secured Loans |
||||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| Asset-Backed Securities – 0.0% |
||||||||||||||||||||||||
| Financials – 0.0% |
||||||||||||||||||||||||
| Grayson Investor Corp. (5) (8) (9) (11) (12) (13) |
||||||||||||||||||||||||
| PAMCO CLO 1997-1A B (5) (8) (9) (11) (13) (14) |
||||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| Total Asset-Backed Securities |
||||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| Corporate Bonds – 5.0% |
||||||||||||||||||||||||
| Healthcare – 4.5% |
||||||||||||||||||||||||
| Hadrian Merger Sub, Inc. (11) |
||||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| Media/Telecommunications – 0.5% |
||||||||||||||||||||||||
| iHeartCommunications, Inc. (5) |
||||||||||||||||||||||||
| iHeartCommunications, Inc. (5) |
||||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| Total Corporate Bonds |
||||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
Shares |
||||||||||||||||||||||||
| Common Stocks – 36.3% |
||||||||||||||||||||||||
| Chemicals – 0.1% |
||||||||||||||||||||||||
| MPM Holdings, Inc. (15) |
||||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| Energy – 3.0% |
||||||||||||||||||||||||
| Quarternorth Energy, Inc. |
||||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| Financials – 3.2% |
||||||||||||||||||||||||
| American Banknote Corp. (8) (9) (15) |
||||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| Real Estate – 18.6% |
||||||||||||||||||||||||
| Nexpoint Real Estate Finance, Inc. (16) |
||||||||||||||||||||||||
| IQHQ, Inc. (8) (9) |
||||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| Real Estate Investment Trust (REIT) – 1.9% |
||||||||||||||||||||||||
| NexPoint Residential Trust, Inc. (5) (16) |
||||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| Service – 0.0% |
||||||||||||||||||||||||
| Wayne Services Legacy Inc. (8) (9) (15) |
$ |
$ |
||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| Telecommunication Services – 9.5% |
||||||||||||||||||||||||
| Terrestar Corp. (8) (9) (15) |
||||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| Total Common Stocks |
||||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| LLC Interests – 8.7% |
||||||||||||||||||||||||
| Consumer Products – 5.7% |
||||||||||||||||||||||||
| US Gaming, LLC (8) (9) (15) |
||||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| Real Estate – 3.0% |
||||||||||||||||||||||||
| SFR WLIF III, LLC (8) (9) (16) |
||||||||||||||||||||||||
| NexPoint Capital REIT, LLC (8) (9) (16) |
||||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| Total LLC Interests |
||||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
Preferred Dividend Rate |
||||||||||||||||||||||||
| Preferred Stocks – 22.3% |
||||||||||||||||||||||||
| Financials – 2.7% |
||||||||||||||||||||||||
| 777 Partners, LLC |
% |
|||||||||||||||||||||||
| United Fidelity Bank FSB |
% |
|||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| Healthcare – 19.6% |
||||||||||||||||||||||||
| Apnimed, Inc. (8) (9) |
% |
|||||||||||||||||||||||
| Apnimed, Inc. (Series C-2) (8) (9) |
% |
|||||||||||||||||||||||
| Sapience Therapeutics, Inc. (Series B Preferred Shares) (8) (9) |
% |
|||||||||||||||||||||||
| Sapience Therapeutics, Inc. (Series B-1 Preferred Shares) (8) (9) |
||||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| Total Preferred Stocks |
||||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| Warrants – 0.4% |
||||||||||||||||||||||||
| Energy – 0.3% |
||||||||||||||||||||||||
| QuarterNorth Tranche 1 (15) |
||||||||||||||||||||||||
| QuarterNorth Tranche 2 (15) |
||||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| Media/Telecommunications – 0.1% |
||||||||||||||||||||||||
| iHeartMedia, Inc. (5) (15) |
||||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| Total Warrants |
||||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| Total Investments- 99.2% |
$ |
$ |
||||||||||||||||||||||
| |
|
|
|
|||||||||||||||||||||
| Cash Equivalents – 2.6% (17) |
$ |
|||||||||||||||||||||||
| Other Assets & Liabilities, net- (1.8%) |
$ |
( |
) | |||||||||||||||||||||
| |
|
|||||||||||||||||||||||
| Net Assets- 100.0% |
$ |
|||||||||||||||||||||||
| |
|
|||||||||||||||||||||||
(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 |
(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, 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 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 Non-qualifying assets represented |
(6) |
The interest rate on these investments is subject to a base rate of 6-Month LIBOR, which at December 31, 2022 was |
(7) |
The interest rate on these investments is subject to a base rate of 3-Month LIBOR, which at December 31, 2022 was |
(8) |
Represents fair value as determined by the Adviser pursuant to the policies and procedures approved by the Board of Trustees (the “Board”). The Board has designated the Adviser as “valuation designee” for the Company pursuant to Rule 2a-5 of the 1940 Act. The Adviser 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 $ |
(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) |
The interest rate on these investments is subject to a base rate of 1-Month LIBOR, which at December 31, 2022 was |
(11) |
Securities exempt from registration under Rule 144A of the Securities Act. These securities may only be resold in transactions exempt from registration to qualified institutional buyers. As of December 31, 2022, these securities amounted to $ |
(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) |
Represents an affiliated issuer. Assets with a total aggregate market value of $ |
(17) |
State Street U.S. Government Money Market Fund. |
PIK |
Payment-in-Kind |
| • | The valuation process begins with each portfolio company or investment being initially valued by investment professionals of the Adviser responsible for credit monitoring or independent third party valuation firms. |
| • | Preliminary valuation conclusions are then documented and discussed with a committee comprised of certain senior management employees of the Adviser (the “Valuation Committee”) established by the Adviser to assist the Adviser in discharging its responsibilities as valuation designee. |
| • | 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 Adviser discusses valuations and determines the fair value of each investment in the portfolio in good faith pursuant to board-approved policies and procedures. |
| Instrument |
Type |
Fair value |
||||
| Grayson Investor Corp. |
$ | |
||||
| PAMCO CLO 1997-1A B |
||||||
| American Banknote Corp. |
||||||
| IQHQ, Inc. |
||||||
| MPM Holdings, Inc. |
||||||
| MidWave Wireless, Inc. (fka Terrestar Corp.) |
||||||
| Wayne Services Legacy, Inc. |
||||||
| NexPoint Capital REIT, LLC |
||||||
| SFR WLIF III, LLC |
||||||
| US Gaming, LLC |
||||||
| Apnimed, Inc. |
||||||
| Apnimed, Inc. |
||||||
| Sapience Therapeutics, Inc. |
||||||
| Sapience Therapeutics, Inc. |
||||||
| CCS Medical, Inc. |
||||||
| NexPoint Capital REIT, LLC |
||||||
| MidWave Wireless, Inc. (fka Terrestar Corp.) |
||||||
| MidWave Wireless, Inc. (fka Terrestar Corp.) |
||||||
| MidWave Wireless, Inc. (fka Terrestar Corp.) |
||||||
| MidWave Wireless, Inc. (fka Terrestar Corp.) |
||||||
| PlantSwitch, Inc. |
| Instrument |
Type |
Fair value |
||||
| Grayson Investor Corp. |
$ | |
||||
| PAMCO CLO 1997-1A B |
||||||
| American Banknote Corp. |
||||||
| IQHQ, Inc. |
||||||
| Terrestar Corp. |
||||||
| Wayne Services Legacy, Inc. |
||||||
| NexPoint Capital REIT, LLC |
||||||
| SFR WLIF III, LLC |
||||||
| US Gaming, LLC |
||||||
| Apnimed, Inc. |
||||||
| Apnimed, Inc. |
||||||
| Sapience Therapeutics, Inc. |
||||||
| Sapience Therapeutics, Inc. |
||||||
| CCS Medical, Inc. |
||||||
| Terrestar Corp. |
||||||
| Terrestar Corp. |
||||||
| Terrestar Corp. |
||||||
| Terrestar Corp. |
||||||
September 30, 2023 |
||||||||||||||||
| Investments |
Level 1 |
Level 2 |
Level 3 |
Total |
||||||||||||
| Assets |
| |||||||||||||||
| Senior Secured Loans |
| |||||||||||||||
| Bioplastics |
$ | $ | $ | $ | ||||||||||||
| Healthcare |
||||||||||||||||
| Real Estate |
||||||||||||||||
| Telecommunication Services |
||||||||||||||||
| Asset-Backed Securities |
| |||||||||||||||
| Financials |
||||||||||||||||
| Corporate Bonds |
| |||||||||||||||
| Media/Telecommunications |
||||||||||||||||
| Common Stocks |
| |||||||||||||||
| Chemicals |
||||||||||||||||
| Energy |
||||||||||||||||
| Financials |
||||||||||||||||
| Real Estate |
||||||||||||||||
| Real Estate Investment Trusts (REITs) |
||||||||||||||||
| Service |
||||||||||||||||
| Telecommunication Services |
||||||||||||||||
| LLC Interests |
| |||||||||||||||
| Consumer Products |
||||||||||||||||
| Real Estate |
||||||||||||||||
| Preferred Stocks |
| |||||||||||||||
| Financials |
||||||||||||||||
| Healthcare |
||||||||||||||||
| Warrants |
| |||||||||||||||
| Energy |
||||||||||||||||
| Media/Telecommunications |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total Assets |
$ |
$ |
$ |
$ |
||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total Investments |
$ |
$ |
$ |
$ |
||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
December 31, 2022 |
||||||||||||||||
| Investments |
Level 1 |
Level 2 |
Level 3 |
Total |
||||||||||||
| Assets |
| |||||||||||||||
| Senior Secured Loans |
| |||||||||||||||
| Healthcare |
$ | $ | $ | $ | ||||||||||||
| Telecommunication Services |
||||||||||||||||
| Asset-Backed Securities |
| |||||||||||||||
| Financials |
||||||||||||||||
| Corporate Bonds |
| |||||||||||||||
| Healthcare |
||||||||||||||||
| Media/Telecommunications |
||||||||||||||||
| Common Stocks |
| |||||||||||||||
| Chemicals |
||||||||||||||||
| Energy |
||||||||||||||||
| Financials |
||||||||||||||||
| Real Estate |
||||||||||||||||
| Real Estate Investment Trust (REITs) |
||||||||||||||||
| Service |
||||||||||||||||
| Telecommunication Services |
||||||||||||||||
| LLC Interests |
| |||||||||||||||
| Consumer Products |
||||||||||||||||
| Real Estate |
||||||||||||||||
| Preferred Stocks |
| |||||||||||||||
| Financials |
||||||||||||||||
| Healthcare |
||||||||||||||||
| Warrants |
| |||||||||||||||
| Energy |
||||||||||||||||
| Media/Telecommunications |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total Assets |
$ |
$ |
$ |
$ |
||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total Investments |
$ |
$ |
$ |
$ |
||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Investments: |
Balance as of December 31, 2022 |
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 September 30, 2023 |
Change in unrealized gain/(loss) on Level 3 securities still held at period end |
|||||||||||||||||||||||||||||||||
| Assets |
||||||||||||||||||||||||||||||||||||||||||||
| Senior Secured Loans |
||||||||||||||||||||||||||||||||||||||||||||
| Bioplastics |
$ | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||
| Healthcare |
( |
) | ( |
) | ||||||||||||||||||||||||||||||||||||||||
| Real Estate |
||||||||||||||||||||||||||||||||||||||||||||
| Telecommunication Services |
||||||||||||||||||||||||||||||||||||||||||||
| Asset-Backed Securities |
||||||||||||||||||||||||||||||||||||||||||||
| Financials |
||||||||||||||||||||||||||||||||||||||||||||
| Common Stocks |
||||||||||||||||||||||||||||||||||||||||||||
| Chemicals |
||||||||||||||||||||||||||||||||||||||||||||
| Financials |
||||||||||||||||||||||||||||||||||||||||||||
| Real Estate |
||||||||||||||||||||||||||||||||||||||||||||
| Service |
||||||||||||||||||||||||||||||||||||||||||||
| Telecommunication Services |
( |
) | ( |
) | ||||||||||||||||||||||||||||||||||||||||
| LLC Interests |
||||||||||||||||||||||||||||||||||||||||||||
| Consumer Products |
( |
) | ||||||||||||||||||||||||||||||||||||||||||
| Real Estate |
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||||||||||||
| Preferred Stocks |
||||||||||||||||||||||||||||||||||||||||||||
| Healthcare |
( |
) | ||||||||||||||||||||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
| Total |
$ | $ | $ | $ | $ | $ | $ | ( |
) | $ | $ | ( |
) | $ | $ | ( |
) | |||||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
| 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 September 30, 2022 |
Change in unrealized gain/(loss) on Level 3 securities still held at period end |
|||||||||||||||||||||||||||||||||
| Assets |
||||||||||||||||||||||||||||||||||||||||||||
| Senior Secured Loans |
||||||||||||||||||||||||||||||||||||||||||||
| Telecommunication Services |
$ | $ | $ | $ | $ | $ | $ | ( |
) | $ | $ | $ | $ | ( |
) | |||||||||||||||||||||||||||||
| Healthcare |
( |
) | ||||||||||||||||||||||||||||||||||||||||||
| Asset-Backed Securities |
||||||||||||||||||||||||||||||||||||||||||||
| Financials |
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||||||||||||
| Common Stocks |
||||||||||||||||||||||||||||||||||||||||||||
| Financials |
( |
) | ( |
) | ||||||||||||||||||||||||||||||||||||||||
| Real Estate |
( |
) | ( |
) | ||||||||||||||||||||||||||||||||||||||||
| Service |
||||||||||||||||||||||||||||||||||||||||||||
| Telecommunication Services |
||||||||||||||||||||||||||||||||||||||||||||
| LLC Interests |
||||||||||||||||||||||||||||||||||||||||||||
| Consumer Products |
( |
) | ( |
) | ||||||||||||||||||||||||||||||||||||||||
| Real Estate |
( |
) | ( |
) | ||||||||||||||||||||||||||||||||||||||||
| Preferred Stocks |
||||||||||||||||||||||||||||||||||||||||||||
| Healthcare |
||||||||||||||||||||||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
| Total |
$ | $ | $ | $ | $ | $ | ( |
) | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Investment |
Fair value at September 30, 2023 |
Valuation Technique |
Unobservable Inputs |
Range of Inputs Value(s) (arithmetic average) |
||||||||
LLC Interest |
$ | | ||||||||||
Preferred Stock |
$ |
| ||||||||||
Common Stock |
Price/MHz-PoP N/A |
( ( $ $ $ |
| |||||||||
Senior Secured Loans |
$ |
|||||||||||
Asset-Backed Securities |
||||||||||||
Total |
$ |
|||||||||||
Investment |
Fair value at December 31, 2022 |
Valuation technique |
Unobservable inputs |
Range of input value(s) (weighted average) |
||||||||
LLC Interest |
$ |
|
| |||||||||
Preferred Stocks |
|
$ |
| |||||||||
Common Stocks |
N/A |
|
( $ ($$ ($$ |
| ||||||||
Senior Secured Loans |
||||||||||||
Asset-Backed Securities |
||||||||||||
Total |
$ |
|||||||||||
For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||
2023 |
2022 |
2023 |
2022 |
|||||||||||||
Net (decrease) in net assets resulting from operations |
$ | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||
Weighted average common shares outstanding |
||||||||||||||||
Earnings (loss) per common share-basic and diluted |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) | ||||||
Fair value |
Percentage |
|||||||
Assets |
||||||||
Healthcare |
$ | % | ||||||
Real Estate |
% | |||||||
Telecommunication Services |
% | |||||||
Financials |
% | |||||||
Consumer Products |
% | |||||||
Energy |
% | |||||||
Bioplastics |
% | |||||||
Real Estate Investment Trusts (REITs) |
% | |||||||
Media/Telecommunications |
% | |||||||
Chemicals |
% | |||||||
Service |
% | |||||||
Total Assets |
$ |
% | ||||||
Fair value |
Percentage |
|||||||
Assets |
||||||||
Healthcare |
$ | % | ||||||
Real Estate |
% | |||||||
Telecommunication Services |
% | |||||||
Consumer Products |
% | |||||||
Financials |
% | |||||||
Energy |
% | |||||||
Real Estate Investment Trusts (REITs) |
% | |||||||
Media/Telecommunications |
% | |||||||
Chemicals |
% | |||||||
Service |
% | |||||||
Total Assets |
$ |
% | ||||||
Amortized Cost |
Fair value |
Percentage of Portfolio (at Fair Value) |
||||||||||
Assets |
||||||||||||
Senior Secured Loans - First Lien |
$ | $ | % | |||||||||
Senior Secured Loans - Second Lien |
% | |||||||||||
Asset-Backed Securities |
% | |||||||||||
Corporate Bonds |
% | |||||||||||
Common Stocks |
% | |||||||||||
LLC Interests |
% | |||||||||||
Preferred Stocks |
% | |||||||||||
Warrants |
% | |||||||||||
Total Assets |
$ |
$ |
% | |||||||||
Amortized Cost |
Fair value |
Percentage of Portfolio (at Fair Value) |
||||||||||
Assets |
||||||||||||
Senior Secured Loans - First Lien |
$ | $ | % | |||||||||
Senior Secured Loans - Second Lien |
% | |||||||||||
Asset-Backed Securities |
% | |||||||||||
Corporate Bonds |
% | |||||||||||
Common Stocks |
% | |||||||||||
LLC Interests |
% | |||||||||||
Preferred Stocks |
% | |||||||||||
Warrants |
% | |||||||||||
Total Assets |
$ |
$ |
% | |||||||||
| Geography |
Fair value |
Percentage |
||||||
| Assets |
||||||||
| Cayman Islands (1) |
$ | % | ||||||
| Luxembourg (1) |
% | |||||||
| United States |
% | |||||||
| |
|
|
|
|||||
| Total Assets |
$ |
% | ||||||
| |
|
|
|
|||||
(1) |
Investment denominated in USD. |
| Geography |
Fair value |
Percentage |
||||||
| Assets |
||||||||
| Cayman Islands (1) |
$ | % | ||||||
| Luxembourg (1) |
% | |||||||
| United States |
% | |||||||
| |
|
|
|
|||||
| Total Assets |
$ |
% | ||||||
| |
|
|
|
|||||
(1) |
Investment denominated in USD. |
| Period ended |
Yearly cumulative other expense |
Yearly expense limitation |
Yearly cumulative expense reimbursement |
Quarterly recoupable/ (recouped) amount |
Recoupment eligibility expiration |
|||||||||||||||
| September 30, 2023 |
$ | $ | $ | $ | ||||||||||||||||
| June 30, 2023 |
||||||||||||||||||||
| March 31, 2023 |
||||||||||||||||||||
| Period ended |
Yearly cumulative other expense |
Yearly expense limitation |
Yearly cumulative expense reimbursement |
Quarterly recoupable/ (recouped) amount |
Recoupment eligibility expiration |
|||||||||||||||
| December 31, 2022 |
$ | $ | $ | $ | ||||||||||||||||
| September 30, 2022 |
||||||||||||||||||||
| June 30, 2022 |
||||||||||||||||||||
| March 31, 2022 |
||||||||||||||||||||
| Period ended |
Yearly cumulative other expense |
Yearly expense limitation |
Yearly cumulative expense reimbursement |
Quarterly recoupable/ (recouped) amount |
Recoupment eligibility expiration |
|||||||||||||||
| December 31, 2021 |
$ | $ | $ | $ | ||||||||||||||||
| September 30, 2021 |
||||||||||||||||||||
| June 30, 2021 |
||||||||||||||||||||
| March 31, 2021 |
||||||||||||||||||||
| Period ended |
Yearly cumulative other expense |
Yearly expense limitation |
Yearly cumulative expense reimbursement |
Quarterly recoupable/ (recouped) amount |
Recoupment eligibility expiration |
|||||||||||||||
| December 31, 2020 |
$ | $ | $ | $ | ||||||||||||||||
| September 30, 2020 |
||||||||||||||||||||
| June 30, 2020 |
||||||||||||||||||||
| March 31, 2020 |
||||||||||||||||||||
Affiliated investments |
Shares at December 31, 2022 |
Fair value as of December 31, 2022 |
Transfers in (at cost) |
Purchases |
Sales |
Realized gains (losses) |
Change in unrealized appreciation (depreciation) |
Fair value as of September 30, 2023 |
Shares at September 30, 2023 |
Affiliated Dividend income |
||||||||||||||||||||||||||||||
NexPoint Residential Trust, Inc. |
$ | $ | $ | $ | $ | $ | ( |
) | $ | $ | $ | |||||||||||||||||||||||||||||
NexPoint Capital REIT, LLC (Senior Loans & Common Stocks) |
( |
) | ||||||||||||||||||||||||||||||||||||||
NexPoint Real Estate Finance, Inc. |
( |
) | ||||||||||||||||||||||||||||||||||||||
SFR WLIF III, LLC |
( |
) | ||||||||||||||||||||||||||||||||||||||
Total affiliated investments |
$ | $ | $ | $ | ( |
) | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
For the Nine Months Ended |
For the Nine Months Ended |
|||||||
September 30, 2023 (Unaudited) |
September 30, 2022 (Unaudited) |
|||||||
| Common shares per share operating performance: |
| |||||||
| Net asset value, beginning of period |
$ | $ | ||||||
| Income from investment operations: |
| |||||||
| Net investment income (1) |
||||||||
| Net realized and unrealized gain (loss) |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Total from investment operations |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Less distribution declared to common shareholders: |
| |||||||
| From net investment income |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Total distributions declared to common shareholders |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Capital share transaction |
| |||||||
| Issuance of common stock (2) |
||||||||
| Shares tendered (1) |
||||||||
| Net asset value, end of period |
$ | $ | ||||||
| Net asset value total return (3)(4) |
( |
)% | ( |
)% | ||||
| Ratio and supplemental data: |
| |||||||
| Net assets, end of period (in 000’s) |
$ | $ | ||||||
| Shares outstanding, end of period |
||||||||
| Common share information at end of period: |
| |||||||
| Ratios based on weighted average net assets of common shares: |
| |||||||
| Gross operating expenses (5) |
% | % | ||||||
| Fees and expenses waived or reimbursed (5) |
( |
)% | ( |
)% | ||||
| Net operating expenses (5) |
% | % | ||||||
| Net investment income (loss) before fees waived or reimbursed (5) |
% | % | ||||||
| Net investment income (loss) after fees waived or reimbursed (5) |
% | % | ||||||
| Portfolio turnover rate (4) |
% | % | ||||||
| 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. |
| 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 outbreak of COVID-19 or a future pandemic or epidemic 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 Form 10-Q are excluded from the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended (the “1933 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.
40
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.
Effective July 12, 2022, certain Skyview personnel became dual-employees of NexPoint Services, Inc., a wholly-owned subsidiary of the Adviser. The same services are being performed by the dual-employees. The Adviser, and not the Company, will compensate all Adviser, Skyview, and dual-employee 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 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 Sections 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 Sections 3(c)(1) or 3(c)(7) of the 1940 Act.
41
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. Prior to July 21, 2023, the Adviser controlled 2,549,002 total shares of common stock of the Company, including reinvestment of dividends, for a net amount of approximately $13.4 million. On July 21, 2023, pursuant to the terms of a Stock Purchase Agreement, Liberty purchased a total of 2,549,002 shares of the Company, representing 27.05% of the Company’s currently issued and outstanding common stock. In aggregate, as of September 30, 2023, Liberty controls 2,549,002 total shares of common stock of the Company, including reinvestment of dividends, for a net amount of approximately $13.3 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; |
| • | 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; |
42
| • | 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, 2024.
Any expenses waived or reimbursed by the Adviser pursuant to the Expense Limitation Agreement are subject to possible recoupment by the Adviser within three years from the date of the waiver or reimbursement. The recoupment by the Adviser will be limited to the amount of previously waived or reimbursed expenses and cannot cause the Company’s expenses to exceed any expense limitation in place at the time of recoupment or waiver.
Reimbursable Expenses Table
The cumulative total of fees waived by the Adviser under the Expense Limitation Agreement which are recoupable as of September 30, 2023, is $1,054,939. 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 2023 quarterly fee waivers and expense reimbursements due from the Adviser as of September 30, 2023, which are subject to recoupment by the Adviser.
43
| Quarter Ended |
Yearly Cumulative Other Expenses |
Yearly Expense Limitation |
Yearly Cumulative Expense Reimbursement |
Quarterly Recoupable/ (Recouped) Amount |
Recoupment Eligibility Expiration |
|||||||||||||||
| September 30, 2023 |
$ | 630,924 | $ | 350,382 | $ | 280,543 | $ | 96,669 | September 30, 2026 | |||||||||||
| June 30, 2023 |
420,066 | 236,192 | 183,874 | $ | 102,016 | June 30, 2026 | ||||||||||||||
| March 31, 2023 |
208,486 | 126,628 | 81,858 | 81,858 | March 31, 2026 | |||||||||||||||
The following table reflects the 2022 quarterly fee waivers and expense reimbursements due from the Adviser as of December 31, 2022, 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, 2022 |
$ | 913,273 | $ | 535,679 | $ | 377,594 | $ | 92,216 | December 31, 2025 | |||||||||||
| September 30, 2022 |
678,333 | 392,955 | 285,378 | 124,667 | September 30, 2025 | |||||||||||||||
| 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 | - | Expired | |||||||||||||||
| June 30, 2020 |
445,585 | 291,677 | 153,908 | - | Expired | |||||||||||||||
| March 31, 2020 |
257,226 | 72,779 | 184,447 | - | Expired | |||||||||||||||
During the three and nine months ended September 30, 2023, $94,039 and $247,947 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 our 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.
Portfolio Investment Activity for the three and nine months ended September 30, 2023 and September 30, 2022:
During the nine months ended September 30, 2023, we made long investments in portfolio companies and other investments totaling $2,582,498. During the same period, we generated proceeds from sales and principal repayments on long investments of $6,617,808. As of September 30, 2023, our investment portfolio, with a total fair value of $47.6 million, consisted of 37 interests in portfolio companies (calculated as a percentage of total invested assets: 21.4% in first lien senior secured loans, 0.6% in second lien senior secured loans, 0.5% in corporate bonds, 0.0% in asset-backed securities, 0.5% in warrants, 29.8% in common stock, 25.1% in preferred stock, and 22.1% in LLC interests). On a look-through basis, the debt investments in our portfolio carry a weighted average cost price of 97.93% on par or stated value, as applicable, and our estimated gross annual portfolio yield (which represents the expected yield to be generated by us on our investment portfolio based on the composition of our portfolio as of such date), prior to leverage costs, was 2.52% based on the amortized cost of our investments. The portfolio yield does not represent an actual investment return to stockholders and does not include income from CLO equity.
44
During the nine months ended September 30, 2022, we made long investments in portfolio companies and other investments totaling $8,148,175. During the same period, we generated proceeds from sales and principal repayments on long investments of $9,358,594. As of September 30, 2022, our investment portfolio, with a total fair value of $53.3 million, consisted of 38 interests in portfolio companies (calculated as a percentage of total invested assets: 23.3% in first lien senior secured loans, 5.3% in second lien senior secured loans, 5.3% in corporate bonds, 0.1% in asset-backed securities, 0.2% in warrants, 36.6% in common stock, 21.1% in preferred stock, and 8.2% in LLC interests). On a lookthrough basis, the debt investments in our portfolio carry a weighted average cost price of 94.33% on par or stated value, as applicable, and our estimated gross annual portfolio yield (which represents the expected yield to be generated by us on our investment portfolio based on the composition of our portfolio as of such date), prior to leverage costs, was 3.03% based on the amortized cost of our investments. The portfolio yield does not represent an actual investment return to stockholders and does not include income from CLO equity.
Total Portfolio Activity
The following tables present selected information regarding our portfolio investment activity for the three - and nine months ended September 30, 2023, and September 30, 2022. The table below includes non-cash transactions for the three and nine months ended September 30, 2023.
| Net Investment Activity |
For the Three Months Ended September 30, 2023 |
For the Nine Months Ended September 30, 2023 |
||||||
| Purchases |
$ | 2,582,498 | $ | 3,045,812 | ||||
| Payment-in-kind |
25,403 | 95,492 | ||||||
| Sales and Principal Repayments |
(3,248,788 | ) | (6,617,808 | ) | ||||
|
|
|
|
|
|||||
| Net Portfolio Activity |
$ | (640,887 | ) | $ | (3,476,504 | ) | ||
|
|
|
|
|
|||||
| Net Investment Activity |
For the Three Months Ended September 30, 2022 |
For the Nine Months Ended September 30, 2022 |
||||||
| Purchases |
$ | 1,440 | $ | 8,148,175 | ||||
| Payment-in-kind |
29,338 | 164,117 | ||||||
| Sales and Principal Repayments |
(2,485 | ) | (9,358,594 | ) | ||||
|
|
|
|
|
|||||
| Net Portfolio Activity |
$ | (28,293 | ) | $ | (1,046,302 | ) | ||
|
|
|
|
|
|||||
| For the Three Months Ended September 30, 2023 |
For the Nine Months Ended September 30, 2023 |
|||||||||||||||
| New Investment Activity by Asset Class |
Purchases | Percentage | Purchases | Percentage | ||||||||||||
| Senior Secured Loans—First Lien |
$ | 2,000,000 | 77.4 | % | $ | 2,463,314 | 80.9 | % | ||||||||
| Senior Secured Loans—Second Lien |
— | — | — | 0.0 | % | |||||||||||
| Corporate Bonds |
— | — | — | 0.0 | % | |||||||||||
| Preferred Stocks |
— | — | — | 0.0 | % | |||||||||||
| LLC Interests |
— | — | — | 0.0 | % | |||||||||||
| Warrants |
— | — | — | 0.0 | % | |||||||||||
| Common Stocks |
582,498 | 22.6 | % | 582,498 | 19.1 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Investment Activity |
$ | 2,582,498 | 100.0 | % | $ | 3,045,812 | 100.0 | % | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| For the Three Months Ended September 30, 2022 |
For the Nine Months Ended September 30, 2022 |
|||||||||||||||
| New Investment Activity by Asset Class |
Purchases | Percentage | Purchases | Percentage | ||||||||||||
| Senior Secured Loans—First Lien |
$ | — | — | $ | 2,910,000 | 35.7 | % | |||||||||
| Senior Secured Loans—Second Lien |
— | — | — | 0.0 | % | |||||||||||
| Corporate Bonds |
— | — | — | 0.0 | % | |||||||||||
| Preferred Stocks |
— | — | 5,199,993 | 63.9 | % | |||||||||||
| LLC Interests |
— | — | 15,000 | 0.2 | % | |||||||||||
| Warrants |
— | — | — | 0.0 | % | |||||||||||
| Common Stocks |
1,440 | 100.0 | % | 23,182 | 0.3 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Investment Activity |
$ | 1,440 | 100.0 | % | $ | 8,148,175 | 100.0 | % | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
45
The following tables summarize the composition of our investment portfolio at amortized cost and fair value as of September 30, 2023, and December 31, 2022:
| September 30, 2023 | ||||||||||||
| Portfolio Composition by Investment Type |
Amortized Cost (1) | Fair Value | Percentage of Portfolio (at fair value) |
|||||||||
| Senior Secured Loans — First Lien |
$ | 10,542,250 | $ | 10,164,389 | 21.4 | % | ||||||
| Senior Secured Loans — Second Lien |
1,495,330 | 272,222 | 0.6 | % | ||||||||
| Asset-Backed Securities |
388,541 | 16,627 | 0.0 | % | ||||||||
| LLC Interests |
10,734,196 | 10,500,365 | 22.1 | % | ||||||||
| Corporate Bonds |
898,247 | 255,247 | 0.5 | % | ||||||||
| Common Stocks |
10,287,517 | 14,187,470 | 29.8 | % | ||||||||
| Preferred Stocks |
11,829,987 | 11,963,894 | 25.1 | % | ||||||||
| Warrants |
74,285 | 242,358 | 0.5 | % | ||||||||
|
|
|
|
|
|
|
|||||||
| Total Invested Assets |
$ | 46,250,353 | $ | 47,602,572 | 100.0 | % | ||||||
|
|
|
|
|
|
|
|||||||
| (1) | Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on investments. |
| December 31, 2022 | ||||||||||||
| Portfolio Composition by Investment Type |
Amortized Cost (1) |
Fair Value | Percentage of Portfolio (at fair value) |
|||||||||
| Senior Secured Loans — First Lien |
$ | 14,645,107 | $ | 11,575,822 | 21.7 | % | ||||||
| Senior Secured Loans — Second Lien |
2,976,056 | 2,652,371 | 5.0 | % | ||||||||
| Asset-Backed Securities |
388,541 | 7,036 | 0.0 | % | ||||||||
| LLC Interests |
3,666,112 | 4,689,242 | 8.8 | % | ||||||||
| Corporate Bonds |
3,358,783 | 2,704,917 | 5.1 | % | ||||||||
| Common Stocks |
17,100,444 | 19,514,684 | 36.6 | % | ||||||||
| Preferred Stocks |
11,829,986 | 11,967,910 | 22.5 | % | ||||||||
| Warrants |
74,284 | 181,733 | 0.3 | % | ||||||||
|
|
|
|
|
|
|
|||||||
| Total Invested Assets |
$ | 54,039,313 | $ | 53,293,715 | 100.0 | % | ||||||
|
|
|
|
|
|
|
|||||||
| (1) | Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on investments. |
The following table presents certain selected information regarding the composition of our investment portfolio as of September 30, 2023, and December 31, 2022:
| September 30, 2023 | December 31, 2022 | |||||||
| Number of Investments |
37 | 39 | ||||||
| % Variable Rate (based on fair value) |
48 | % | 71 | % | ||||
| % Non-Income Producing Equity or Other Investments (based on fair value) |
42 | % | 27 | % | ||||
| Weighted Average Cost Price of Investments (as a % of par or stated value) |
97.93 | % | 94.17 | % | ||||
| Weighted Average Credit Rating of Investments that were Rated |
Ca | Caa1 | ||||||
| % of Fixed Income Investments on Non-Accrual (based on fair value) |
0.0 | % | 0.0 | % | ||||
46
Portfolio Composition by Strategy and Industry
The table below summarizes the composition of our investment portfolio by strategy and enumerates the percentage, by fair value, of the total portfolio assets in such strategies as of September 30, 2023, and December 31, 2022:
| September 30, 2023 | December 31, 2022 | |||||||||||||||
| Portfolio Composition by Strategy |
Fair Value | Percentage of Portfolio |
Fair Value | Percentage of Portfolio |
||||||||||||
| Broadly Syndicated – Private |
$ | 6,110,726 | 12.8 | % | $ | 6,183,456 | 11.6 | % | ||||||||
| Broadly Syndicated – Public |
2,523,114 | 5.3 | % | 2,561,915 | 4.8 | % | ||||||||||
| Middle-Market |
36,968,720 | 77.7 | % | 42,133,492 | 74.4 | % | ||||||||||
| Opportunistic/Other |
2,000,012 | 4.2 | % | 2,414,852 | 5.1 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Invested Assets |
$ | 47,602,572 | 100.0 | % | $ | 53,293,715 | 100.0 | % | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Broadly syndicated debt refers to loans and other instruments originated by a bank to a large corporation (both private and public) that are sold off, or syndicated, to investors in pieces. Middle-Market companies include companies with annual revenues between $50 million and $2.5 billion.
The table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets in such industries as of September 30, 2023, and December 31, 2022:
| September 30, 2023 | December 31, 2022 | |||||||||||||||
| Industry Classifications |
Fair Value | Percentage of Portfolio |
Fair Value | Percentage of Portfolio |
||||||||||||
| Bioplastics |
$ | 2,000,000 | 4.2 | % | $ | — | — | % | ||||||||
| Chemicals |
42,500 | 0.1 | % | 42,500 | 0.1 | % | ||||||||||
| Consumer Products |
2,885,636 | 6.1 | % | 3,088,750 | 5.8 | % | ||||||||||
| Energy |
2,431,677 | 5.1 | % | 1,752,941 | 3.3 | % | ||||||||||
| Financials |
3,133,502 | 6.6 | % | 3,180,161 | 6.0 | % | ||||||||||
| Healthcare |
17,386,761 | 36.5 | % | 26,101,074 | 49.0 | % | ||||||||||
| Media/Telecommunications |
264,950 | 0.6 | % | 310,563 | 0.6 | % | ||||||||||
| Real Estate Investment Trusts (REITs) |
753,316 | 1.6 | % | 1,018,779 | 1.9 | % | ||||||||||
| Real Estate |
12,591,158 | 26.5 | % | 11,613,222 | 21.8 | % | ||||||||||
| Service |
2,346 | 0.0 | % | 2,268 | 0.0 | % | ||||||||||
| Telecommunication Services |
6,110,726 | 12.8 | % | 6,183,457 | 11.6 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Invested Assets |
$ | 47,602,572 | 100.0 | % | $ | 53,293,715 | 100.0 | % | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
As of September 30, 2023, the Company was an “affiliated person,” as defined in the 1940 Act, of NexPoint Real Estate Finance, Inc., NexPoint Capital, REIT, SFR WLIF III, and NexPoint Residential Trust, Inc. In general, under the 1940 Act, we are presumed to “control” a portfolio company if we owned 25% or more of its voting securities or we 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 we owned 5% or more of its voting securities.
Summary Description of Portfolio Companies/Investments
As of September 30, 2023, and December 31, 2022, 48.6% and 53.5% (based on fair value), respectively, of our portfolio consisted of healthcare related and opportunistic investments. Information regarding these investments is provided below. Information regarding these investments is provided below. This additional information is limited to publicly available information, and does not address credit worthiness or financial viability of the issuer, or our future plans as it relates to a specific investment:
Healthcare Investments
BDC Sapience Holdco, LLC. (Sapience Therapeutics, Inc.): As of September 30, 2023, and December 31, 2022, we held preferred shares of Sapience Therapeutics, Inc. with an aggregate fair value of $8.3 million and $8.1 million, respectively. Sapience Therapeutics is a clinical stage biopharmaceutical company which addresses previously ‘undruggable’ molecular targets that address protein-protein interactions via the development of peptide-based drugs.
CCS Medical, Inc.: As of September 30, 2023, and December 31, 2022, we held first lien senior secured loans of CCS Medical, Inc. with an aggregate fair value of $3.0 million and $3.0 million, respectively. CCS Medical, Inc. provides direct-to-home delivery of medical supplies. The Company offers diabetes testing, insulin pumps, prescription medications, ostomy, urological, wound care, and incontinence supplies. CCS Medical serves customers in the United States.
47
Apnimed, Inc.: As of September 30, 2023, and December 31, 2022, we held preferred shares of Apnimed Inc, with an aggregate fair value of $2.3 million and $2.3 million, respectively. Apnimed, Inc. is a clinical-stage pharmaceutical company focused on developing oral pharmacologic therapies for the treatment of obstructive sleep apnea (OSA) and related disorders. Apnimed’s lead development program targets the neurologic control of upper airway muscles to maintain an open airway during sleep.
Covenant Surgical Partners, Inc.: As of September 30, 2023, and December 31, 2022, we held first lien senior secured loans of Covenant Surgical Partners, Inc. with an aggregate fair value of $1.3 million and $1.6 million, respectively. Covenant Physician Partners is a physician services company that partners with leading healthcare providers across the country to grow thriving practices and centers. As of September 30, 2023, the company delivered physician services to nearly 1,735 associates and physicians in 19 states.
Auris Luxembourg III S.a.r.l.: As of September 30, 2023, and December 31, 2022, we held first lien senior secured loans of Auris Luxembourg III S.a.r.l. with an aggregate fair value of $1.4 million and $1.3 million, respectively. Auris Luxembourg III S.a.r.l’s parent, WSAudiology is a global hearing aid manufacturer.
Results of Operations for the three and nine months ended September 30, 2023, and September 30, 2022
Revenues
We generate a significant portion of our investment income in the form of interest on the debt securities we purchase or originate. We have invested primarily in broadly syndicated bank loans of private companies. Bank loans generally pay interest at rates which are periodically determined by reference to a base lending rate plus a spread. The base lending rate is typically the three-month LIBOR. The settlement of bank loans differs from the settlement of many other equity or debt instruments. Bank loans are manually settled through the agent by assignment. As a result, settlement can take an undetermined amount of time. Currently, according to data provided by Markit Partners, bank loans settle, on average, on the seventeenth day after the trade date. Generally, interest does not begin to accrue to the buyer until seven business days after the trade date.
Our CLO equity pays quarterly dividends based on excess cash flow available after the CLO’s payment “waterfall” provisions. Both Grayson and PAMCO CLOs are past their respective investment periods, and as a result, excess cash flow is expected to decline over time. We, therefore, expect that the quarterly dividends paid by the investments will similarly decline.
Expenses
For the three and nine months ended September 30, 2023, we had total net operating expenses of $377,145 or $0.04 per share and $1,234,826 or $0.13 per share, respectively. For the three and nine months ended September 30, 2022, we had total net operating expenses of $437,984 or $0.04 per share and $1,432,111 or $0.14 per share, respectively. Base management fees attributed to the Adviser were $207,269 and $705,652 for the three months and nine months ended September 30, 2023. Base management fees attributed to the Adviser were $254,995 and $836,626 for the three and nine months ended September 30, 2022. Our expenses include administrative services expenses attributed to the Adviser of $47,312 and $146,989 for the three and nine months ended September 30, 2023, respectively. Administrative services expenses attributed to the Adviser were $55,480 and $171,815 for the three and nine months ended September 30, 2022, 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 advisory fees.
Our other expenses subject to the Expense Limitation Agreement for three and nine months ended September 30, 2023, were $210,859 and $630,925, respectively, and consisted of the following:
| For the Three Months Ended September 30, 2023 |
For the Nine Months Ended September 30, 2023 |
|||||||
| Audit and tax fees |
$ | 41,176 | $ | 123,032 | ||||
| Legal fees |
9,631 | 28,527 | ||||||
| Custodian and accounting service fees |
77,265 | 231,112 | ||||||
| Reports to stockholders |
25,591 | 63,323 | ||||||
| Stock transfer fee |
41,561 | 124,138 | ||||||
48
| For the Three Months Ended September 30, 2023 |
For the Nine Months Ended September 30, 2023 |
|||||||
| Directors’ fees |
(1,471 | ) | 9,231 | |||||
| Other expenses |
17,106 | 51,562 | ||||||
|
|
|
|
|
|||||
| Total |
$ | 210,859 | $ | 630,925 | ||||
|
|
|
|
|
|||||
Please refer to the Expense Limitation section above for further details on expense reimbursements.
Our other expenses subject to the Expense Limitation Agreement for three and nine months ended September 30, 2022, were $239,622 and $678,333, respectively, and consisted of the following:
| For the Three Months Ended September 30, 2022 |
For the Nine Months Ended September 30, 2022 |
|||||||
| Audit and tax fees |
$ | 44,074 | $ | 123,991 | ||||
| Legal fees |
13,459 | 53,658 | ||||||
| Custodian and accounting service fees |
78,412 | 232,701 | ||||||
| Reports to stockholders |
21,930 | 60,644 | ||||||
| Stock transfer fee |
53,802 | 156,065 | ||||||
| Directors’ fees |
4,421 | 12,134 | ||||||
| Other expenses |
23,524 | 39,140 | ||||||
|
|
|
|
|
|||||
| Total |
$ | 239,622 | $ | 678,333 | ||||
|
|
|
|
|
|||||
Net Investment Income
We earned net investment income of $681,628 or $0.07 per share, and $1,557,215 or $0.16 per share, for the three and nine months ended September 30, 2023, respectively. We earned net investment income of $555,608 or $0.06 per share, and $1,675,987 or $0.17 per share, for the three and nine months ended September 30, 2022, respectively.
Net Realized Gains or Losses
We had sales or principal repayments of $3,248,788 and $6,617,808 during the three and nine months ended September 30, 2023, respectively, from which we realized a net gains/(losses) of $(242,193) and $(4,015,983) respectively. We had sales or principal repayments of $43,767 and
$9,356,594 during the three and nine months ended September 30, 2022, respectively, from which we realized a net gains/(losses) of $2,056 and $267,485 respectively.
Net Change in Unrealized Appreciation (Depreciation) on Investments
For the three months ended September 30, 2023 and September 30, 2022, the net change in unrealized appreciation (depreciation) on investments totaled $265,026 or $0.03 per share, and $(3,210,287) or $(0.32) per share, respectively. For the nine months ended September 30, 2023, and September 30, 2022, the net change in unrealized appreciation (depreciation) on investments totaled $2,070,475 or $0.21 per share, and $(6,379,359) or $(0.64) per share, respectively. The net change in unrealized appreciation (depreciation) on our investments during the nine months ended September 30, 2023, was primarily driven by the performance of NexPoint Real Estate Finance, Inc. The net change in unrealized appreciation (depreciation) on our investments during the nine months ended September 30, 2022, was primarily driven by the performance of Envision Healthcare Corp. The net change in unrealized appreciation (depreciation) on our investments during the three months ended September 30, 2023, was primarily driven by the performance of QuarterNorth Energy, Inc. The net change in unrealized appreciation (depreciation) on our investments during the three months ended September 30, 2022, was primarily driven by the performance of Envision Healthcare Corp.
Net Increase from Payment from Affiliates
For the year ended December 31, 2016, the Adviser committed $872,000 to the Company to voluntarily reimburse the Company for unrealized losses sustained. No amounts were committed for the three and nine months ended September 30, 2023, and September 30, 2022. Cumulatively since inception, the Adviser has committed $2,275,000 to voluntarily reimburse the Company for such losses. Had these payments not been made, the NAV as of September 30, 2023, would have been lower. These payments are shown in the Statement of Operations as net increase from amounts committed by affiliates, if applicable, and are not recoupable.
Net Increase (Decrease) in Net Assets Resulting from Operations
For the nine months ended September 30, 2023, and September 30, 2022, the net increase/(decrease) in net assets resulting from operations was $(388,293) or $(0.04) per share, and $(4,435,887) or $(0.45) per share, respectively.
49
| For the Nine Months Ended September 30, 2023 |
For the Nine Months Ended September 30, 2022 |
|||||||
| Income |
$ | 2,792,041 | $ | 3,108,098 | ||||
| Net expenses |
(1,234,826 | ) | (1,432,111 | ) | ||||
| Net realized gain/(loss) |
(4,015,983 | ) | 267,485 | |||||
| Net unrealized appreciation (depreciation) |
2,070,475 | (6,379,359 | ) | |||||
| Net increase from amounts committed by affiliates |
— | — | ||||||
|
|
|
|
|
|||||
| Total |
$ | (388,293 | ) | $ | (4,435,887 | ) | ||
For the three months ended September 30, 2023, and September 30, 2022, the net increase/(decrease) in net assets resulting from operations was $704,461 or $0.07 per share, and $(2,652,623) or $(0.27) per share, respectively.
| For the Three Months Ended September 30, 2023 |
For the Three Months Ended September 30, 2022 |
|||||||
| Income |
$ | 1,058,773 | $ | 993,592 | ||||
| Net expenses |
(377,145 | ) | (437,984 | ) | ||||
| Net realized gain/(loss) |
(242,193 | ) | 2,056 | |||||
| Net unrealized appreciation (depreciation) |
265,026 | (3,210,287 | ) | |||||
| Net increase from amounts committed by affiliates |
— | — | ||||||
|
|
|
|
|
|||||
| Total |
$ | 704,461 | $ | (2,652,623 | ) | |||
Financial Condition, Liquidity and Capital Resources
As of September 30, 2023, and September 30, 2022, we had cash and cash equivalents of $2,350,754 and $2,173,985, respectively. As of September 30, 2023, and September 30, 2022, $2,097,864 and $1,752,448 was held in the State Street U.S. Government Money Market Fund, and
$252,890 and $421,537 was held in a custodial account with State Street Bank and Trust Company, respectively. Cash and cash equivalents are available to fund new investments, pay operating expenses and pay distributions.
Prior to July 21, 2023, the Adviser controlled 2,549,002 total shares of common stock of the Company, including reinvestment of dividends, for a net amount of approximately $13.4 million. On July 21, 2023, pursuant to the terms of a Stock Purchase Agreement, Liberty CLO Holdco Ltd. (“Liberty”) purchased a total of 2,549,002 shares of the Company, representing 27.05% of the Company’s currently issued and outstanding common stock. In aggregate, as of September 30, 2023, Liberty controls 2,549,002 total shares of common stock of the Company, including reinvestment of dividends, for a net amount of approximately $13.3 million.
The sales commissions and dealer manager fees related to the sale of our common stock were $0 and $0 for the three months ended September 30, 2023, and September 30, 2022, respectively, and were offset against capital in excess of par value on the consolidated financial statements.
We expect to generate cash flows primarily from fees, interest and dividends earned from our investments, as well as principal repayments and proceeds from sales of our investments.
Prior to investing in securities of portfolio companies, we invest the net proceeds from the issuance of shares of common stock under our distribution reinvestment plan and from sales and paydowns of existing investments primarily in cash, cash equivalents, U.S. government securities, repurchase agreements, high-quality debt instruments maturing in one year or less from the time of investment, consistent with our BDC election and our election to be treated as a RIC. Additionally, we may invest in higher yielding, liquid credit investments such as bank loans and corporate notes and bonds, which are considered “junk” as they are rated below investment grade, to the extent that at time of purchase 70% of our portfolio is in qualified investments as required by rules and regulations under the 1940 Act.
While we are authorized to issue preferred stock, we do not currently anticipate issuing any.
Contractual Obligations and Off-Balance Sheet Arrangements
We may become a party to financial instruments with off-balance sheet risk in the normal course of our business to meet the financial needs of our portfolio companies. These instruments may include commitments to extend credit and involve, to varying degrees, elements of liquidity and credit risk in excess of the amount recognized in the balance sheet. As of September 30, 2023 and September 30, 2022, we had no outstanding commitments to fund investments.
We have certain contracts under which we have material future commitments. We have entered into the Investment Advisory Agreement with the Adviser in accordance with the 1940 Act. Under the Investment Advisory Agreement, the Adviser provides us with investment advisory and management services. For these services, we pay (1) a management fee equal to a percentage of the average value of our gross assets and (2) an incentive fee based on our performance.
50
The incentive fee consists of two parts. The first part, which is calculated and payable quarterly in arrears, equals Pre-Incentive Fee Net Investment Income for the immediately preceding calendar quarter and is subject to a hurdle rate, expressed as a rate of return on our net assets, equal to 1.875% per quarter. As a result, the Adviser will not earn this incentive fee for any quarter until our pre-incentive fee net investment income for such quarter exceeds the hurdle rate of 1.875%. Once our 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 our 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. Thereafter, the Adviser will receive 20.0% of our pre-incentive fee net investment income. For purposes of calculating this part of the incentive fee, “Pre-Incentive Fee Net Investment Income” means interest income, distribution income and any other income (including any other fees, other than fees for providing managerial assistance, such as commitment, origination, structuring, diligence and consulting fees or other fees that we receive from portfolio companies) accrued during the calendar quarter, minus our operating expenses for the quarter (including the base management fee, expenses payable under the Administration Agreement and any interest expense and any dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-Incentive Fee Net Investment Income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with PIK interest and zero-coupon securities), accrued income that we have not yet received in cash. Pre-Incentive Fee Net Investment Income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation.
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 our incentive fee capital gains, which will equal our 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. We will accrue for the capital gains incentive fee, which, if earned, will be paid annually. We 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 nine months ended September 30, 2023, and September 30, 2022, the Company incurred $0 and $0 of incentive fees on capital gains, respectively. Effective December 20, 2017, the Adviser ended its voluntary waiver of incentive fees. No such fees have been paid with respect to realized gains as of September 30, 2023.
Under the Administration Agreement, the Adviser furnishes us with office facilities and equipment, provides us clerical, bookkeeping and record keeping services at such facilities and provides us with other administrative services necessary to conduct our day-to-day operations. We will reimburse the Adviser for the allocable portion (subject to the review and approval of the Board) of overhead and other expenses incurred by it in performing its obligations under the Administration Agreement, including rent, the fees and expenses associated with performing compliance functions and our allocable portion of the cost of our chief financial officer and chief compliance officer and their respective staffs, to the extent that such expenses do not exceed an annual rate of 0.4% of our gross assets. The Adviser also provides on our behalf significant managerial assistance to those portfolio companies to which we are required to offer to provide such assistance and any expenses payable to the Adviser for such managerial assistance are not subject to the cap on reimbursement.
Our organization and offering costs together 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. The cumulative aggregate amount 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.
If any of the contractual obligations discussed above is terminated, our costs under any new agreements that we enter into may increase. In addition, we would likely incur significant time and expense in locating alternative parties to provide the services we receive under our Investment Advisory Agreement and our Administration Agreement. Any new investment advisory agreement would also be subject to approval by our stockholders.
If for any taxable year we were not a “publicly offered” RIC within the meaning of Code Section 67(c)(2)(B), certain of our direct and indirect expenses, including the management fee, the incentive fee and certain other advisory expenses, would be subject to special “pass-through” rules. Such rules would treat these expenses as additional dividends to certain of our direct or indirect stockholders (generally including individuals and entities that compute their taxable income in the same manner as an individual) and as deductible by those stockholders, subject to the 2% “floor” on miscellaneous itemized deductions and other significant limitations on itemized deductions set forth in the Code.
Distributions
In order to qualify for the special tax treatment accorded RICs and their shareholders, we are required under the Code, among other things, to distribute at least 90% of our net ordinary income and net short-term capital gains in excess of net long-term capital losses, or “investment company taxable income,” to our stockholders on an annual basis. We intend to authorize and declare quarterly distributions to be paid quarterly to our stockholders as determined by the Board. In addition, we also intend to distribute any realized net capital gains (i.e., realized net long-term capital gains in excess of realized net short-term capital losses) at least annually.
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We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of our distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage requirements applicable to us as a BDC under the 1940 Act. If we do not distribute a certain percentage of our income annually, we will suffer adverse U.S. federal income tax consequences, including possible failure to qualify for the special tax treatment accorded RICs and their shareholders. We cannot assure stockholders that they will receive any distributions.
To the extent our taxable earnings fall below the total amount of our distributions for a taxable year, a portion of those distributions may be deemed a return of capital to our stockholders for U.S. federal income tax purposes. Thus, the source of a distribution to our stockholders may be the original capital invested by the stockholder rather than our income or gains. Stockholders should read any written disclosure accompanying a distribution payment carefully and should not assume that the source of any distribution is our ordinary income or gains. Required distributions are driven by tax laws and thus tax accounting applies, not GAAP. Therefore, it is possible that we pay more in required distributions than we earn for book purposes. For the three and nine months ended September 30, 2023, and September 30, 2022, the Company did not distribute in excess of net investment income.
We have adopted an “opt in” distribution reinvestment plan for our stockholders. As a result, if we declare a cash distribution, our stockholders will receive distributions in cash unless they specifically “opt in” to the distribution reinvestment plan so as to have their cash distributions reinvested in additional shares of our common stock. However, certain state authorities or regulators may impose restrictions from time to time that may prevent or limit a stockholder’s ability to participate in our distribution reinvestment plan. Although distributions paid in the form of additional shares of our common stock will generally be subject to U.S. federal, state and local taxes in the same manner as cash distributions, stockholders participating in our dividend reinvestment plan will not receive any corresponding cash distributions with which to pay any such applicable taxes.
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.
For the nine months ended September 30, 2023, the Company made the following distributions:
| Payable Date |
Dividend/ Share (1) |
Total Dividend (1) |
Dividends Reinvested |
|||||||||
| 9/30/2023 |
$ | 0.090 | $ | 841,972 | $ | — | ||||||
| 6/30/2023 |
0.090 | 848,061 | 275,845 | |||||||||
| 3/31/2023 |
0.090 | 859,401 | 280,882 | |||||||||
| 1/2/2023(2) |
— | — | 294,055 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total |
$ | 0.270 | $ | 2,549,434 | $ | 850,782 | ||||||
| 1 | For the current period, there were no dividends classified as a return of capital. |
| 2 | The December 2022 Dividend was reinvested in January 2023, see total December 2022 Dividend in table below. |
For the year ended December 31, 2022, the Company made the following distributions
| Payable Date |
Dividend/ Share (1) |
Total Dividend (1) |
Dividends Reinvested |
|||||||||
| 12/31/2022(3) |
$ | 0.090 | $ | 870,980 | $ | — | ||||||
| 9/30/2022 |
0.090 | $ | 874,461 | 303,070 | ||||||||
| 6/30/2022 |
0.090 | $ | 887,710 | 298,766 | ||||||||
| 3/31/2022 |
0.090 | 892,680 | 301,212 | |||||||||
| 1/2/2022(2) |
— | — | 306,152 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total |
$ | 0.360 | $ | 3,525,831 | $ | 1,209,200 | ||||||
|
|
|
|
|
|
|
|||||||
| 1 | Of the total dividends shown, $1,999,373 was classified as a return of capital. |
| 2 | The December 2021 Dividend was reinvested in January 2022, see total December 2021 Dividend in table below. |
| 3 | The December 2022 Dividend was reinvested in January 2023. |
52
For the year ended December 31, 2021, the Company made the following distributions:
| Payable Date |
Dividend/ Share (1) |
Total Dividend (1) |
Dividends Reinvested |
|||||||||
| 12/31/2021(3) |
$ | 0.090 | $ | 896,061 | $ | — | ||||||
| 9/30/2021 |
0.090 | 903,359 | 320,218 | |||||||||
| 6/30/2021 |
0.090 | 909,619 | 322,287 | |||||||||
| 3/31/2021 |
0.090 | 924,140 | 331,406 | |||||||||
| 1/2/2021(2) |
— | — | 345,331 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total |
$ | 0.360 | $ | 3,633,179 | $ | 1,319,241 | ||||||
|
|
|
|
|
|
|
|||||||
| 1 | For the current period, there were no dividends classified as a return of capital. |
| 2 | The December 2020 Dividend was reinvested in January 2021. |
| 3 | The December 2021 Dividend was reinvested in January 2022. |
Related Party Transactions
We have entered into a number of business relationships with affiliated or related parties, including the following:
| • | We entered into the Investment Advisory Agreement with the Adviser. James Dondero, our president, controls the Adviser by virtue of his control of its general partner, NexPoint Advisors GP, LLC. |
| • | Pursuant to an expense limitation agreement, the Adviser has agreed to waive fees or, if necessary, reimburse us to limit certain expenses to 1.0% of the quarter-end value of our gross assets. |
| • | The Adviser provides us with the office facilities and administrative services necessary to conduct our day-to-day operations pursuant to the Administration Agreement. |
| • | The dealer manager, NexPoint Securities, Inc., is an affiliate of the Adviser. |
| • | Prior to July 21, 2023, the Adviser controlled 2,549,002 total shares of common stock of the Company, including reinvestment of dividends, for a net amount of approximately $13.4 million. On July 21, 2023, pursuant to the terms of a Stock Purchase Agreement, Liberty CLO Holdco Ltd. (“Liberty”) purchased a total of 2,549,002 shares of the Company, representing 27.05% of the Company’s currently issued and outstanding common stock. In aggregate, as of September 30, 2023, Liberty controls 2,549,002 total shares of common stock of the Company, including reinvestment of dividends, for a net amount of approximately $13.3 million. |
| • | Cumulatively since inception, the Adviser has paid $2,275,000 to voluntarily reimburse the Company for certain unrealized losses on investments. Had these payments not been made, the NAV as of September 30, 2023, would have been lower. These payments are not recoupable by the Adviser. |
The Adviser and its affiliates also sponsor, or manage, and may in the future sponsor or manage, other investment funds, accounts or investment vehicles (together referred to as “accounts”) that have investment mandates that are similar, in whole and in part, with ours. The Adviser and its affiliates may determine that an investment is appropriate for us and for one or more of those other accounts. In such event, depending on the availability of such investment and other appropriate factors, and pursuant to the Adviser’s allocation policy and co-investment relief, the Adviser or its affiliates may determine that we should invest side-by-side with one or more other accounts. We do not intend to make any investments if they are not permitted by applicable law and interpretive positions of the SEC and its staff, or if they are inconsistent with the Adviser’s allocation procedures and co-investment relief.
In addition, we and the Adviser have each adopted a formal code of ethics that governs the conduct of our and the Adviser’s officers, directors and employees. Our officers and directors also remain subject to the duties imposed by both the 1940 Act and the Delaware General Corporations Law.
Critical Accounting Policies
The preparation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ. We have identified the following as critical accounting policies.
Fair Value of Financial Instruments
We will value our investments in accordance with ASC Topic 820, Fair Value Measurements and Disclosure, or ASC Topic 820. ASC Topic 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about assets and liabilities measured at fair value. ASC Topic 820’s definition of fair value focuses on exit price in the principal, or most advantageous, market and prioritizes the use of market-based inputs over entity-specific inputs within a measurement of fair value.
53
The portfolio will often include debt investments and equity investments that are fair valued. The portion of our portfolio that receives values from independent third parties are valued at their mid quotations obtained from unaffiliated market makers, other financial institutions that trade in similar investments or based on prices provided by independent third-party pricing services. For investments where there are no available bid quotations, fair value is derived using proprietary models that consider the analyses of independent valuation agents as well as credit risk, liquidity, market credit spreads, and other applicable factors for similar transactions.
Due to the nature of our strategy, our portfolio will include relatively illiquid investments that are privately held. Valuations of privately held investments are inherently uncertain, may fluctuate over short periods of time and may be based on estimates. The determination of fair value may differ materially from the values that would have been used if a ready market for these investments existed. Our net asset value could be materially affected if the determinations regarding the fair value of our investments were materially higher or lower than the values that we ultimately realize upon the disposal of such investments.
Pursuant to Rule 2a-5 under the 1940 Act, the Board has designated the Adviser as the Company’s valuation designee to perform the fair valuation determination for securities and other assets held by the Company. Pursuant to board approved policies and procedures, the Adviser, or its designee, is responsible for determining in good faith the fair value of the portfolio investments that are not publicly traded, whose market prices are not readily available on a quarterly basis or any other situation where portfolio investments require a fair value determination. Rule 2a-5 states that a market quotation is readily available only when that quotation is a quoted price (unadjusted) in active markets for identical investments that the Company can access at the measurement date, provided that a quotation will not be readily available if it is not reliable. Market quotations may also not be “readily available” if a significant event occurs that causes the Adviser to believe that the market price of a security no longer represents the security’s current value at the time of the Company’s NAV determination.
The valuation process is conducted at the end of each fiscal quarter, with a portion of our valuations of portfolio companies without market quotations subject to review by the independent valuation firms each quarter. When an external event with respect to one of our portfolio companies, such as a purchase transaction, public offering or subsequent equity sale occurs, we expect to use the pricing indicated by such external event to corroborate our valuation.
With respect to investments for which market quotations are not readily available, the Adviser undertakes a multi-step valuation process each quarter, as described below:
| • | The valuation process begins with each portfolio company or investment being initially valued by investment professionals of the Adviser responsible for credit monitoring or independent third-party valuation firms. |
| • | Preliminary valuation conclusions are then documented and discussed with the Valuation Committee established by the Adviser to assist the Adviser in discharging its responsibilities as valuation designee. |
| • | 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 Adviser 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 September 30, 2023, 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 | $ | 16,615 | |||
| PAMCO CLO 1997-1A B |
Asset-Backed Securities | 12 | ||||
| American Banknote Corp. |
Common Stocks | 1,732,500 | ||||
| IQHQ, Inc. |
Common Stocks | 2,359,000 | ||||
| MPM Holdings, Inc. |
Common Stocks | 42,500 | ||||
| MidWave Wireless, Inc. (fka Terrestar Corp.) |
Common Stocks | 4,944,671 | ||||
| Wayne Services Legacy Inc. |
Common Stocks | 2,346 | ||||
| NexPoint Capital REIT, LLC |
LLC Interests | 7,270,216 | ||||
| SFR WLIF III, LLC |
LLC Interests | 344,513 | ||||
| US GAMING LLC |
LLC Interests | 2,885,636 | ||||
| Apnimed, Inc. |
Preferred Stocks | 1,467,425 | ||||
| Apnimed, Inc. |
Preferred Stocks | 830,189 | ||||
| Sapience Therapeutics, Inc. |
Preferred Stocks | 4,581,906 | ||||
| Sapience Therapeutics, Inc. |
Preferred Stocks | 3,699,999 | ||||
| CCS Medical, Inc. |
Senior Secured Loans | 3,000,000 | ||||
54
| Instrument |
Type |
Fair Value | ||||
| NexPoint Capital REIT, LLC |
Senior Secured Loans | 463,314 | ||||
| MidWave Wireless, Inc. (fka Terrestar Corp.) |
Senior Secured Loans | 884,379 | ||||
| MidWave Wireless, Inc. (fka Terrestar Corp.) |
Senior Secured Loans | 209,371 | ||||
| MidWave Wireless, Inc. (fka Terrestar Corp.) |
Senior Secured Loans | 37,705 | ||||
| MidWave Wireless, Inc. (fka Terrestar Corp.) |
Senior Secured Loans | 34,900 | ||||
| PlantSwitch, Inc. |
Senior Secured Loans | 2,000,000 | ||||
As of December 31, 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 | $ | 7,023 | |||
| PAMCO CLO 1997-1A B |
Asset-Backed Securities | 13 | ||||
| American Banknote Corp. |
Common Stocks | 1,732,500 | ||||
| IQHQ, Inc. |
Common Stocks | 2,359,000 | ||||
| Terrestar Corp. |
Common Stocks | 5,114,214 | ||||
| Wayne Services Legacy Inc. |
Common Stocks | 2,269 | ||||
| NexPoint Capital REIT, LLC |
LLC Interests | 1,176,024 | ||||
| SFR WLIF III, LLC |
LLC Interests | 424,468 | ||||
| US Gaming, LLC |
LLC Interests | 3,088,750 | ||||
| Apnimed, Inc. |
Preferred Stocks | 1,499,989 | ||||
| Apnimed, Inc. |
Preferred Stocks | 799,994 | ||||
| Sapience Therapeutics, Inc. |
Preferred Stocks | 4,549,525 | ||||
| Sapience Therapeutics, Inc. |
Preferred Stocks | 3,677,777 | ||||
| CCS Medical, Inc. |
Senior Secured Loans | 3,000,000 | ||||
| Terrestar Corp. |
Senior Secured Loans | 810,953 | ||||
| Terrestar Corp. |
Senior Secured Loans | 191,988 | ||||
| Terrestar Corp. |
Senior Secured Loans | 34,300 | ||||
| Terrestar Corp. |
Senior Secured Loans | 32,002 | ||||
Organization Costs
Organization costs include the cost of incorporation, such as the cost of legal services and other fees pertaining to our organization. Organization costs, together with 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. For the three and nine months ended September 30, 2023, and September 30, 2022, the Adviser did not incur or pay any organization costs on our behalf. For the period from our inception to September 30, 2023, the Adviser incurred and paid organization costs of $33,392 on our behalf.
Offering Costs
Our offering costs include legal fees, promotional costs and other costs pertaining to the public offering of our shares of common stock and are capitalized and amortized to expense over one year. For the three and nine months ended September 30, 2023, the Adviser incurred offering costs of $0 on our behalf. For the three and nine months ended September 30, 2022, the Adviser incurred offering costs of $0 and on our behalf. For the three and nine months ended September 30, 2023, the Company capitalized $0 of offering costs. For the three and nine months ended September 30, 2022, the Company capitalized $0 of offering costs. Of the capitalized offering costs, $0 were amortized to expense during the three and nine months ended September 30, 2023. Of the capitalized offering costs, $0 were amortized to expense during the three and nine months ended September 30, 2022. As of September 30, 2023 and September 30, 2022, $0 and $0 remained on the Consolidated Statements of Assets and Liabilities, respectively.
Organization costs and offering costs are limited to 1% of total gross proceeds raised in this offering and are not due and payable to the Adviser to the extent they exceed that amount. As of September 30, 2023, 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.
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Investment Transactions and Related Investment Income and Expense
We record our investment transactions on a trade date basis, which is the date when we have determined that all material terms have been defined for the transactions. These transactions could possibly settle on a subsequent date depending on the transaction type. All related revenue and expenses attributable to these transactions are reflected on the Consolidated Statements of Operations commencing on the trade date unless otherwise specified by the transaction documents. Realized gains and losses on investment transactions are recorded on the specific identification method. We accrue interest income if we expect that ultimately we will be able to collect it. Generally, when an interest payment default occurs on a loan in our portfolio, or if our management otherwise believes that the issuer of the loan will not be able to service the loan and other obligations, we place the loan on non-accrual status and will cease recognizing interest income on that loan until all principal and interest is current through payment or until a restructuring occurs, such that the interest income is deemed to be collectible. However, we remain contractually entitled to this interest. We may make exceptions to this policy if the loan has sufficient collateral value and is in the process of collection. Accrued interest is written off when it becomes probable that such interest will not be collected, and the amount of uncollectible interest can be reasonably estimated. We also accrue for delayed compensation, which is a pricing adjustment payable by the parties to a secondary loan trade that closes late, intended to assure that neither party derives an economic advantage from the delay. Delayed compensation begins calculating at the loan’s specific coupon rate if a trade hasn’t settled within 7 business days of trading. Original issue discounts, market discounts or premiums are accreted or amortized using the effective interest method as interest income and will be accreted or amortized over the maturity period of the investments. We will record prepayment premiums on loans and debt securities as interest income. Dividend income, if any, will be recognized on an accrual basis to the extent that we expect to collect such amount.
We may have investments in our portfolio that contain a PIK interest provision. Any PIK interest will be added to the principal balance of such investments and is recorded as income, if the portfolio company valuation indicates that such PIK interest is collectible. In order to qualify for the special tax treatment accorded RICs and their shareholders, substantially all of our income (including PIK interest) must be distributed to stockholders in the form of dividends, even if we have not collected any cash.
Interest expense is recorded on an accrual basis. Certain expenses related to legal and tax consultation, due diligence, rating fees, valuation expenses and independent collateral appraisals may arise when we make certain investments.
Loan Origination, Facility, Commitment and Amendment Fees
We may receive fees in addition to interest income from loans during the life of the investment. We may receive origination fees upon the origination of an investment. These origination fees are initially deferred and deducted from the cost basis of the investment and subsequently accreted into income over the term of the loan. We may receive facility, commitment and amendment fees, which are paid to us on an ongoing basis. Facility fees, sometimes referred to as asset management fees, are accrued as a percentage periodic fee on the base amount (either the funded facility amount or the committed principal amount). Commitment fees are based upon the undrawn portion committed by us and are recorded on an accrual basis. Amendment fees are paid in connection with loan amendments and waivers and are accounted for upon completion of the amendments or waivers, generally when such fees are receivable. Any such fees are included in other income on the Consolidated Statements of Operations.
Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation
We measure net realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized upfront fees and prepayment penalties. Net change in unrealized appreciation or depreciation will reflect the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized.
U.S. Federal Income Taxes
We have elected to be treated as a RIC under Subchapter M of the Code and intend each year to qualify and be eligible to be treated as such. As a RIC, we generally will not have to pay corporate-level federal income taxes on any investment company taxable income or net capital gains that we distribute as dividends to our stockholders. In order to qualify for the special tax treatment accorded RICs and their shareholders, we must meet certain gross income, diversification, and distribution requirements.
Recent Accounting Pronouncements
Please refer to Note 2 to the consolidated financial statements included herein for discussion of recent accounting pronouncements.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
We are subject to financial market risks, most significantly changes in interest rates. As of September 30, 2023, 48% (based on fair value) of the investments in our portfolio had floating interest rates. These investments are usually based on a floating SOFR and typically have interest rate reset provisions that adjust applicable interest rates under such loans to current market rates on a monthly or quarterly basis.
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To the extent that any present or future credit facilities or other financing arrangements that we or any of our subsidiaries enter into are based on a floating interest rate, we will be subject to risks relating to changes in market interest rates. In periods of rising interest rates when we or our subsidiaries have such debt outstanding, or financing arrangements in effect, our interest expense would increase, which could reduce our net investment income, especially to the extent we hold fixed rate investments.
A rise in the general level of interest rates can be expected to lead to higher interest rates applicable to our debt investments, especially to the extent that we predominantly hold variable-rate investments, and to declines in the value of any fixed- rate investments we hold. To the extent that a majority of our investments may be in variable-rate investments, an increase in interest rates could make it easier for us to meet or exceed the hurdle rate for the income incentive fee payable to the Adviser and may result in a substantial increase in our net investment income, and also to the amount of incentive fees payable to our Adviser with respect to our increasing pre-incentive fee net investment income.
In July 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2022. The Alternative Reference Rates Committee (“ARRC”) has proposed the Secured Overnight Financing Rate (“SOFR”) as the recommended alternative to USD-LIBOR for use in derivatives and other financial contracts that are currently indexed to USD-LIBOR. ARRC has proposed a paced market transition plan to SOFR from USD-LIBOR and organizations are currently working on industry wide and company specific transition plans as it relates to derivatives and cash markets exposed to USD-LIBOR. We have material contracts that are indexed to USD-LIBOR and are monitoring this activity and evaluating the related risks.
In connection with the COVID-19 pandemic, the U.S. Federal Reserve and other central banks have reduced certain interest rates and LIBOR has decreased. A prolonged reduction in interest rates will reduce our gross investment income and could result in a decrease in our net investment income if such decreases in LIBOR are not offset by a corresponding increase in the spread over LIBOR that we earn on any portfolio investments, a decrease in in our operating expenses, including with respect to our income incentive fee, or a decrease in the interest rate of our floating interest rate liabilities tied to LIBOR.
Assuming that the consolidated Statement of Assets and Liabilities as of September 30, 2023 were to remain constant and that we took no actions to alter our existing interest rate sensitivity, the following table shows the annualized impact of hypothetical base rate changes in interest rates.
| Change in interest rates |
Increase (decrease) in interest income |
(Increase) decrease in interest expense |
Increase (decrease) in NII |
|||||||||
| Down 25 basis points |
$ | — | $ | — | $ | — | ||||||
| Up 50 basis points |
28,030 | — | 28,030 | |||||||||
| Up 100 basis points |
56,061 | — | 56,061 | |||||||||
| Up 200 basis points |
112,121 | — | 112,121 | |||||||||
| Up 300 basis points |
168,182 | — | 168,182 | |||||||||
Although we believe that this analysis is indicative of our existing sensitivity to interest rate changes, it does not adjust for changes in the credit market, credit quality, the size and composition of the assets in our portfolio and other business developments, including borrowing under future credit facilities or other borrowing. Accordingly, we can offer no assurances that actual results would not differ materially from the analysis above.
We may in the future hedge against interest rate fluctuations by using standard hedging instruments such as interest rate swaps, futures, options and forward contracts to the limited extent permitted under the 1940 Act and applicable commodities laws. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to the investments in our portfolio with fixed interest rates.
| Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in the Company’s filings under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Investment Company Act of 1940, as amended, is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Company’s management, including the principal executive officer and principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable
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assurance of achieving the desired control objectives. As of the period covered by this report, we, including our president and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based upon that evaluation, our president and chief financial officer concluded that our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There have been no material changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Part II – Other Information
| Item 1: | Legal Proceedings. |
Although we may, from time to time, be involved in litigation arising out of our operations in the normal course of business or otherwise, we are currently not a party to any pending material legal proceedings.
| Item 1A: | Risk Factors. |
None.
| Item 2: | Unregistered Sales of Equity Securities and Use of Proceeds. |
None.
| Item 3: | Defaults Upon Senior Securities. |
None.
| Item 4: | Mine Safety Disclosures. |
None.
| Item 5: | Other Information. |
On July 21, 2023, pursuant to the terms of a Stock Purchase Agreement, Liberty CLO Holdco Ltd. (“Liberty”) completed the purchase of a total of 2,549,002 shares of NexPoint Capital, Inc. (the “Company”), representing 27.05% of the Company’s currently issued and outstanding common stock. The shares were purchased from NexPoint Advisors, L.P. (the “Adviser”), for an aggregate purchase price of $11,396,587.93. Liberty used its own capital to purchase the stock.
| Item 6: | Exhibits |
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| * | Filed herewith |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.
| NEXPOINT CAPITAL, INC. | ||||||
| Date: November 14, 2023 | By: | /s/ James Dondero | ||||
| Name: | James Dondero | |||||
| Title: | President and Principal Executive Officer | |||||
| Date: November 14, 2023 | By: | /s/ Frank Waterhouse | ||||
| Name: | Frank Waterhouse | |||||
| Title: | Treasurer, Principal Accounting Officer and Principal Financial Officer | |||||
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