BLACKROCK CAPITAL INVESTMENT CORPORATION The information contained in this section should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this report. This report, and other statements that we may make, may contain forward-looking statements with respect to future financial or business performance, strategies or expectations. Forward-looking statements are typically identified by words or phrases such as "trend," "opportunity," "pipeline," "believe," "comfortable," "expect," "anticipate," "current," "intention," "estimate," "position," "assume," "potential," "outlook," "continue," "remain," "maintain," "sustain," "seek," "achieve" and similar expressions, or future or conditional verbs such as "will," "would," "should," "could," "may" or similar expressions. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Forward-looking statements speak only as of the date they are made, and we assume no duty to and do not undertake to update forward-looking statements. Actual results could differ materially from those anticipated in forward-looking statements and future results could differ materially from historical performance. In addition to factors previously identified elsewhere in the reportsBlackRock Capital Investment Corporation has filed with theSecurities and Exchange Commission (the "SEC"), the following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance: • our future operating results; • our business prospects and the prospects of our portfolio companies; • the impact of investments that we expect to make; • 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 invest;
• the financial condition of and ability of our current and prospective
portfolio companies to achieve their objectives;
• our expected financings and investments;
• the adequacy of our cash resources and working capital, including our
ability to obtain continued financing on favorable terms;
• the timing of cash flows, if any, from the operations of our portfolio
companies;
• the impact of increased competition;
• the impact of COVID-19 on our portfolio companies and the markets in
which they operate, interest rates and the economy in general;
• the ability of the Advisor to locate suitable investments for us and to
monitor and administer our investments;
• changes in law and policy accompanying the new administration and
uncertainty pending any such changes;
• increased geopolitical unrest, terrorist attacks or acts of war, which
may adversely affect the general economy, domestic and local financial
and capital markets, or the specific industries of our portfolio
companies;
• changes and volatility in political, economic or industry conditions, the
interest rate environment, foreign exchange rates or financial and
capital markets;
• the unfavorable resolution of legal proceedings; and
• the impact of changes to tax legislation and, generally, our tax position.
Overview We were incorporated inDelaware onApril 13, 2005 and commenced operations with private funding onJuly 25, 2005 , and completed our initial public offering onJuly 2, 2007 . Our investment objective is to generate both current income and capital appreciation through debt and equity investments. We invest primarily in middle-market companies in the form of senior and junior secured and unsecured debt securities and loans, each of which may include an equity component, and by making direct preferred, common and other equity investments in such companies. We are externally managed and have elected to be regulated as a BDC under the 1940 Act. As a BDC, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in "qualifying assets," including securities of private or thinly traded publicU.S. companies, cash, cash equivalents,U.S. Government securities and high-quality debt investments that mature in one year or less. 47
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Certain items previously reported may have been reclassified to conform to the current year presentation.
Investments
Our level of investment activity can and does vary substantially from period to period depending on many factors, including the amount of debt and equity capital available to middle-market companies, the level of merger and acquisition activity, the general economic environment and the competitive environment for the types of investments we make.
As a BDC, we generally do not acquire any assets other than "qualifying assets" specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). Qualifying assets include investments in "eligible portfolio companies." Under the relevantSEC rules, the term "eligible portfolio company" includes most private companies, companies whose securities are not listed on a national securities exchange, and certain public companies that have listed their securities on a national securities exchange and have a market capitalization of less than$250 million . These rules also permit us to include as qualifying assets certain follow-on investments in companies that were eligible portfolio companies at the time of initial investment but that no longer meet the definition. As ofJune 30, 2020 , approximately 17.6% of the total assets of the Company were not qualifying assets under Section 55(a) of the 1940 Act.
Revenues
We generate revenues primarily in the form of interest on the debt we hold, dividends on our equity interests and capital gains on the sale of warrants and other debt or equity interests that we acquire in portfolio companies. Our investments in fixed income instruments generally have an expected maturity of three to ten years, although we have no lower or upper constraint on maturity, and typically bear interest at a fixed or floating rate. Interest on our debt securities is generally payable quarterly or semi-annually. In some cases, our debt instruments and preferred stock investments may defer payments of cash interest or dividends or pay interest or dividends in-kind. Any outstanding principal amount of our debt securities and any accrued but unpaid interest will generally become due at the maturity date. In addition, we may generate revenue in the form of prepayment fees, commitment, origination, capital structuring fees, and fees for providing significant managerial assistance.
Expenses
Our primary operating expenses include the payment of a base management fee and, depending on our operating results, an incentive management fee, interest and credit facility fees, expenses reimbursable under the management agreement, professional fees, administration fees and the allocable portion of overhead under the administration agreement. The base management fee and incentive management fee compensate the Advisor for work in identifying, evaluating, negotiating, closing and monitoring our investments. Our Current Management Agreement with the Advisor provides that we will reimburse the Advisor for costs and expenses incurred by the Advisor for office space rental, office equipment and utilities allocable to the Advisor under the Current Management Agreement, as well as any costs and expenses incurred by the Advisor relating to any non-investment advisory, administrative or operating services provided by the Advisor to us. We bear all other costs and expenses of our operations and transactions.
Critical accounting policies
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements 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. Management considers the significant accounting policies important to understanding the consolidated financial statements. In addition to the discussion below, our significant accounting policies are further described in the notes to the consolidated financial statements. See Note 2 to the consolidated financial statements for a description of significant accounting policies and of recently issued accounting pronouncements. Management considers Investments to be an area deemed a critical accounting policy.
Financial and operating highlights
At
Investment portfolio, at fair value:
Net assets:
Indebtedness, excluding deferred financing costs:
Net asset value per share:
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Portfolio Activity for the Three Months Ended
Cost of investments during period, including PIK:
Sales, repayments and other exits during period:
Number of portfolio companies at end of period: 52
Operating Results for the Three Months Ended
Net investment income per share:
Distributions declared per share:
Basic earnings (loss) per share:
Net investment income:
Net realized and unrealized gain (loss):
Net increase (decrease) in net assets from operations:
Net investment income per share, as adjusted1:
Basic earnings (loss) per share, as adjusted1:
Net investment income, as adjusted1:
Net increase (decrease) in net assets from operations, as adjusted1:
As Adjusted1: Amounts are adjusted to remove the incentive management fee expense based on gains, as required by GAAP, and to include only the incremental incentive management fee expense based on income. Under the Current Management Agreement, incentive management fee expense based on income is calculated for each calendar quarter and may be paid on a quarterly basis if certain thresholds are met. Amounts reflect the Company's ongoing operating results and reflect the Company's financial performance over time.
Portfolio and investment activity
We invested approximately$21.5 million during the three months endedJune 30, 2020 . The new investments consisted of senior secured loans secured by first lien ($3.0 million , or 14.0%), senior secured first lien notes ($1.0 million or 4.5%), and unsecured or subordinated debt securities ($17.5 million , or 81.5%). Additionally, we received proceeds from sales, repayments and other exits of approximately$22.6 million during the three months endedJune 30, 2020 . Concentration of our assets in an issuer, industry or sector may present certain risks. To the extent that we assume large positions in the securities of a small number of issuers, our net asset value may fluctuate to a greater extent than that of a diversified investment company as a result of changes in the financial condition or the market's assessment of the issuer. AtJune 30, 2020 , our portfolio of$644.3 million (at fair value) consisted of 52 portfolio companies and was invested approximately 59% in senior secured loans, 27% in unsecured or subordinated debt securities, 14% in equity investments, and less than 1% in senior secured notes. Our average investment by portfolio company at amortized cost, excluding investments below$5.0 million , was approximately$21.8 million atJune 30, 2020 . Our largest portfolio company investment at fair value was approximately$130.7 million and our five largest portfolio company investments at fair value comprised approximately 43% of our portfolio atJune 30, 2020 . AtDecember 31, 2019 , our portfolio of$749.9 million (at fair value) consisted of 47 portfolio companies and was invested 56% in senior secured loans, 22% in unsecured or subordinated debt securities, 21% in equity investments and 1% in senior secured notes. Our average investment by portfolio company at amortized cost, excluding investments below$5.0 million , was approximately$21.9 million atDecember 31, 2019 . Our largest portfolio company investment by value was approximately$118.2 million and our five largest portfolio company investments by value comprised approximately 41% of our portfolio atDecember 31, 2019 . In addition, we may, from time to time, invest a substantial portion of our assets in the securities of issuers in any single industry or sector of the economy or in only a few issuers. A downturn in an industry or sector in which we are concentrated could have a larger impact on us than on a company that does not concentrate in that particular industry or sector. Our investment advisor monitors industry and sector uncertainties on an ongoing basis, including substantial regulatory challenges in the healthcare sector, volatility and extensive government regulation in the financial services sector, cyclical risks associated with the overall economy that may affect the consumer products sector, risks related to the costs of raw materials and energy affecting the chemicals sector, cyclicality within the energy sector as a result of fluctuations in commodity prices and demand for, and production of commodities, among various other industry and sector uncertainties due to certain exposures. AtJune 30, 2020 , our top three industry concentrations at fair value consisted ofDiversified Financial Services (33.7%), Road & Rail (6.7%), and Health Care Equipment & Supplies (5.7%). AtDecember 31, 2019 , our top three industry concentrations at fair value consisted ofDiversified Financial Services (34.0%), Chemicals (7.0%) and Thrifts & Mortgage Finance (6.2%) (see Note 5 to the consolidated financial statements).
The weighted average yields at fair market value and cost as of
June 30, 2020 December 31, 2019
Fair Market Value Cost Fair Market Value Cost
Total portfolio 9.8 % 8.6 % 10.4 % 9.4 %
Senior secured loans 9.1 % 8.8 % 10.2 % 10.2 %
Other debt securities 12.0 % 10.4 % 11.8 % 10.8 %
Debt and income producing equity
securities 9.9 % 9.3 % 10.9 % 10.7 %
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-------------------------------------------------------------------------------- For the three and six months endedJune 30, 2020 , the total return based on net asset value was (6.2)% and (15.7)%, respectively. For the three and six months endedJune 30, 2020 , the total return based on market price was 25.9% and (40.7)%, respectively. For the three and six months endedJune 30, 2019 , the total return based on net asset value was (1.8)% and 2.2%, respectively. For the three and six months endedJune 30, 2019 , the total return based on market price was 3.6% and 20.8%, respectively. Total returns are historical and are calculated by determining the percentage change in the net asset value or market price with all distributions reinvested, if any. Distributions are assumed to be reinvested in accordance with the Company's dividend reinvestment plan and do not reflect brokerage commissions. The Advisor generally employs a grading system for our entire portfolio. The Advisor grades all loans on a scale of 1 to 4. This system is intended to reflect the performance of the borrower's business, the collateral coverage of the loans and other factors considered relevant. Generally, the Advisor assigns only one loan grade to each portfolio company for all loan investments in that portfolio company; however, the Advisor will assign multiple ratings when appropriate for different investments in one portfolio company. The following is a description of the conditions associated with each investment rating:
Grade 1: Investments in portfolio companies whose performance is substantially within the Advisor's expectations and whose risk factors are neutral to favorable to those at the time of the original investment.
Grade 2: Investments in portfolio companies whose performance is below the Advisor's expectations and that require closer monitoring; however, no loss of investment return (interest and/or dividends) or principal is expected.
Grade 3: Investments in portfolio companies whose performance is below the Advisor's expectations and for which risk has increased materially since origination. Some loss of investment return is expected, but no loss of principal is expected. Companies graded 3 generally will be out of compliance with debt covenants and will be unlikely to make debt repayments on their original schedule.
Grade 4: Investments in portfolio companies whose performance is materially below the Advisor's expectations where business trends have deteriorated and risk factors have increased substantially since the original investment. Investments graded 4 are those for which some loss of principal is expected.
The Advisor monitors and, when appropriate, changes the investment ratings assigned to each investment in our portfolio. In connection with our valuation process, the Advisor and Board of Directors review these investment ratings on a quarterly basis. Our average investment rating was 1.93 atJune 30, 2020 and 1.39 atDecember 31, 2019 . The following is a distribution of the investment ratings of our portfolio companies, at fair value, atJune 30, 2020 andDecember 31, 2019 : June 30, December 31, 2020 2019 Grade 1$ 214,158,739 $ 543,022,093 Grade 2 328,738,115 163,762,457 Grade 3 34,295,433 - Grade 4 67,094,299 43,074,531 Not Rated - - Total investments$ 644,286,586 $ 749,859,081 Results of operations
Results comparisons for the three months ended
Investment income
Three Months Ended Three Months Ended
June 30, 2020 June 30, 2019
Investment Income:
Interest and fees on senior secured loans $ 9,699,935 $ 9,756,671
Interest and fees on other debt securities 5,227,745
5,753,473
Interest earned on short-term investments, cash equivalents 9,130
37,224
Dividends and fees on equity securities 2,566,148 4,103,813 Other Income - 5,075 Total investment income $ 17,502,958 $ 19,656,256 Total investment income for the three months endedJune 30, 2020 decreased$2.2 million , or 11.0%, as compared to the three months endedJune 30, 2019 . Excluding fee income and other income, total investment income decreased by approximately 9.3%, primarily due to a lower rate environment and a decrease in dividend income period over period, the impact of which was partially offset by a 6.3% 50
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increase in the average investment portfolio at amortized cost for the comparative periods. The increase in portfolio size is primarily due to acquisitions during the second half of 2019 and first half of 2020.
Expenses
Three Months Ended Three Months Ended
June 30, 2020 June 30, 2019
Expenses:
Base management fees $ 2,708,862 $ 3,020,614
Incentive management fees 1,608,740 2,245,935
Interest and credit facility fees 4,359,441 3,761,328
Professional fees 544,845 495,474
Administrative services 375,704 337,634
Director fees 152,500 175,000
Investment advisor expenses 87,500 87,500
Other 507,916 549,031
Total expenses, before incentive management
fee waiver 10,345,508 10,672,516
Incentive management fee waiver (1,608,740 ) (2,245,935 ) Expenses, net of incentive management fee waiver $ 8,736,768 $ 8,426,581
Total expenses, net of incentive management fee waiver, increased
Interest and credit facility fees increased approximately$0.6 million , or 15.9%, for the three months endedJune 30, 2020 from comparable period in 2019, primarily due to higher average debt outstanding during the three months endedJune 30, 2020 , the impact of which was partially offset from a lower rate environment (see Note 7 to the consolidated financial statements). Base management fees decreased approximately$0.3 million , or 10.3%, in for the three months endedJune 30, 2020 from comparable period in 2019 was due to a decrease in the total assets on which management fees are calculated (in arrears), and a decrease in the base management fee rate effectiveMay 2, 2020 (see Note 3 to the consolidated financial statements). The decrease in total assets was primarily due to a decline in the fair value of investments as a result of portfolio depreciation during 2020. As previously disclosed, the Advisor, in consultation with the Company's Board of Directors, has agreed to waive incentive fees based on income throughJune 30, 2019 (see Note 3 to the consolidated financial statements) and has voluntarily waived incentive fees for three months endedJune 30, 2020 . For the three months endedJune 30, 2020 and 2019, there was no incentive management fees based on gains incurred (see Note 3 to the consolidated financial statements).
Net investment income
Net investment income was$8.8 million and$11.2 million for the three months endedJune 30, 2020 and 2019, respectively. The decrease of$2.4 million , or 21.9% was due to a$2.2 million decline in total investment income and a$0.3 million increase in expenses described above.
Net realized gain or loss
Net realized gain (loss) for the three months ended
Net unrealized appreciation or depreciation
For the three months endedJune 30, 2020 and 2019, the change in net unrealized appreciation or depreciation on investments and foreign currency translation was a decrease in net unrealized depreciation of$18.4 million and$1.9 million , respectively. The decrease in net unrealized depreciation for the three months endedJune 30, 2020 was primarily due to i) the reversal of previously recognized depreciation of$50.3 million related to the sale of our equity investment in U.S. Well Services, Inc. and sale of our debt investment inSur La Table, Inc. , partially offset by ii)$41.1 million increase in valuation depreciation in our investments inAGY Holding Corp. ,Gordon Brothers Finance Company andBCIC Senior Loan Partners . The decrease in net unrealized depreciation for the three months endedJune 30, 2019 was primarily due to the reversal of previously recognized depreciation of$22.5 million related to the restructure of our debt investment inWestmoreland Resource Partners, LP and repayment ofUnited PF Holdings, LLC , the impact of which was partially offset by net valuation depreciation of$(20.6) million primarily related to our equity investment in certain non-core assets. 51
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Net increase or (decrease) in net assets resulting from operations
The net increase or (decrease) in net assets resulting from operations for the three months endedJune 30, 2020 and 2019 was$(27.4) million and$(10.6) million , respectively. As compared to the prior period, the decrease is reflective of a decrease in net investment income of$2.4 million period-over-period, as well as a net realized and unrealized gain (loss) of$(36.2) million for the current period, as compared to($21.8) million of net realized and unrealized gain (loss) for the three months endedJune 30, 2019 .
Results comparisons for the six months ended
Investment income
Six Months Six Months
Ended Ended
June 30, 2020 June 30, 2019
Investment Income:
Interest and fees on senior secured loans $ 20,366,098 $ 18,667,112
Interest and fees on other debt securities 10,337,733
11,712,517
Interest earned on short-term investments, cash equivalents 24,770
63,250
Dividends and fees on equity securities 5,473,651 8,522,944 Other income - 5,075 Total investment income$ 36,202,252 $ 38,970,898 Total investment income for the six months endedJune 30, 2020 decreased$2.8 million , or 7.1%, as compared to the six months endedJune 30, 2019 . Excluding fee income and other income, total investment income decreased by approximately 4.9%, primarily attributable to a lower rate environment and a decrease in dividend income period over period, the impact of which was partially offset by a 8.8% increase in the average investment portfolio for the six months endedJune 30, 2020 , at amortized cost, as compared to the six months endedJune 30, 2019 . The increase in portfolio size is primarily due to acquisitions during the second half of 2019 and first half of 2020. Expenses Six Months Six Months Ended Ended June 30, 2020 June 30, 2019 Expenses: Base management fees$ 6,004,549 $ 5,943,762 Incentive management fees 3,533,138 4,526,771 Interest and credit facility fees 8,571,715 7,153,762 Professional fees 1,069,857 968,517 Administrative services 689,265 700,939 Director fees 337,250 368,000 Investment advisor expenses 175,000 175,000 Other 966,439 1,027,059
Total expenses, before incentive management fee waiver 21,347,213
20,863,810
Incentive management fee waiver (3,533,138 ) (4,526,771 ) Expenses, net of incentive management fee waiver$ 17,814,075 $ 16,337,039 Total expenses, net of incentive management fee waiver, increased$1.5 million , or 9.0%, for the six months endedJune 30, 2020 from comparable period in 2019, primarily due to the increase in interest and credit facility fees discussed below. Interest and credit facility fees increased$1.4 million , or 19.8% for the six months endedJune 30, 2020 over the respective period primarily due to higher average debt outstanding during the six months endedJune 30, 2020 , the impact of which was partially offset from a lower rate environment (see Note 7 to the consolidated financial statements). As previously disclosed, the Advisor, in consultation with the Company's Board of Directors, has agreed to waive incentive fees based on income throughJune 30, 2019 (See Note 3 to the consolidated financial statements) and has voluntarily waived incentive fees based on income for the six months endedJune 30, 2020 . For the six months endedJune 30, 2020 and 2019, there was no incentive management fees based on gains incurred (see Note 3 to the consolidated financial statements). 52
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Net investment income
Net investment income was$18.4 million and$22.6 million for the six months endedJune 30, 2020 and 2019, respectively. The decrease of$4.2 million over the comparable period was due to the$2.8 million decline in investment income and a$1.5 million increase in expenses.
Net realized gain or loss
Net realized gain (loss) for the six months endedJune 30, 2020 was$(56.1) million , primarily due to the sale of our equity investment in U.S. Well Services, Inc. and debt investment inSur La Table, Inc. Net realized gain (loss) for the six months endedJune 30, 2019 was$(23.7) million , primarily due to the restructure ofWestmoreland Resource Partners, LP and partial sale of our equity investment in U.S. Well Services, Inc.
Net unrealized appreciation or depreciation
For the six months endedJune 30, 2020 and 2019, the change in net unrealized appreciation or depreciation on investments and foreign currency translation was an increase in net unrealized depreciation of$(48.9) million and a decrease in net unrealized depreciation of$8.4 million , respectively. The increase in net unrealized depreciation for the six months endedJune 30, 2020 was primarily due to i)$(44.8) million increase in valuation depreciation in our investments inBCIC Senior Loan Partners, LLC ,Gordon Brothers Finance Company andFirst Boston Construction Holdings, LLC ii)$(23.5) million increase in valuation depreciation in our debt investment inAGY Holding Corp. , iii) overall increase in valuation depreciation across our portfolio as a result of macro-economic conditions impacted by the COVID-19 outbreak (see Note 5 to the consolidated financial statements and Part II. Item 1A. Risk Factors), partially offset by iv)$37.6 million reversal of previously recognized depreciation related to the sale of our equity investment in U.S. Well Services, Inc. The comparable period's decrease in net unrealized depreciation for the six months endedJune 30, 2019 was primarily due to the reversal of previously recognized net depreciation of$21.3 million related to the restructure of our debt investment inWestmoreland Resource Partners, LP and repayment ofUnited PF Holdings, LLC andParagon Films, Inc. , the impact of which was partially offset by net valuation depreciation of$(12.9) million primarily related to our equity investment in certain non-core assets.
Net increase or (decrease) in net assets resulting from operations
The net increase or (decrease) in net assets resulting from operations for the six months endedJune 30, 2020 and 2019 was$(86.6) million and$7.4 million , respectively. As compared to the prior period, the decrease is reflective of an overall decrease in net investment income of$4.2 million period-over-period, as well as a net realized and unrealized gain (loss) of$(105.0) million for the current period, as compared to$(15.3) million of net realized and unrealized gain (loss) for the six months endedJune 30, 2019 .
Supplemental Non-GAAP information
We report our financial results on a GAAP basis; however, management believes that evaluating our ongoing operating results may be enhanced if investors have additional non-GAAP basis financial measures. Management reviews non-GAAP financial measures to assess ongoing operations and, for the reasons described below, considers them to be effective indicators, for both management and investors, of our financial performance over time. Management does not advocate that investors consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. AfterMarch 6, 2017 , Incentive Fees based on income are calculated for each calendar quarter and may be paid on a quarterly basis if certain thresholds are met. We record our liability for incentive management fees based on capital gains by performing a hypothetical liquidation at the end of each reporting period. The accrual of this hypothetical capital gains incentive management fee is required by GAAP, but it should be noted that a fee so calculated and accrued is not due and payable until the end of the measurement period, or everyJune 30 . The incremental incentive management fees disclosed for a given period are not necessarily indicative of actual full year results. Changes in the economic environment, financial markets and other parameters used in determining such estimates could cause actual results to differ and such differences could be material. See Note 3 to the consolidated financial statements for a more detailed description of the Company's incentive management fee. In addition, as previously disclosed, the Advisor, in consultation with the Company's Board of Directors, had agreed to waive incentive fees based on income fromMarch 7, 2017 toJune 30, 2019 (see Note 3 to the consolidated financial statements). BCIA had agreed to honor such waiver. The Advisor had voluntarily waived a portion of its incentive fees based on income fromJuly 1, 2019 throughJune 30, 2020 . 53
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Computations for all periods are derived from our consolidated financial
statements as follows:
Three Months
Ended Three Months Six Months Six Months
June 30, Ended Ended Ended
2020 June 30, 2019 June 30, 2020 June 30, 2019
GAAP Basis:
Net Investment Income $ 8,766,190 $ 11,229,675 $ 18,388,177 $ 22,633,859
Net Investment Income per share 0.13 0.16 0.27 0.33
Addback: GAAP incentive
management fee expense based on
Gains - - - -
Addback: GAAP incentive
management fee expense based on
Income net of incentive
management fee waiver - - - -
Pre-Incentive Fee1:
Net Investment Income $ 8,766,190 $ 11,229,675 $ 18,388,177 $ 22,633,859
Net Investment Income per share 0.13 0.16 0.27 0.33
Less: Incremental incentive - - - -
management fee expense based on
Income net of incentive
management fee waiver
As Adjusted2:
Net Investment Income $ 8,766,190 $ 11,229,675 $ 18,388,177 $ 22,633,859
Net Investment Income per share 0.13 0.16 0.27 0.33
Pre-Incentive Fee1: Amounts are adjusted to remove all incentive management fees. Such fees are calculated but not necessarily due and payable at this time.
As Adjusted2: Amounts are adjusted to remove the incentive management fee expense based on gains, as required by GAAP, and to include only the incremental incentive management fee expense based on income. Under the Current Management Agreement, incentive management fee expense based on income is calculated for each calendar quarter and may be paid on a quarterly basis if certain thresholds are met. Amounts reflect the Company's ongoing operating results and reflect the Company's financial performance over time.
Financial condition, liquidity and capital resources
During the six months endedJune 30, 2020 , we generated operating cash flows primarily from interest and fees received on senior secured loans and other debt securities, as well as from sales of selected portfolio company investments or repayments of principal. Net cash provided by operating activities for the six months endedJune 30, 2020 was$5.8 million . Our primary source of cash from operating activities during the period primarily consisted of net sales of investments of$4.6 million , excluding PIK. Net cash used in financing activities during the six months endedJune 30, 2020 was$(17.4) million . Our uses of cash consisted of cash distributions paid of$(18.5) million , and purchases of treasury stock of$(3.6) million . Our source of cash from financing activities consisted of$4.8 million in net debt borrowings under the Credit Facility.
Contractual obligations
A summary of our significant contractual payment obligations for the repayment
of outstanding borrowings at
Payments Due By Period (dollars in millions)
Less than 1
Total year 1-3 years 3-5 years After 5 years
Credit Facility(1) $ 179.2 $ - $ 179.2 $ - $ -
2022 Convertible Notes 143.8 - 143.8 - -
Interest and Credit Facility Fees
Payable 0.5 0.5 - - -
(1) At
Off-balance sheet arrangements
In the normal course of business, the Company may enter into guarantees on behalf of portfolio companies. Under these arrangements, the Company would be required to make payments to third parties if the portfolio companies were to default on their related payment obligations. There were no such guarantees outstanding atJune 30, 2020 andDecember 31, 2019 . In addition, from time to time, the Company may provide for a commitment to a portfolio company for investment in an existing or new security. AtJune 30, 2020 andDecember 31, 2019 , the Company was obligated to existing portfolio companies for unfunded commitments of$16.2 million and$23.8 million , respectively. Of the$16.2 million total unfunded commitments atJune 30, 2020 ,$11.6 million was on our aggregate$96.3 million equity commitment toBCIC Senior Loan Partners, LLC ("Senior Loan Partners ") (see Note 5 to the consolidated financial statements). We maintain sufficient cash on hand and available borrowings to fund such unfunded commitments should the need arise. 54
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Distributions
Our quarterly distributions, if any, are determined by our Board of Directors. Distributions are declared considering our estimate of annual taxable income available for distribution to stockholders and the amount of taxable income carried over from the prior year for distribution in the current year. We cannot assure stockholders that they will receive any distributions at all or distributions at a particular level. The following table lists the quarterly distributions per share from our common stock sinceJune 2018 : Distribution Amount Per Share Outstanding Record Date Payment Date $ 0.18 June 18, 2018 July 9, 2018 $ 0.18 September 17, 2018 October 8, 2018 $ 0.18 December 18, 2018 January 8, 2019 $ 0.18 March 18, 2019 April 8, 2019 $ 0.18 June 18, 2019 July 9, 2019 $ 0.14 September 16, 2019 October 7, 2019 $ 0.14 December 18, 2019 January 8, 2020 $ 0.14 March 17, 2020 April 7, 2020 $ 0.10 June 1, 2020 July 7, 2020 $ 0.10 August 18, 2020 September 29, 2020
Tax characteristics of all distributions are reported to stockholders on Form 1099 after the end of the calendar year.
We have elected to be taxed as a RIC under Subchapter M of the Code. In order to maintain favorable RIC tax treatment, we must distribute annually to our stockholders at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, out of the assets legally available for distribution. Under theRegulated Investment Company Modernization Act of 2010, capital losses incurred by the Company afterDecember 31, 2010 will not be subject to expiration. In addition, such losses must be utilized prior to the losses incurred in the years preceding enactment. In order to avoid certain excise taxes imposed on RICs, we must distribute during each calendar year an amount at least equal to the sum of:
• 98% of our ordinary income for the calendar year;
• 98.2% of our capital gains in excess of capital losses for the one-year
period ending on
• any ordinary income and net capital gains for preceding years that were
not distributed during such years.
We may, at our discretion, carry forward taxable income in excess of calendar year distributions and pay a 4% excise tax on this income. If we choose to do so, all other things being equal, this would increase expenses and reduce the amounts available to be distributed to our stockholders. We will accrue excise tax on estimated taxable income as required. In addition, although we currently intend to distribute realized net capital gains (i.e., net long-term capital gains in excess of short-term capital losses), if any, at least annually, out of the assets legally available for such distributions, we may in the future decide to retain such capital gains for investment. There was no provision for federal excise taxes recorded for the years endedDecember 31, 2019 and 2018. The final tax characterization of distributions is determined after the fiscal year and is reported on Form 1099 and in the Company's annual report to stockholders. Distributions can be characterized as ordinary income, capital gains and/or return of capital. To the extent that distributions exceed the Company's current and accumulated earnings and profits, the excess may be treated as a non-taxable return of capital. Distributions that exceed a Company's taxable income but do not exceed the Company's current and accumulated earnings and profits, may be classified as ordinary income which is taxable to stockholders. The Company estimates the source of its distributions as required by Section 19(a) of the 1940 Act. On a quarterly basis, for any payment of dividends estimated to be paid from any other source other than net investment income accrued for current period or certain cumulative periods based on the Section 19(a) requirement, the Company posts a Section 19(a) notice through theDepository Trust Company's Legal Notice System and its website, as well as sends its registered stockholders a printed copy of such notice along with the dividend payment. The estimates of the source of the distribution are interim estimates based on GAAP that are subject to revision, and the exact character of the distributions for tax purposes cannot be determined until the final books and records are finalized for the calendar year. Therefore, these estimates are made solely in order to comply with the requirements of Section 19(a) of the 1940 Act and should not be relied upon for tax reporting or any other purposes and could differ significantly from the actual character of distributions for tax purposes. For the$0.10 dividend paid onJuly 7, 2020 , the Company noted that$0.10 was from net investment income and none was a return of capital. For Consolidated Statements of Changes in Net Assets, sources of distribution to stockholders will be adjusted on an annual basis, if necessary, and calculated in accordance with federal income tax regulations. 55
-------------------------------------------------------------------------------- We maintain an "opt out" dividend reinvestment plan for our common stockholders. As a result, except as discussed below, if we declare a distribution, stockholders' cash distributions will be automatically reinvested in additional shares of our common stock, unless they specifically "opt out" of the dividend reinvestment plan as to receive cash distributions. Additionally, if the Company makes a distribution to be paid in cash or in stock at the election of stockholders as of the applicable dividend record date (a "Cash/Stock Distribution"), the terms are subject to the amended Plan datedMay 13, 2020 described below. For the three and six months endedJune 30, 2020 , distributions reinvested pursuant to the Company's dividend reinvestment plan were$638,560 (through issuance of new shares) and$1,358,251 (through issuance of new shares and purchase of shares in the open market), respectively (see Note 8 to the consolidated financial statements). For the three and six months endedJune 30, 2019 , distributions reinvested pursuant to the Company's dividend reinvestment plan were$985,662 (through purchase of shares in the open market) and$1,988,562 (through purchase of shares in the open market), respectively. OnMarch 6, 2018 , the Board of Directors of Company adopted amendments to the Company's dividend reinvestment plan (the "Plan"). Under the terms of the amended Plan, if the Company declares a dividend or determines to make a capital gain or other distribution, the reinvestment plan agent will acquire shares for the participants' accounts, depending upon the following circumstances, (i) through receipt of additional unissued but authorized shares from the Company ("newly issued shares") and/or (ii) by purchase of outstanding shares on the open market ("open-market purchases"). If, on the distribution payment date, the last quarterly net asset value per share ("NAV") is equal to or less than the closing market price per share on such distribution payment date (such condition often referred to as a "market premium"), the reinvestment plan agent will invest the distribution amount in newly issued shares on behalf of the participants. The number of newly issued shares to be credited to each participant's account will be determined by dividing the dollar amount of the distribution by the greater of (i) the NAV or (ii) 95% of the closing market price on the distribution payment date. If, on the distribution payment date, the NAV is greater than the closing market price per share on such distribution payment date (such condition often referred to as a "market discount"), the reinvestment plan agent may, upon notice from the Company, either (a) invest the distribution amount in newly issued shares on behalf of the participants or (b) invest the distribution amount in shares acquired on behalf of the participants in open-market purchases. OnMay 13, 2020 , the Board of Directors of the Company adopted further amendments to the Plan. Under the terms of the amended Plan, if the Company makes a Cash/Stock Distribution, each stockholder will be required to elect whether to receive the distribution in cash or in shares of the Company's common stock ("Common Shares"), pursuant to such notices, forms or other documentation as may be provided to the stockholder by the Company (the "Election Forms"). If the stockholder is a Plan participant and elects to receive the Cash/Stock Distribution in cash, the stockholder will be deemed to have elected not to participate in the Plan solely with respect to such Cash/Stock Distribution and will receive the distribution in cash subject to any rules applicable to the distribution that may limit the portion of the distribution the Company is required to pay in cash. If the stockholder is a Plan participant and elects to receive the Cash/Stock Distribution in stock, the stockholder will receive the distribution in newly issued Common Shares. The number of newly issued Common Shares credited to the stockholders' account in either case will be determined by dividing the dollar amount of the distribution (or portion of the distribution to be paid in Common Shares) by the price per Common Share determined in accordance with the Election Forms rather than pursuant to the formula(s) otherwise applicable under the Plan. This feature of the Plan means that, under certain circumstances, we may issue shares of our common stock at a price below net asset value per share, which could cause our stockholders to experience dilution. 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 these distributions from time to time. Also, we may be limited in our ability to make distributions due to the asset coverage test applicable to us as a BDC under the 1940 Act and due to provisions in our existing and future debt arrangements. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of favorable RIC tax treatment. In addition, in accordance withU.S. generally accepted accounting principles and tax regulations, we include in income certain amounts that we have not yet received in cash, such as payment-in-kind interest, which represents contractual interest added to the loan balance that becomes due at the end of the loan term, or the accrual of original issue or market discount. Since we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the requirement to distribute at least 90% of our investment company taxable income to obtain tax benefits as a RIC and may be subject to income or excise taxes. In order to satisfy the annual distribution requirement applicable to RICs, we may have the ability to declare a large portion of a dividend in shares of our common stock instead of in cash. As long as a sufficient portion of such dividend is paid in cash and certain requirements are met, the entire distribution would generally be treated as a dividend forU.S. federal income tax purposes.
Recent developments
OnJuly 7, 2020 , the Company paid a dividend of$0.10 per share, or$6.81 million , to stockholders of record onJune 1, 2020 , as announced onMay 6, 2020 . Out of the total dividend of$6.81 million , approximately$1.36 million was paid in cash and$5.45 million was paid in approximately 2.03 million shares of the Company's common stock issued at a price of$2.68200 per share (representing the average closing stock price for the Company's common stock on the five trading days beginning withJune 23, 2020 and ending withJune 29, 2020 (both days inclusive)). As a result, the Company's NAV has increased by approximately$5.45 million onJuly 7, 2020 , attributable to the portion of dividend paid in shares. OnJuly 28, 2020 , the Company's Board of Directors declared a distribution of$0.10 per share, payable onSeptember 29, 2020 to stockholders of record at the close of business onAugust 18, 2020 . The distributions will be paid in a combination of cash and shares of the Company's common stock at the election of stockholders, with the total amount of cash to be distributed to all stockholders limited to 20% of the total distributions to be paid to all stockholders. The portion of the distributions not paid in cash will be paid in the form of newly issued 56
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shares of the Company's common stock at the average closing stock price for the Company's common stock on the five trading days beginning withSeptember 15, 2020 and ending withSeptember 21, 2020 (both days inclusive). Notice is hereby given in accordance with Section 23(c) of the 1940 Act that from time to time the Company may purchase shares of its common stock in the open market at prevailing market prices.
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