BLACKROCK CAPITAL INVESTMENT CORPORATION The information contained in this section should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this Annual Report. Forward-looking statements 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") and those identified elsewhere in this report, including the "Risk Factors" section, the following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance:
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our future operating results;
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our business prospects and the prospects of our portfolio companies;
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the impact of investments that we expect to make;
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our contractual arrangements and relationships with third parties;
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the dependence of our future success on the general economy and its impact on the industries in which we invest;
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the financial condition of and ability of our current and prospective portfolio companies to achieve their objectives;
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our expected financings and investments;
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the adequacy of our cash resources and working capital, including our ability to obtain continued financing on favorable terms;
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the timing of cash flows, if any, from the operations of our portfolio companies;
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the impact of increased competition;
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the impact of COVID-19 on our portfolio companies and the markets in which they operate, interest rates and the economy in general;
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the ability of the Advisor to locate suitable investments for us and to monitor and administer our investments;
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changes in law and policy accompanying the new administration and uncertainty pending any such changes;
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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;
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changes and volatility in political, economic or industry conditions, the interest rate environment, inflation, foreign exchange rates or financial and capital markets;
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the unfavorable resolution of legal proceedings; and
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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 debt securities and loans, and our investment portfolio may include junior secured and unsecured debt securities and loans, each of which may include an equity component. 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.
Certain items previously reported may have been reclassified to conform to the current year presentation.
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--------------------------------------------------------------------------------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, the competitive environment for the types of investments we make and the level of repayment activity from our portfolio companies.
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 ofDecember 31, 2022 , approximately 15.0% 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 monthly, 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, end-of-term or exit fees, for providing significant managerial assistance, and other investment related income.
Expenses
Our primary operating expenses include the payment of a Management Fee and, depending on our operating results, Incentive Fees, interest and credit facility fees, expenses reimbursable under the Current Management Agreement, professional fees, administration fees and the allocable portion of overhead under the administration agreement. The Management Fee and Incentive 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 and estimates
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 in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements, as well as the reported amounts of revenues and expenses
during the reporting periods presented. Although management believes these
estimates and assumptions to be reasonable, actual results could differ from
those estimates and such differences could be material.
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 adopted accounting pronouncements. Management considers
Investments to be an area deemed a critical accounting policy as a result of the
judgments necessary for management to select valuation methodologies and to
select significant unobservable inputs to estimate fair value. Pursuant to Rule
2a-5 (the "Rule") under the 1940 Act, the Company's Board has designated the
Advisor as the Company's Valuation Designee to perform certain fair value
functions, including performing fair value determinations, and has reviewed and
approved amended policies and procedures adopted by BCIA to seek to ensure
compliance with the requirements of the Rule as part of such designation. The
Valuation Designee will provide quarterly valuation reporting and notifications
on any material valuation matters to the Board as required under the Rule (see
Note 2 to the consolidated financial statements).
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--------------------------------------------------------------------------------Financial and operating highlights
AtDecember 31, 2022 : Investment portfolio, at fair value:$570.5 million Net assets:$318.5 million Indebtedness, excluding deferred issuance costs:$254.0 million Net asset value per share:$4.39
Portfolio Activity for the Year Ended
Operating Results for the Year EndedDecember 31, 2022 : Net investment income per share:$0.40 Dividends declared per share:$0.40 Basic earnings (loss) per share:$0.05 Net investment income:$29.4 million Net realized and unrealized gain (loss):$(25.9) million Net increase (decrease) in net assets from operations:$3.5 million Net investment income per share, as adjusted1:$0.38 Basic earnings (loss) per share, as adjusted1:$0.03 Net investment income, as adjusted1:$27.8 million Net increase (decrease) in net assets from operations, as adjusted1:$1.9 million As Adjusted1: The Company reports its financial results in accordance with GAAP; however, management believes evaluating the Company's ongoing operating results may be enhanced if investors have additional non-GAAP financial measures. See "Supplemental Non-GAAP information" for further information on non-GAAP financial measures and for as adjusted items, which are adjusted to remove the impact of the accrued hypothetical liquidation basis incentive fee expense reversal based on capital gains that was recorded, as required by GAAP, and to include only the incremental incentive fee based on income. Under the Current Management Agreement, incentive fee expense based on income is calculated for each calendar quarter and may be paid on a quarterly basis if certain thresholds are met. Adjusted amounts reflect the fact that no Incentive Fee on capital gains was realized and payable to the Advisor during the year endedDecember 31, 2022 .
Portfolio and investment activity
We invested approximately$231.5 million , including PIK, during the year endedDecember 31, 2022 . The new investments consisted of senior secured loans secured by first lien ($220.5 million , or 95.3%) or second lien ($10.7 million , or 4.6%), and equity securities ($0.3 million , or 0.1%). Additionally, we received proceeds from sales, repayments and other exits of approximately$192.4 million during the year endedDecember 31, 2022 . 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. AtDecember 31, 2022 , our portfolio of$570.5 million (at fair value) consisted of 116 portfolio companies and was invested approximately 94% in senior secured loans, 4% in unsecured or subordinated debt securities, 2% in equity investments, and less than 1% in senior secured notes. Our average investment by portfolio company at amortized cost was approximately$5.7 million atDecember 31, 2022 . Our largest portfolio company investment at fair value was approximately$24.8 million and our five largest portfolio company investments at fair value comprised approximately 14% of our portfolio atDecember 31, 2022 . AtDecember 31, 2021 , our portfolio of$552.6 million (at fair value) consisted of 86 portfolio companies and was invested 93% in senior secured loans, 5% in unsecured or subordinated debt securities, 2% in equity investments and less than 1% in senior secured notes. Our average investment by portfolio company at amortized cost was approximately$7.1 million atDecember 31, 2021 . Our largest portfolio company investment at fair value was approximately$37.3 million and our five largest portfolio company investments by value comprised approximately 21% of our portfolio atDecember 31, 2021 . 67 -------------------------------------------------------------------------------- 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 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 and events outside of our control, including public health crises such as COVID-19, or other geopolitical or macroeconomic events (see Item 1A. Risk Factors for further details), which may have resulted in a negative impact to certain industries, including significant reductions in demand for certain goods and services, reductions in business activity and financial transactions, supply chain interruptions and overall economic and financial market instability both globally and inthe United States (see Note 5 to the consolidated financial statements), among various other industry and sector uncertainties due to certain exposures. AtDecember 31, 2022 , our top three industry concentrations at fair value consisted of Software (15.2%),Diversified Financial Services (14.5%) andInternet Software & Services (11.1%). AtDecember 31, 2021 , our top three industry concentrations at fair value consisted ofDiversified Financial Services (13.6%),Internet Software & Services (11.2%) and Road & Rail (10.5%) (see Note 5 to the consolidated financial statements).
The weighted average portfolio yields at fair value and cost as of
December 31, 2022 December 31, 2021
Fair Value Cost Fair Value Cost
Weighted Average Yield(1)
Total portfolio 11.9 % 10.6 % 8.5 % 7.6 %
Senior secured loans 12.4 % 12.4 % 9.0 % 9.0 %
Other debt securities 3.4 % 1.7 % 1.9 % 1.1 %
Debt and income producing
equity securities 12.0 % 11.6 % 8.7 % 8.4 %
(1)
Computed as (a) the annual stated interest rate or yield earned plus the net
annual amortization of original issue discount, divided by (b) the amortized
cost or at fair value of each category, as applicable. The calculation excludes
exit fees that are receivable upon repayment of certain loan investments.
For the years ended December 31, 2022 and 2021 the total return based on net
asset value was 2.78% and 23.57%, respectively, and the total return based on
market price was 0.22% and 64.33%, respectively. Total returns are historical
and are calculated by determining the percentage change in the net asset value
or market price with all dividends reinvested, if any. Dividends 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 or above the Advisor's original base case expectations and whose risk
factors are neutral to favorable to those at the time of the original investment
or subsequent restructuring.
Grade 2: Investments in portfolio companies whose performance is materially below the Advisor's original base case expectations or risk factors have increased since the time of original investment or subsequent restructuring. No loss of investment return or principal (or invested capital) is expected.
Grade 3: Investments in portfolio companies whose performance is materially below the Advisor's original base case expectations or risk factors have increased materially since the time of original investment or subsequent restructuring. Some loss of investment return is expected, but no loss of principal (or invested capital) is expected.
Grade 4: Investments in portfolio companies whose performance is materially below the Advisor's original base case expectations or risk factors have increased substantially since the time of original investment or subsequent restructuring. Some loss of principal (or invested capital) is expected.
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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 review these investment ratings on a quarterly
basis. Our weighted average investment rating was 1.33 at December 31, 2022 and
1.21 at December 31, 2021 . The following is a distribution of the investment
ratings of our portfolio companies, at fair value, at December 31, 2022 and
December 31, 2021 :
December 31, December 31,
2022 2021
Grade 1 $ 422,813,958 $ 474,466,652
Grade 2 117,689,506 49,356,296
Grade 3 9,675,397 -
Grade 4 15,936,823 22,579,310
Not Rated(1) 4,373,400 6,161,736
Total investments $ 570,489,084 $ 552,563,994
(1)
The 'Not Rated' category at December 31, 2022 consists primarily of the
Company's residual equity investment in Stitch Holdings, L.P. Not Rated category
as of December 31, 2021 consists primarily of the Company's residual equity
investments in Stitch Holdings, L.P. and AGY Equity, LLC . For purposes of
calculating our weighted average investment rating, the Not Rated category is
excluded.
Results of operations
Results comparisons are for the years ended December 31, 2022 , 2021 and 2020.
Investment income
Year Ended
December 31, December 31,
2022 2021 December 31, 2020
Investment income
Interest and fees on senior secured
loans $ 56,809,947 $ 43,782,088 $ 40,269,786
Interest and fees on other debt
securities 641,700 722,862 18,628,369
Interest earned on short-term
investments, cash equivalents 164,623 5,732 26,846Dividends and fees on equity securities 319,524 1,734,338
8,190,499
Total investment income $ 57,935,794 $ 46,245,020 $ 67,115,500
Total investment income for the year ended December 31, 2022 increased $11.7
million , or 25.3%, as compared to the year ended December 31, 2021 . The increase
was primarily due to i) a 17.0% higher average balance in senior secured loans,
at amortized cost, during the year ended December 31, 2022 ; ii) a 9.7% increase
in the weighted average yield on senior secured loans year over year as a result
of a higher interest rate environment; and iii) an increase in fee and other
one-time income of $1.1 million year over year as a result of certain exited
investments during the year. The increased balance of senior secured loans is
primarily due to net deployments during 2021 and 2022, which were substantially
all in senior secured debt. These increases are partially offset by a decrease
in dividend income of $1.4 million year over year, which is primarily
attributable to the exit of BCIC Senior Loan Partners, LLC ("Senior Loan
Partners ") during December 2021 .
Total investment income for the year ended December 31, 2021 decreased $20.9
million , or 31.1%, as compared to the year ended December 31, 2020 . The primary
reasons for the decrease year over year is a $13.1 million decrease in
investment income due to our unsecured debt investment in Gordon Brothers
Finance Company ("GBFC") going on non-accrual status during the second half of
2020, and a decrease in dividend income year over year. The decrease in dividend
income is comprised of i) a $4.2 million decrease from Senior Loan Partners ,
primarily due to the disposal of underlying portfolio company investments in
Senior Loan Partners during late 2020 and throughout 2021; and ii) a $2.3
million decrease associated with GBFC preferred stock going on non-accrual
status during the second half of 2020. Excluding fee income and other income,
total investment income decreased by approximately 31.6%, primarily attributable
to a 22.9% decrease in the average investment portfolio for the year ended
December 31, 2021 , at amortized cost, as compared to the year ended December 31,
2020 . The decrease in portfolio size is primarily due to desirable exits during
2020 and 2021, primarily in junior capital exposure as discussed above and other
non-core assets.
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Expenses
Year Ended
December 31, 2022 December 31, 2021 December 31, 2020
Operating expenses
Interest and other debt expenses $ 13,140,402 $ 11,620,899 $ 15,584,214
Management fees 8,311,686 7,784,188 10,799,832
Incentive fees on income 3,422,362 249,385 6,304,333
Incentive fees on capital gains (1,544,569 ) 1,544,569 -
Administrative expenses 1,407,775 1,354,283 1,457,979
Professional fees 836,788 1,100,008 1,964,252
Insurance expense 747,428 809,356 650,432
Director fees 613,750 622,500 652,250
Investment advisor expenses 103,276 350,000 350,000
Other operating expenses 1,525,774 1,011,273 1,433,054
Total expenses, before incentive
fee waiver 28,564,672 26,446,461 39,196,346
Incentive fee waiver - (79,383 ) (6,304,333 )
Total expenses, net of incentive
fee waiver $ 28,564,672 $
26,367,078
Total expenses, net of incentive fee waiver, increased$2.2 million , or 8.3%, for the year endedDecember 31, 2022 from the comparable period in 2021, primarily due to increases in incentive fees on income, interest and other debt expenses and management fees, which were partially offset by the reversal of previously accrued incentive fees on capital gains in 2022 as required by GAAP. Total expenses, net of incentive fee waiver, decreased$6.5 million , or 19.8%, for the year endedDecember 31, 2021 from the comparable period in 2020, primarily due to decreases in interest and other debt expenses and management fees, which were partially offset by an increase in accrued incentive fees on capital gains in 2021 as required by GAAP. Incentive fees on income increased approximately$3.2 million for the year endedDecember 31, 2022 from the comparable period in 2021 due to higher pre-incentive net investment income in excess of the hurdle year over year. Incentive fees on income decreased approximately$6.1 million for the year endedDecember 31, 2021 from the comparable period in 2020 due to less pre-incentive net investment income in excess of the hurdle year over year. For the years endedDecember 31, 2021 and 2020, the Advisor voluntarily waived incentive fees on income of$0.1 million and$6.3 million , respectively, resulting in net incentive fees of$0.2 million and zero, respectively. The Company is required under GAAP to accrue a hypothetical liquidation basis incentive fee on capital gains (if any), based upon net realized capital gains and unrealized capital appreciation and depreciation on investments held at the end of each reporting period. If the resulting calculation amount is negative, the accrual for GAAP in a given period may result in the reduction or reversal of incentive fees on capital gains accrued in a prior period (see Note 3 to the consolidated financial statements). It should be noted that incentive fees based on capital gains (if any) are not due and payable until the end of the annual measurement period, or everyJune 30 . The accrual (reversal) of incentive fees on capital gains was$(1.5) million and$1.5 million during the years endedDecember 31, 2022 and 2021, respectively. As ofDecember 31, 2022 andDecember 31, 2021 , the balance of accrued incentive fees on capital gains was zero and$1.5 million , respectively. However, as ofDecember 31, 2021 , no incentive fees on capital gains were realized and payable to the Advisor as of such date. Interest and other debt expenses increased approximately$1.5 million , or 13.1%, for the year endedDecember 31, 2022 from the comparable period in 2021 due to an increase in average debt outstanding year over year, and a higher interest rate environment (see Note 4 to the consolidated financial statements). Interest and other debt expenses decreased approximately$4.0 million , or 25.4%, for the year endedDecember 31, 2021 from the comparable period in 2020, primarily due to a significant decrease in the average debt outstanding year over year, and a lower rate environment. Management fees increased approximately$0.5 million , or 6.8%, for the year endedDecember 31, 2022 from the comparable period in 2021 due to an increase in the total assets on which management fees are calculated (in arrears). The increase in total assets was primarily due to net deployments during 2021 and the first nine months of 2022. Management fees decreased approximately$3.0 million , or 27.9%, for the year endedDecember 31, 2021 from the comparable period in 2020 due to a decline in the total assets on which management fees are calculated (in arrears), and a decrease in the management fee rate effectiveMay 2, 2020 . The decrease in total assets was primarily due to net sales, repayments and valuation depreciation during 2020.
Net investment income
Net investment income was$29.4 million ,$19.9 million and$34.2 million for the years endedDecember 31, 2022 , 2021 and 2020, respectively. For the year endedDecember 31, 2022 , net investment income increased by approximately$9.5 million , or 47.8%, compared to 2021, due to an increase in total investment income of$11.7 million , partially offset by an increase in total expenses of$2.2 million . For the year endedDecember 31, 2021 , net investment income decreased$14.4 million , or 41.9%, compared to 2020, due to a decrease in total investment income of$20.9 million , partially offset by a decrease in total expenses of$6.5 million . 70 --------------------------------------------------------------------------------
Net realized gain or loss
Net realized gain (loss) was$1.2 million ,$(19.1) million and$(116.0) million for the years endedDecember 31, 2022 , 2021 and 2020, respectively. Net realized gain (loss) of$1.2 million for the year endedDecember 31, 2022 was primarily due to escrow proceeds received from SVP -Singer Holdings, LP andECI Cayman Holdings, LP , which were exited during 2021 and 2018, respectively. Net realized gain (loss) of$(19.1) million for the year endedDecember 31, 2021 was primarily due to a$(22.0) million realized loss on the exit of ourSenior Loan Partners investment, an$(18.5) million realized loss on the restructure ofAdvanced Lighting Technologies, LLC , and exits of our investments inRed Apple Stores Inc. ,First Boston Construction Holdings, LLC , andAdvantage Insurance Inc. ; partially offset by a realized gain of$22.0 million on the sale of SVP -Singer Holdings, LP . Net realized gain (loss) of$(116.0) million for the year endedDecember 31, 2020 was primarily due to the restructure ofAGY Holding Corp. , resulting in a realized loss of$(59.2) million , the sale of our equity investment inU.S. Well Services, Inc. , resulting in a realized loss of$(43.8) million , and sale of our debt investment inSur La Table, Inc. , which resulted in a realized loss of$(12.3) million . Substantially all of the net realized losses were reflected in unrealized depreciation in prior periods.
Net unrealized appreciation or depreciation
For the year endedDecember 31, 2022 , 2021 and 2020, the change in net unrealized appreciation or depreciation on our investments, Interest Rate Swap and foreign currency was an increase in net unrealized depreciation of$(27.1) million , a decrease in net unrealized depreciation of$65.7 million and an increase in net unrealized depreciation of$(22.1) million , respectively. The increase in net unrealized depreciation for the year endedDecember 31, 2022 was primarily due to i) an overall increase in valuation depreciation across our portfolio due to spread widening and general market declines during the period (see Item 1A. Risk Factors), out of which our investments inRazor Group GmbH (Germany ),Stitch Holdings L.P. , Thras.io, LLC,Magenta Buyer, LLC ,Syndigo, LLC andZest Acquisition Corp. contributed$(8.2) million ; ii) a$(2.5) million increase in unrealized depreciation in GBFC, net of the reversal of$2.0 million of previously recognized depreciation on the position as a result of a paydown during the period; and iii) a$(1.3) million increase in valuation depreciation related to our Interest Rate Swap. The decrease in net unrealized depreciation for the year endedDecember 31, 2021 was primarily due to i) the reversal of previously recognized depreciation of$25.8 million , related to the exit of our investment inSenior Loan Partners ; ii) the reversal of previously recognized depreciation of$24.3 million , including foreign currency translation, related to the exits of our investments inRed Apple Stores Inc. , SVP -Singer Holdings, LP ,First Boston Construction Holdings, LLC , andAdvantage Insurance Inc. , and the restructure ofAdvanced Lighting Technologies, LLC ; iii) decrease in valuation depreciation of$4.2 million in our investment inSt. George Warehousing & Trucking Co. of California , Inc., as well as an overall increase in valuation across our portfolio. The increase in net unrealized depreciation for the year endedDecember 31, 2020 was primarily due to a$(85.4) million increase in valuation depreciation in our investments inGBFC and Senior Loan Partners , partially offset by a$64.0 million reversal of previously recognized depreciation related to the sale of our equity investment inU.S. Well Services, Inc. and the restructure ofAGY Holding Corp.
Net increase or decrease in net assets resulting from operations
The net increase or (decrease) in net assets resulting from operations for the years endedDecember 31, 2022 , 2021 and 2020 was approximately$3.5 million ,$66.5 million and$(103.9) million , respectively. As compared to the year endedDecember 31, 2021 , the decrease in 2022 is primarily due to a year over year decrease in net realized and unrealized gain (loss) of$72.5 million , partially offset by an increase in net investment income of$9.5 million year over year. As compared to the year endedDecember 31, 2020 , the increase in 2021 is primarily due to an increase in net realized and unrealized gain (loss) of$184.7 million , partially offset by a decrease in net investment income of$14.4 million .
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. In addition, as previously disclosed, the Advisor, in consultation with the Company's Board, had agreed to waive incentive fees based on income fromMarch 7, 2017 toJune 30, 2019 . BCIA had agreed to honor such waiver. The Advisor had voluntarily waived a portion of its incentive fees based on income fromJuly 1, 2019 throughSeptember 30, 2021 . We record our liability for incentive fee based on capital gains by performing a hypothetical liquidation basis calculation at the end of each reporting period, as required by GAAP, which assumes that all unrealized capital appreciation and depreciation is realized as of the reporting date. It should be noted that incentive fees based on capital gains (if any) are not due and payable until the end of the annual measurement period, or everyJune 30 . The incremental incentive fee disclosed for a given period is 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. There can be no assurance that unrealized capital appreciation and depreciation will be realized in the future, or that any accrued capital gains incentive fee will become payable. incentive fee amounts on capital gains actually paid by the Company will specifically exclude consideration of unrealized capital appreciation, consistent with requirements under the Advisers 71 --------------------------------------------------------------------------------
Act and the Current Management Agreement. See Note 3 to the consolidated financial statements for a more detailed description of the Company's incentive fee.
Computations for all periods are derived from our consolidated financial
statements as follows:
Year Ended
December 31, December 31, December 31,
2022 2021 2020
GAAP Basis:
Net Investment Income $ 29,371,122 $ 19,877,942 $ 34,223,487
Net Investment Income per share 0.40 0.27 0.49
Addback: GAAP incentive fee (reversal) based
on capital gains (1,544,569 ) 1,544,569 -
Addback: GAAP incentive fee based on Income
net of incentive fee waiver (if any) 3,422,362 170,002 -
Pre-Incentive Fee1:
Net Investment Income $ 31,248,915 $ 21,592,513 $ 34,223,487
Net Investment Income per share 0.43 0.29 0.49
Less: Incremental incentive fee based on Income net of incentive fee waiver (if any) (3,422,362 ) (170,002 )
-
As Adjusted2:
Net Investment Income $ 27,826,553 $ 21,422,511 $ 34,223,487
Net Investment Income per share 0.38 0.29 0.49
Pre-Incentive Fee1: Amounts are adjusted to remove all incentive fees (if any).
As Adjusted2: Amounts are adjusted to remove the GAAP accrual (reversal) for incentive fee based on capital gains (if any), and to include only the incremental incentive fee based on income (if any). Adjusted amounts reflect the fact that no incentive fee on capital gains was realized and payable to the Advisor during the years endedDecember 31, 2022 , 2021 and 2020, respectively (see Note 3). Under the Current Management Agreement, incentive fee based on income is calculated for each calendar quarter and may be paid on a quarterly basis if certain thresholds are met.
Financial condition, liquidity and capital resources
During the year endedDecember 31, 2022 , we generated operating cash flows primarily from interest and fees received on senior secured loans and other debt securities, as well as from dispositions of selected portfolio company investments or repayments of principal. Net cash used in operating activities for the year endedDecember 31, 2022 was$(24.0) million . Our use of cash from operating activities during the period primarily consisted of$(37.4) million in net purchases of investments, excluding PIK capitalization. Net cash provided by financing activities for the year endedDecember 31, 2022 was$20.8 million . Our sources of cash from financing activities consisted of$108.0 million in net debt borrowings under the Credit Facility and$92.0 million from the issuance of our 2025 Private Placement Notes. Our uses of cash consisted of the$(143.7) million repayment of our 2022 Convertible Notes, cash dividends paid to stockholders of$(29.5) million , purchases of treasury stock of$(4.9) million , and payments of debt issuance costs of$(1.2) million . During the year endedDecember 31, 2021 , we generated operating cash flows primarily from interest and fees received on senior secured loans and other debt securities, as well as from sales of selected portfolio company investments or repayments of principal. Net cash used in operating activities for the year endedDecember 31, 2021 was$(0.6) million . Our use of cash from operating activities during the period primarily consisted of$(21.6) million in net purchases of investments, excluding PIK capitalization. Net cash used by financing activities for the year endedDecember 31, 2021 was$(10.0) million . Our uses of cash from financing activities consisted of cash dividends paid of$(22.3) million , purchases of treasury stock of$(2.2) million , and payment of debt issuance costs of approximately$(0.8) million . Our source of cash from financing activities consisted of$15.2 million in net debt borrowings under the Credit Facility. In the normal course of business, we may enter into guarantees on behalf of portfolio companies. Under these arrangements, we 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 atDecember 31, 2022 andDecember 31, 2021 . 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. AtDecember 31, 2022 andDecember 31, 2021 , we were obligated to existing portfolio companies for unfunded commitments of$72.1 million across 51 portfolio companies and$49.4 million across 35 portfolio companies, respectively.
As of
72
--------------------------------------------------------------------------------Contractual obligations
A summary of our significant contractual payment obligations for the repayment
of outstanding borrowings at
Payments Due By Period (dollars in millions)
Total Less than 1 year 1-3 years 3-5 years After 5 years Credit Facility(1)
$ 162.0 $ -$ 162.0 $ - $ - 2025 Private Placement Notes 92.0 - 92.0 - - Interest and Debt Related Payables 0.7 0.7 - - - (1)
At
Dividends
Our quarterly dividends, if any, are determined by our Board. Dividends 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 dividends at all or dividends at a particular level. The following table lists the quarterly dividends per share from our common stock sinceNovember 2020 : Dividend Amount Per Share Outstanding Record Date Payment Date$0.10 November 18, 2020 December 30, 2020$0.10 March 17, 2021 April 7, 2021$0.10 June 16, 2021 July 7, 2021$0.10 September 15, 2021 October 6, 2021$0.10 December 16, 2021 January 6, 2022$0.10 March 17, 2022 April 7, 2022$0.10 June 16, 2022 July 7, 2022$0.10 September 15, 2022 October 6, 2022$0.10 December 16, 2022 January 6, 2023$0.10 March 16, 2023 April 6, 2023
Tax characteristics of all dividends are reported to stockholders on Form 1099-DIV or Form 1042-S 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. 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 (not taking into account any capital gains or losses) for the calendar year;
•
98.2% of the amount by which our capital gains exceed our capital losses
(adjusted for certain ordinary losses) for the one-year period generally ending
on
•
certain undistributed amounts from previous years on which we paid no
We may, at our discretion, carry forward taxable income in excess of calendar year dividends 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 dividends, we may in the future decide to retain such capital gains for investment. There was no provision for federal excise taxes recorded for the year endedDecember 31, 2022 , 2021 and 2020. The final tax characterization of dividends is determined after the fiscal year and is reported on Form 1099 and in the Company's annual report to stockholders. Dividends can be characterized as ordinary income, capital gains and/or return of capital. To the extent that dividends exceed the Company's current and accumulated earnings and profits, the excess may be treated as a non-taxable return of capital. Dividends 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 dividends 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 dividend are interim estimates based on GAAP that are subject to revision, and the exact character of the dividends 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 dividends for tax purposes. For the$0.10 dividend per share paid on January 73 -------------------------------------------------------------------------------- 6, 2023, the Company noted that$0.10 was sourced from net investment income and there was no return of capital paid based on book income. For Consolidated Statements of Changes in Net Assets, sources of dividends to stockholders will be adjusted on an annual basis, if necessary, and calculated in accordance with federal income tax regulations. We maintain an "opt out" dividend reinvestment plan for our common stockholders. As a result, except as discussed below, if we declare a dividend, stockholders' cash dividends will be automatically reinvested in additional shares of our common stock, unless they specifically "opt out" of the Company's dividend reinvestment plan (the "Plan") as to receive cash dividends. Additionally, if the Company makes a dividend to be paid in cash or in stock at the election of stockholders as of the applicable dividend record date (a "Cash/Stock Dividend"), the terms are subject to the amended Plan datedMay 13, 2020 described below (see Note 7 to the consolidated financial statements). OnMarch 6, 2018 , the Company's Board adopted amendments to 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 dividend 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 dividend payment date (such condition often referred to as a "market premium"), the reinvestment plan agent will invest the dividend 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 dividend by the greater of (i) the NAV or (ii) 95% of the closing market price on the dividend payment date. If, on the dividend payment date, the NAV is greater than the closing market price per share on such dividend 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 dividend amount in newly issued shares on behalf of the participants or (b) invest the dividends amount in shares acquired on behalf of the participants in open-market purchases. OnMay 13, 2020 , the Company's Board adopted further amendments to the Plan. Under the terms of the amended Plan, if the Company makes a Cash/Stock Dividend, each stockholder will be required to elect whether to receive the dividend 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 Dividend in cash, the stockholder will be deemed to have elected not to participate in the Plan solely with respect to such Cash/Stock Dividend and will receive the dividend in cash subject to any rules applicable to the dividend that may limit the portion of the dividend the Company is required to pay in cash. If the stockholder is a Plan participant and elects to receive the Cash/Stock Dividend in stock, the stockholder will receive the dividend 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 dividend (or portion of the dividend 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 NAV per share, which could cause our stockholders to experience dilution. At the Company's special meeting of stockholders held onMay 3, 2022 , stockholders did not approve the Company's ability to sell or otherwise issue shares of common stock at a price below its then current net asset value per share for a 12-month period expiring on the anniversary of the date of stockholder approval. We may not be able to achieve operating results that will allow us to make dividends at a specific level or to increase the amount of these dividends from time to time. Also, we may be limited in our ability to make dividends 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. GAAP 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 accretion 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
On
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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