FIDUS INVESTMENT CORPORATION The following discussion and analysis of our financial condition and results of operations should be read in conjunction withFidus Investment Corporation's consolidated financial statements and related notes appearing in our annual report on Form 10-K for the year endedDecember 31, 2020 , filed with theSEC onFebruary 25, 2021 . The information contained in this section should also be read in conjunction with our unaudited consolidated financial statements and related notes thereto appearing elsewhere in this quarterly report on Form 10-Q.
Except as otherwise specified, references to "we," "us," "our," "Fidus" and
"FIC" refer to
Forward Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections aboutFidus Investment Corporation , our current and prospective portfolio investments, our industry, our beliefs, and our assumptions. Words such as "anticipates," "expects," "intends," "plans," "will," "may," "continue," "believes," "seeks," "estimates," "would," "could," "should," "targets," "projects" and variations of these words and similar expressions are intended to identify forward-looking statements. The forward-looking statements contained in this Quarterly Report on Form 10-Q involve risks and uncertainties, including statements as to:
• our future operating results and the impact of the COVID-19 pandemic
thereon;
• our business prospects and the prospects of our portfolio companies,including our and their ability to achieve our respective objectives as a
result of the current COVID-19 pandemic;
• the impact of investments that we expect to make;
• pandemics or other serious public health events, such as the recent
global outbreak of COVID-19;
• 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 and the impact of the
COVID-19 pandemic thereon;
• the ability of our portfolio companies to achieve their objectives;
• our expected financing and investments;
• the adequacy of our cash resources and working capital;
• the timing of cash flows, if any, from the operations of our portfolio
companies and the impact of the COVID-19 pandemic thereon;
• the ability of the Investment Advisor to locate suitable investments for
us and to monitor and administer our investments and the impacts of the
COVID-19 pandemic thereon;
• the ability of our investment advisor to attract and retain highly
talented professionals;
• our regulatory structure and tax status;
• our ability to operate as a BDC, a SBIC and a RIC;
• the timing, form and amount of any dividend distributions;
• the impact of fluctuations in interest rates on our business;
• the valuation of any investments in portfolio companies, particularly
those having no liquid trading market; and
• our ability to recover unrealized losses.
These statements are not guarantees of future performance and are subject to
risks, uncertainties and other factors, some of which are beyond our control and
difficult to predict and could cause actual results to differ materially from
those expressed or forecasted in the forward-looking statements, including
without limitation:
• an economic downturn, including as a result of the current
COVID-19pandemic, could impair our portfolio companies' ability to
continue to operate, which could lead to the loss of some or all of our
investments in such portfolio companies;
• a contraction of available credit and/or an inability to access the
equity markets, including as a result of the COVID-19 pandemic, could
impair our lending and investment activities;
• interest rate volatility could adversely affect our results, particularly
because we use leverage as part of our investment strategy;
• currency fluctuations could adversely affect the results of our
investments in foreign companies, particularly to the extent that we
receive payments denominated in foreign currency rather than the U.S.
dollars; and
• the risks, uncertainties and other factors we identify in Item 1A. - Risk
Factors contained in our Annual Report on Form 10-K for the year ended
our other filings with the SEC .
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FIDUS INVESTMENT CORPORATION
Notes to Consolidated Financial Statements (unaudited)
(in thousands, except shares and per share data)
Although we believe that the assumptions on which these forward-looking
statements are based are reasonable, any of those assumptions could prove to be
inaccurate, and as a result, the forward-looking statements based on those
assumptions also could be inaccurate. Important assumptions include our ability
to originate new debt investments, certain margins and levels of profitability
and the availability of additional capital. In light of these and other
uncertainties, the inclusion of a projection or forward-looking statement in
this Quarterly Report on Form 10-Q should not be regarded as a representation by
us that our plans and objectives will be achieved. These risks and uncertainties
include those described or identified in Item 1.A - Risk Factorscontained in our
Annual Report on Form 10-K for the year ended December 31, 2020 , filed with the
SEC on February 25, 2021 . You should not place undue reliance on these
forward-looking statements, which apply only as of the date of this Quarterly
Report on Form 10-Q.
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FIDUS INVESTMENT CORPORATION
Notes to Consolidated Financial Statements (unaudited)
(in thousands, except shares and per share data)
Overview
General and Corporate Structure
We provide customized debt and equity financing solutions to lower middle-market companies, which we define asU.S. based companies having revenues between$10.0 million and$150.0 million . Our investment objective is to provide attractive risk-adjusted returns by generating both current income from our debt investments and capital appreciation from our equity related investments. Our investment strategy includes partnering with business owners, management teams and financial sponsors by providing customized financing for ownership transactions, recapitalizations, strategic acquisitions, business expansion and other growth initiatives. Although we are classified as a non-diversified investment company within the meaning of the 1940 Act, we maintain the flexibility to operate as a diversified investment company and have done so for an extended period of time. We seek to maintain a diversified portfolio of investments in order to help mitigate the potential effects of adverse economic events related to particular companies, regions or industries. FIC was formed as aMaryland corporation onFebruary 14, 2011 . We completed our initial public offering, or IPO, inJune 2011 . FIC has elected to be treated as business development company, or BDC, under the 1940 Act and our investment activities are managed byFidus Investment Advisors , our investment advisor, and supervised by the Board, a majority of whom are independent of us. OnMarch 29, 2013 , we commenced operations of a wholly-owned subsidiary, Fund II. OnApril 18, 2018 , we commenced operations of another wholly-owned subsidiary, Fund III. Fund II and Fund III are collectively referred to as the "Funds." Fund II and Fund III received their SBIC licenses onMay 28, 2013 , andMarch 21, 2019 , respectively. We plan to continue to operate the Funds as SBICs, subject to SBA approval, and to utilize the proceeds of the sale of SBA-guaranteed debentures to enhance returns to our stockholders. We have also made, and continue to make, investments directly through FIC. We believe that utilizing FIC and the Funds as investment vehicles provides us with access to a broader array of investment opportunities. We have certain wholly-owned taxable subsidiaries (the "Taxable Subsidiaries"), each of which generally holds one or more of our portfolio investments listed on the consolidated schedules of investments. The Taxable Subsidiaries are consolidated for financial reporting purposes, such that our consolidated financial statements reflect our investment in the portfolio company investments owned by the Taxable Subsidiaries. The purpose of the Taxable Subsidiaries is to permit us to hold equity investments in portfolio companies that are taxed as partnerships forU.S. federal income tax purposes (such as entities organized as limited liability companies ("LLCs") or other forms of pass through entities) while complying with the "source-of-income" requirements contained in the RIC tax provisions. The Taxable Subsidiaries are not consolidated with us forU.S. federal corporate income tax purposes, and each Taxable Subsidiary will be subject toU.S. federal corporate income tax on its taxable income. Any such income or expense is reflected in the consolidated statements of operations.
COVID-19 Update
OnMarch 11, 2020 , theWorld Health Organization declared the novel coronavirus, or COVID-19, as a pandemic, and onMarch 13, 2020 the United States declared a national emergency with respect to COVID-19. The outbreak of COVID-19 has severely impacted global economic activity and caused significant volatility and negative pressure in financial markets. The global impact of the outbreak has been rapidly evolving and many countries, includingthe United States , have reacted by instituting quarantines, restricting travel and hospitality, and temporarily closing or limiting operations at many corporate offices, retail stores, restaurants, fitness clubs and manufacturing facilities and factories in affected jurisdictions. Such actions are creating disruption in global supply chains and adversely impacting a number of industries. The outbreak could have a continued adverse impact on economic and market conditions and trigger a period of global economic slowdown. The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID-19. Nevertheless, COVID-19 presents material uncertainty and risks with respect to the underlying value of the Company's portfolio companies, the Company's business, financial condition, results of operations and cash flows, such as the potential negative impact to financing arrangements, company decisions to delay, defer and/or modify the character of dividends in order to preserve liquidity, increased costs of operations, changes in law and/or regulation, and uncertainty regarding government and regulatory policy. We have evaluated subsequent events fromJuly 1, 2021 toAugust 5, 2021 . However, as the discussion in this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations relates to the Company's financial statements for the year endedDecember 31, 2020 , the analysis contained herein may not fully account for impacts relating to the COVID-19 pandemic. In that regard, for example, as ofJune 30, 2021 , the Company valued its portfolio investments in conformity with GAAP based on the facts and circumstances known by the Company at that time, or reasonably expected to be known at that time. Due to the overall volatility that the COVID-19 pandemic has caused during the months that followed June 30, 2021, any valuations conducted now or in the future in conformity with GAAP could result in a lower fair value of our portfolio. The potential impact to our results going forward will depend to a large extent on future developments and new information that may emerge regarding the duration and severity of COVID-19 and the actions taken by authorities and other entities to contain the coronavirus or treat its impact, all of which are beyond our control. Accordingly, the Company cannot predict the extent to which its financial condition and results of operations will be affected at this time. 42
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FIDUS INVESTMENT CORPORATION
Notes to Consolidated Financial Statements (unaudited)
(in thousands, except shares and per share data)
Investments
We seek to create a diversified investment portfolio that primarily includes
debt investments and, to a lesser extent, equity securities. Our investments
typically range between $5.0 million to $35.0 million per portfolio company,
although this investment size may vary proportionately with the size of our
capital base. Our investment objective is to provide attractive risk-adjusted
returns by generating both current income from our debt investments and capital
appreciation from our equity related investments. We may invest in the equity
securities of our portfolio companies, such as preferred stock, common stock,
warrants and other equity interests, either directly or in conjunction with our
debt investments.
First Lien Debt. To a lesser extent, we also structure some of our debt
investments as senior secured or first lien debt investments. First lien debt
investments are secured by a first priority lien on existing and future assets
of the borrower and may take the form of term loans or revolving lines of
credit. First lien debt is typically senior on a lien basis to other liabilities
in the issuer's capital structure and has the benefit of a first-priority
security interest in assets of the issuer. The security interest ranks above the
security interest of any second lien lenders in those assets. Our first lien
debt may include stand-alone first lien loans, "last out" first lien loans, or
"unitranche" loans. Stand-alone first lien loans are traditional first lien
loans. All lenders in the facility have equal rights to the collateral that is
subject to the first-priority security interest. "Last out" first lien loans
have a secondary priority behind super-senior "first out" first lien loans in
the collateral securing the loans in certain circumstances. The arrangements for
a "last out" first lien loan are set forth in an "agreement among lenders,"
which provides lenders with "first out" and "last out" payment streams based on
a single lien on the collateral. Since the "first out" lenders generally have
priority over the "last out" lenders for receiving payment under certain
specified events of default, or upon the occurrence of other triggering events
under intercreditor agreements or agreements among lenders, the "last out"
lenders bear a greater risk and, in exchange, receive a higher effective
interest rate, through arrangements among the lenders, than the "first out"
lenders or lenders in stand-alone first lien loans. Agreements among lenders
also typically provide greater voting rights to the "last out" lenders than the
intercreditor agreements to which second lien lenders often are subject.
Many of our debt investments also include excess cash flow sweep features,
whereby principal repayment may be required before maturity if the portfolio
company achieves certain defined operating targets. Additionally, our debt
investments typically have principal prepayment penalties in the early years of
the debt investment. The majority of our debt investments provide for a fixed
interest rate.
Second Lien Debt. The majority of our debt investments take the form of second
lien debt, which includes senior subordinated notes. Second lien debt
investments obtain security interests in the assets of the portfolio company as
collateral in support of the repayment of such loans. Second lien debt typically
is senior on a lien basis to other liabilities in the issuer's capital structure
and has the benefit of a security interest over assets of the issuer, though
ranking junior to first lien debt secured by those assets. First lien lenders
and second lien lenders typically have separate liens on the collateral, and an
intercreditor agreement provides the first lien lenders with priority over the
second lien lenders' liens on the collateral. These loans typically provide for
no contractual loan amortization, with all amortization deferred until loan
maturity, and may include payment-in-kind ("PIK") interest, which increases the
principal balance over the term and, coupled with the deferred principal payment
provision, increases credit risk exposure over the life of the loan.
Subordinated Debt. These investments are typically structured as unsecured,
subordinated notes. Structurally, subordinated debt usually ranks subordinate in
priority of payment to first lien and second lien debt and may not have the
benefit of financial covenants common in first lien and second lien debt.
Subordinated debt may rank junior as it relates to proceeds in certain
liquidations where it does not have the benefit of a lien in specific collateral
held by creditors (typically first lien and/or second lien) who have a perfected
security interest in such collateral. However, subordinated debt ranks senior to
common and preferred equity in an issuer's capital structure. These loans
typically have relatively higher fixed interest rates (often representing a
combination of cash pay and PIK interest) and amortization of principal deferred
to maturity. The PIK feature (meaning a feature allowing for the payment of
interest in the form of additional principal amount of the loan instead of in
cash), which effectively operates as negative amortization of loan principal,
coupled with the deferred principal payment provision, increases credit risk
exposure over the life of the loan.
Equity Securities . Our equity securities typically consist of either a direct
minority equity investment in common or preferred stock or
membership/partnership interests of a portfolio company, or we may receive
warrants to buy a minority equity interest in a portfolio company in connection
with a debt investment. Warrants we receive with our debt investments typically
require only a nominal cost to exercise, and thus, as a portfolio company
appreciates in value, we may achieve additional investment return from this
equity interest. Our equity investments are typically not control-oriented
investments, and in many cases, we acquire equity securities as part of a group
of private equity investors in which we are not the lead investor. We may
structure such equity investments to include provisions protecting our rights as
a minority-interest holder, as well as a "put," or right to sell such securities
back to the issuer, upon the occurrence of specified events. In many cases, we
may also seek to obtain registration rights in
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FIDUS INVESTMENT CORPORATION
Notes to Consolidated Financial Statements (unaudited)
(in thousands, except shares and per share data)
connection with these equity interests, which may include demand and "piggyback"
registration rights. Our equity investments typically are made in connection
with debt investments to the same portfolio companies.
Revenues: We generate revenue in the form of interest and fee income on debt
investments and dividends, if any, on equity investments. Our debt investments,
whether in the form of second lien, subordinated or first lien loans, typically
have terms of five to seven years and most bear interest at a fixed rate, but
some bear interest at a floating rate. In some instances, we receive payments on
our debt investments based on scheduled amortization of the outstanding
balances. In addition, we may receive repayments of some of our debt investments
prior to their scheduled maturity dates, which may include prepayment penalties.
The frequency or volume of these repayments fluctuates significantly from period
to period. Our portfolio activity may reflect the proceeds of sales of
securities. In some cases, our investments provide for deferred interest
payments or PIK interest. The principal amount of debt investments and any
accrued but unpaid interest generally become due at the maturity date. In
addition, we may generate revenue in the form of commitment, origination,
amendment, or structuring fees and fees for providing managerial assistance.
Debt investment origination fees, OID and market discount or premium, if any,
are capitalized, and we accrete or amortize such amounts into interest income.
We record prepayment penalties on debt investments as fee income when earned.
Interest and dividend income is recorded on the accrual basis to the extent that
we expect to collect such amounts. Interest is accrued daily based on the
outstanding principal amount and the contractual terms of the debt investment.
Dividend income is recorded as dividends are declared or at the point an
obligation exists for the portfolio company to make a distribution, and is
generally recognized when received. Distributions of earnings from portfolio
companies are evaluated to determine if the distribution is a distribution of
earnings or a return of capital. Distributions of earnings are included in
dividend income while a return of capital is recorded as a reduction in the cost
basis of the investment. Estimates are adjusted as necessary after the relevant
tax forms are received from the portfolio company. Debt investments or preferred
equity investments (for which we are accruing PIK dividends) are placed
on non-accrual status when principal, interest or dividend payments become
materially past due, or when there is reasonable doubt that principal, interest
or dividends will be collected. Interest and dividend payments received on
non-accrual investments may be recognized as interest or dividend income or may
be applied to the investment principal balance based on management's judgment.
Non-accrual investments are restored to accrual status when past due principal,
interest or dividends are paid and, in management's judgment, payments are
likely to remain current. See "Critical Accounting Policies and Use of Estimates
- Revenue Recognition."
We recognize realized gains or losses on investments based on the difference
between the net proceeds from the disposition and the cost basis of the
investment, without regard to unrealized gains or losses previously recognized.
We record current period changes in fair value of investments that are measured
at fair value as a component of the net change in unrealized appreciation
(depreciation) on investments in the consolidated statements of operations.
Expenses: All investment professionals of the Investment Advisor and/or its
affiliates, when and to the extent engaged in providing investment advisory and
management services to us, and the compensation and routine overhead expenses
allocable to personnel who provide these services to us, are provided and paid
for by the Investment Advisor and not by us. We bear all other out-of-pocket
costs and expenses of our operations and transactions, including, without
limitation, those relating to:
• organization;
• calculating our net asset value (including the cost and expenses of any
independent valuation firm);
• fees and expenses incurred by the Investment Advisor under the InvestmentAdvisory Agreement or payable to third parties, including agents,
consultants or other advisors, in monitoring financial and legal affairs
for us and in monitoring our investments and performing due diligence on
our prospective portfolio companies or otherwise relating to, or
associated with, evaluating and making investments, including "dead deal"
costs;
• interest payable on debt, if any, incurred to finance our investments;
• offerings of our common stock and other securities;
• investment advisory fees and management fees;
• administration fees and expenses, if any, payable under theAdministration Agreement (including payments under the Administration
Agreement between us and the Investment Advisor based upon our allocable
portion of the Investment Advisor's overhead in performing its
obligations under the Administration Agreement, including rent and the
allocable portion of the cost of our officers, including our chiefcompliance officer, our chief financial officer, and their respective
staffs);
• transfer agent, dividend agent and custodial fees and expenses;
• federal and state registration fees;
• all costs of registration and listing our shares on any securities exchange;
•U.S. federal, state and local taxes; • Independent Directors' fees and expenses;
• costs of preparing and filing reports or other documents required by the
SEC or other regulators including printing costs;
• costs of any reports, proxy statements or other notices to stockholders,
including printing and mailing costs;
• our allocable portion of any fidelity bond, directors and officers/errors
and omissions liability insurance, and any other insurance premiums;
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FIDUS INVESTMENT CORPORATION
Notes to Consolidated Financial Statements (unaudited)
(in thousands, except shares and per share data)
• direct costs and expenses of administration, including printing, mailing,
long distance telephone, copying, secretarial and other staff,
independent auditors and outside legal costs;
• proxy voting expenses; and
• all other expenses reasonably incurred by us or the Investment Advisor in
connection with administering our business.
Portfolio Composition, Investment Activity and Yield
During the six months endedJune 30, 2021 and 2020, we invested$167.3 million and$85.1 million , respectively, in debt and equity investments including ten and five new portfolio companies, respectively. During the six months endedJune 30, 2021 and 2020, we received proceeds from sales or repayments, including principal, return of capital dividends and net realized gains (losses), of$191.6 million and$76.3 million , respectively, including exits of four and one portfolio companies, respectively. The following table summarizes investment purchases and sales and repayments of investments by type for the six months endedJune 30, 2021 and 2020 (dollars in millions). Purchases of Investments Sales and Repayments of Investments
Six Months Ended
2021 2020 2021 2020
First Lien Debt(1) $ 132.9 79.4 % $ 49.2 57.8 %
11.5 6.8 21.0 24.7 135.0 70.5 12.8 16.7
Subordinated Debt 16.0 9.6 13.5 15.9 24.0 12.5 1.5 2.0
Equity 6.9 4.2 1.4 1.6 - - 42.2 55.3
Warrants - - - - - - 4.5 5.9
Total $ 167.3 100.0 % $ 85.1 100.0 % $ 191.6 100.0 % $ 76.3 100.0 %
(1) For the Six Months Ended
securities, which account for 73.8% and 43.4% of purchases, respectively. For
the Six Months Ended
which account for 11.7% and 0.8% of repayments, respectively.
As ofJune 30, 2021 , the fair value of our investment portfolio totaled$743.5 million and consisted of 72 active portfolio companies and four portfolio companies that have sold their underlying operations. As ofJune 30, 2021 , 28 portfolio companies' debt investments bore interest at a variable rate, which represented$296.2 million , or 50.0%, of our debt investment portfolio on a fair value basis, and the remainder of our debt investment portfolio was comprised of fixed rate investments. Overall, the portfolio had net unrealized appreciation of$72.6 million as ofJune 30, 2021 . As ofJune 30, 2021 , our average active portfolio company investment at amortized cost was$9.3 million , which excludes investments in the four portfolio companies that have sold their underlying operations. As ofDecember 31, 2020 , the fair value of our investment portfolio totaled$742.9 million and consisted of 66 active portfolio companies and three portfolio companies that have sold their underlying operations. As ofDecember 31, 2020 , 22 portfolio companies' debt investments bore interest at a variable rate, which represented$230.9 million , or 36.8%, of our debt investment portfolio on a fair value basis, and the remainder of our debt investment portfolio was comprised of fixed rate investments. Overall, the portfolio had net unrealized appreciation of$55.8 million as ofDecember 31, 2020 . As ofDecember 31, 2020 , our average active portfolio company investment at amortized cost was$10.4 million , which excludes investments in the three portfolio companies that have sold their underlying operations. The weighted average yield on debt investments as ofJune 30, 2021 andDecember 31, 2020 was 12.2% and 12.2%, respectively. The weighted average yield of our debt investments is not the same as a return on investment for our stockholders but, rather, relates to a portion of our investment portfolio and is calculated before the payment of all of our and our subsidiaries' fees and expenses. The weighted average yields were computed using the effective interest rates for debt investments at cost including the accretion of OID and debt investment origination fees, but excluding investments on non-accrual status and investments recorded as a secured borrowing, if any. 45
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FIDUS INVESTMENT CORPORATION
Notes to Consolidated Financial Statements (unaudited)
(in thousands, except shares and per share data)
The following table shows the portfolio composition by investment type at fair
value and cost and as a percentage of total investments (dollars in millions):
Fair Value Cost
June 30, 2021 December 31, 2020 June 30, 2021 December 31, 2020First Lien Debt(1)$ 285.0 38.3 %$ 187.4 25.2 %$ 284.6 42.4 %$ 184.6 26.9 % Second Lien Debt 208.0 28.0 332.2 44.7 221.2 33.0 341.9 49.7 Subordinated Debt 99.9 13.4 107.9 14.5 99.4 14.8 107.3 15.6 Equity 147.2 19.8 112.8 15.2 62.5 9.3 50.0 7.3 Warrants 3.4 0.5 2.6 0.4 3.2 0.5 3.2 0.5 Total$ 743.5 100.0 %$ 742.9 100.0 %$ 670.9 100.0 %$ 687.0 100.0 %
(1) Includes unitranche investments, which account for 30.6% and 33.8% of our
portfolio on a fair value and cost basis as of
Includes unitranche investments, which account for 17.3% and 18.4% of our
portfolio on a fair value and cost basis as of
respectively.
All investments made by us as ofJune 30, 2021 andDecember 31, 2020 were made in portfolio companies headquartered in theU.S. The following table shows portfolio composition by geographic region at fair value and cost and as a percentage of total investments (dollars in millions). The geographic composition is determined by the location of the corporate headquarters of the portfolio company, which may not be indicative of the primary source of the portfolio company's business. Fair Value Cost June 30, 2021 December 31, 2020 June 30, 2021 December 31, 2020 Midwest$ 195.4 26.3 %$ 225.7 30.4 %$ 147.2 21.9 %$ 189.6 27.6 % Southeast 170.3 22.9 153.3 20.6 144.2 21.5 130.0 18.9 Northeast 144.8 19.5 123.3 16.6 148.3 22.1 127.8 18.6 West 102.0 13.7 108.7 14.6 97.1 14.5 109.2 15.9 Southwest 131.0 17.6 131.9 17.8 134.1 20.0 130.4 19.0 Total$ 743.5 100.0 %$ 742.9 100.0 %$ 670.9 100.0 %$ 687.0 100.0 % 46
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FIDUS INVESTMENT CORPORATION
Notes to Consolidated Financial Statements (unaudited)
(in thousands, except shares and per share data)
The following table shows the detailed industry composition of our portfolio at fair value and cost as a percentage of total investments:
Fair Value Cost
June 30, 2021 December 31, 2020 June 30, 2021 December 31, 2020
Business Services 16.6 % 12.3 % 18.0 % 13.0 %
Information Technology Services 16.3 12.8 17.2 13.2
Healthcare Products 11.9 9.0 6.6 4.8
Component Manufacturing 10.2 7.4 10.5 6.9
Specialty Distribution 9.7 15.8 10.2 17.0
Aerospace & Defense Manufacturing 5.8 5.2 5.9 5.6
Healthcare Services 3.6 5.4 4.0 6.0
Building Products Manufacturing 3.5 3.2 4.2 3.8
Transportation Services 3.2 3.0 3.2 3.1
Promotional Products 2.9 3.3 3.8 3.7
Oil & Gas Services 2.8 2.8 0.4 0.4
Consumer Products 2.6 5.1 2.8 5.5
Environmental Industries 2.6 2.4 2.9 2.7
Utilities: Services 2.2 2.5 3.3 2.7
Oil & Gas Distribution 1.7 1.5 1.7 1.5
Retail 1.4 3.6 1.7 4.4
Industrial Cleaning & Coatings 1.4 1.4 1.9 1.9
Utility Equipment Manufacturing 1.4 0.9 1.3 1.3
Vending Equipment Manufacturing 0.2 0.3 0.3 0.3
Restaurants 0.0 (1) 0.0 (1) 0.1 0.1
Specialty Chemicals 0.0 (1) 0.0 (1) 0.0 (1) 0.0 (1)
Packaging - 2.1 - 2.1
Total 100.0 % 100.0 % 100.0 % 100.0 %
(1) Percentage is less than 0.1% of respective total.
Portfolio Asset Quality
In addition to various risk management and monitoring tools, the Investment Advisor uses an internally developed investment rating system to characterize and monitor the credit profile and our expected level of returns on each investment in our portfolio. We use a five-level numeric rating scale. The following is a description of the conditions associated with each investment rating:
• Investment Rating 1 is used for investments that involve the least amount
of risk in our portfolio. The portfolio company is performing above
expectations, the debt investment is expected to be paid in the near term
and the trends and risk factors are favorable, and may include an
expected capital gain on the equity investment.
• Investment Rating 2 is used for investments that involve a level of risk
similar to the risk at the time of origination. The portfolio company is
performing substantially within our expectations and the risk factors are
neutral or favorable. Each new portfolio investment enters our portfolio
with Investment Rating 2.
• Investment Rating 3 is used for investments performing below expectations
and indicates the investment's risk has increased somewhat since
origination. The portfolio company requires closer monitoring, but we
expect a full return of principal and collection of all interest and/or
dividends.
• Investment Rating 4 is used for investments performing materially below
expectations and the risk has increased materially since origination. The
investment has the potential for some loss of investment return, but we
expect no loss of principal.
• Investment Rating 5 is used for investments performing substantially
below our expectations and the risks have increased substantially since
origination. We expect some loss of principal.
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FIDUS INVESTMENT CORPORATION
Notes to Consolidated Financial Statements (unaudited)
(in thousands, except shares and per share data)
The following table shows the distribution of our investments on the 1 to 5
investment rating scale at fair value and cost as of
Fair Value Cost
Investment Rating June 30, 2021 December 31, 2020 June 30, 2021 December 31, 2020
1 $ 131.2 17.6 % $ 109.3 14.7 % $ 45.6 6.8 % $ 38.7 5.6 %
2 527.2 70.9 544.4 73.3 520.3 77.6 537.6 78.3
3 67.4 9.1 80.1 10.8 73.9 11.0 87.5 12.7
4 17.7 2.4 9.0 1.2 23.4 3.5 13.7 2.0
5 - - 0.1 - 7.7 1.1 9.5 1.4
Total $ 743.5 100.0 % $ 742.9 100.0 % $ 670.9 100.0 % $ 687.0 100.0 %
Based on our investment rating system, the weighted average rating of our
portfolio as of
Non-Accrual
As of
June 30, 2021 December 31, 2020
Portfolio Company Fair Value Cost Fair Value Cost
EBL, LLC (EbLens) $ - (2) $ - (2) $ 5.5 (1) $ 9.2 (1)
Total $ - $ - $ 5.5 $ 9.2 (1) Portfolio company was on PIK-only on non-accrual status at period end,
meaning the Company has ceased recognizing PIK interest income on the
investment.
(2) Portfolio company debt investment was not on non-accrual status at period
end.
Discussion and Analysis of Results of Operations
Comparison of three and six months ended
Investment Income
Below is a summary of the changes in total investment income for the three months endedJune 30, 2021 as compared to the same period in 2020 (dollars in millions): Three Months Ended June 30, 2021 2020 $ Change % Change (1)(2) Interest income$ 17.8 $ 18.8 $ (1.0) (5.6%) Payment-in-kind interestincome 1.1 1.2 (0.1) (6.5%) Dividend income 0.8 - 0.8 NM Fee income 2.1 0.4 1.7 435.1% Interest on idle funds and other income - - - NM Total investment income$ 21.8 $ 20.4 $ 1.4 6.8% (1) NM = Not meaningful
(2) Percent change calculated based on underlying dollar amounts in thousands as
presented on the consolidated statements of operations.
For the three months endedJune 30, 2021 , total investment income was$21.8 million , an increase of$1.4 million or 6.8%, from the$20.4 million of total investment income for the three months endedJune 30, 2020 . As reflected in the table above, the increase is primarily attributable to the following: 48
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FIDUS INVESTMENT CORPORATION
Notes to Consolidated Financial Statements (unaudited)
(in thousands, except shares and per share data)
• $1.7 million increase in fee income resulting from an increase inorigination, prepayment, and amendment fees during 2021 as compared to
2020.
• $0.8 million increase in dividend income due to increased levels of
distributions received from equity investments.
• $1.1 million decrease in total interest income (which includes aa decrease in average debt investment balances, partially offset by a
higher weighted average yield on debt investment balances outstanding,
during 2021 as compared to 2020.
Below is a summary of the changes in total investment income for the six months endedJune 30, 2021 as compared to the same period in 2020 (dollars in millions): Six Months Ended June 30, 2021 2020 $ Change % Change (1)(2) Interest income$ 36.9 $ 36.3 $ 0.6 1.7% Payment-in-kind interestincome 2.1 2.3 (0.2 ) (8.4%) Dividend income 0.9 0.1 0.8 497.4% Fee income 5.2 1.7 3.5 208.4% Interest on idle funds and other income - - - NM Total investment income$ 45.1 $ 40.4 $ 4.7 11.6% (1) NM = Not meaningful
(2) Percent change calculated based on underlying dollar amounts in thousands as
presented on the consolidated statements of operations.
For the six months endedJune 30, 2021 , total investment income was$45.1 million , an increase of$4.7 million or 11.6%, from the$40.4 million of total investment income for the six months endedJune 30, 2020 . As reflected in the table above, the increase is primarily attributable to the following:
•
origination, prepayment, and amendment fees during 2021 as compared to
2020.
• $0.8 million increase in dividend income due to increased levels of
distributions received from equity investments.
• $0.4 million increase in total interest income (which includes aa decrease in average debt investment balances outstanding, partially
offset by a higher weighted average yield on debt investment balances
outstanding, during 2021 as compared to 2020.
Expenses
Below is a summary of the changes in total expenses, including income tax
provision, for the three months ended
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FIDUS INVESTMENT CORPORATION
Notes to Consolidated Financial Statements (unaudited)
(in thousands, except shares and per share data)
Three Months Ended June 30,
2021 2020 $ Change % Change (1)(2)
Interest and financing expenses $ 4.6 $ 4.9 $ (0.3) (6.2%)
Base management fee 3.2 3.2 - NM
Incentive fee - income 2.5 2.1 0.4 20.7%
Incentive fee (reversal) - capital
gains 3.8 (0.3) 4.1 (1576.4%)
Administrative service expenses 0.5 0.4 0.1 18.1%
Professional fees 0.3 0.6 (0.3) (52.3%)
Other general and administrative
expenses 0.4 0.5 (0.1) (20.8%)
Total expenses, before base management
and income incentive fee waivers 15.3 11.4 3.9 34.3%
Base management and income incentive
fee waivers - (0.4) 0.4 (93.1%)
Total expenses, before income tax
provision 15.3 11.0 4.3 39.3%
Income tax provision (benefit) - 0.1 (0.1) (75.9%)
Total expenses, including income tax
provision $ 15.3 $ 11.1 $ 4.2 37.8%
(1) NM = Not meaningful
(2) Percent change calculated based on underlying dollar amounts in thousands as
presented on the consolidated statements of operations.
For the three months endedJune 30, 2021 , total expenses, including income tax provision, were$15.3 million , an increase of$4.2 million or 37.8%, from the$11.1 million of total expenses for the three months endedJune 30, 2020 . As reflected in the table above, changes across periods were primarily attributable to the following:
•
(losses), plus net change in unrealized appreciation (depreciation) on
investments), plus realized losses on extinguishment of debt during 2021
as compared to the same period in 2020.
• $0.8 million net increase in the income incentive fee due to a
$1.8 million increase in pre-incentive fee net investment income during
2021 and a one-time $0.4 income incentive fee waiver in 2020, as compared
to the same period in 2020.
• $0.3 million decrease in interest and financing expenses due to a
decrease in average borrowings outstanding and the weighted average
interest rate during 2021 as compared to 2020.
•
and tax compliance costs during 2021 as compared to 2020.
Below is a summary of the changes in total expenses, including income tax
provision, for the six months ended
Six Months Ended June 30,
2021 2020 $ Change % Change (1)(2)
Interest and financing expenses $ 9.7 $ 9.8 $ (0.1) (0.7%)
Base management fee 6.3 6.4 (0.1) (1.1%)
Incentive fee - income 5.3 4.0 1.3 31.5%
Incentive fee - capital gains 4.0 (9.1) 13.1 (143.5%)
Administrative service expenses 0.8 0.8 - NM
Professional fees 0.7 1.3 (0.6) (47.4%)
Other general and administrative
expenses 0.7 0.8 (0.1) (11.3%)
Total expenses, before base management
and income incentive fee waivers 27.5 14.0 13.5 97.0%
Base management and income incentive
fee waivers - (0.4) 0.4 (93.1%)
Total expenses, before income tax
provision 27.5 13.6 13.9 103.0%
Income tax provision (benefit) - 0.1 (0.1) (77.8%)
Total expenses, including income tax
provision $ 27.5 $ 13.7 $ 13.8 101.1%
(1) NM = Not meaningful
(2) Percent change calculated based on underlying dollar amounts in thousands as
presented on the consolidated statements of operations.
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FIDUS INVESTMENT CORPORATION
Notes to Consolidated Financial Statements (unaudited)
(in thousands, except shares and per share data)
For the six months ended June 30, 2021 , total expenses, including income tax
provision, were $27.5 million , an increase of $13.8 million or 101.1%, from the
$13.7 million of total expenses for the six months ended June 30, 2020 . As
reflected in the table above, changes across periods were primarily attributable
to the following:
•
a
(losses), plus net change in unrealized appreciation (depreciation) on
investments, plus realized losses on extinguishment of debt during 2021
as compared to the same period in 2020. The reversal in the capital gains
incentive fee accrued for the six months ended
primarily driven by COVID related write-downs across the portfolio due to
fair value calibration to public company multiples.
• $1.7 million net increase in the income incentive fee due to a
2021 and a one-time
to the same period in 2020.
• $0.1 million decrease in interest and financing expenses due to adecrease in weighted average interest rate during 2021 as compared to
2020.
•
assets during 2021 as compared to 2020.
•
and tax compliance costs during 2021 as compared to 2020.
Net Investment Income
Net investment income decreased by$(2.8) million , or (30.3)%, to$6.5 million during the three months endedJune 30, 2021 as compared to the same period in 2020, as a result of the$4.2 million increase in total expenses, including base management and incentive fee waivers and income tax provision, partially offset by the$1.4 increase in total investment income. Net investment income decreased by$(9.1) million , or (34.3)%, to$17.6 million during the six months endedJune 30, 2021 as compared to the same period in 2020, as a result of the$13.8 million increase in total expenses, including base management and incentive fee waivers and income tax provision, partially offset by the$4.7 increase in total investment income.
For the three and six months endedJune 30, 2021 , the total net realized gain/(loss) on investments, before income tax (provision)/benefit, was$2.2 million and$5.4 million , respectively. There was no income tax (provision) benefit from realized gains on investments for the three and six months endedJune 30, 2021 , respectively. Significant realized gains (losses) for the three and six months endedJune 30, 2021 are summarized below (dollars in millions):
Period Ended
Three Six
Portfolio Company Realization Event (1) Months Months
Wheel Pros, Inc. Exit of portfolio company $ 2.1 $ 2.1
Software Technology, LLC Exit of portfolio company - 1.4
Spectra A&D Acquisition, Inc. (fka Sale of portfolio company
FDS Avionics Corp.) - 1.0
Rohrer Corporation Exit of portfolio company - 0.9
Other 0.1 -
Net realized gain (loss) on
investments 2.2 5.4
Income tax (provision) benefit
from realized gains on investments - -
Net realized gain (loss), net of income tax provision, on investments
$ 2.2 $ 5.4
(1) As it relates to realization events, we define an 'exit' of a portfolio company as situations where we have completely exited our position in all of the portfolio company's securities and no longer carry the portfolio company on our schedule of investments. We define a 'sale' of a portfolio company, distinguished from an exit, as situations where the underlying operations of a portfolio company have been sold, but where we retain a residual ownership interest in the legacy entity (we generally distinguish these residual portfolio company investments from 'active' portfolio company investments). For the three and six months endedJune 30, 2020 , the total net realized gain/(loss) on investments, before income tax (provision)/benefit, was$0.2 million and$31.6 million , respectively. Income tax (provision) benefit from realized gains on investments was$(0) and$(1.1) for the three and six months endedJune 30, 2020 , respectively. Significant realized gains (losses) for the three and six months endedJune 30, 2020 are summarized below (dollars in millions): 51
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FIDUS INVESTMENT CORPORATION
Notes to Consolidated Financial Statements (unaudited)
(in thousands, except shares and per share data)
Period Ended June 30,2020
Three Six
Portfolio Company Realization Event (1) Months Months
Pfanstiehl, Inc. Sold 50% of equity investment $ - $ 12.8
Fiber Materials, Inc. Sale of portfolio company - 9.8
Medsurant Holdings, LLC Sold 50% of equity investment - 1.7
Revenue Management Sold 50% of equity investment -
Solutions, LLC 1.5
Worldwide Express Sold 50% of equity investment -
Operations, LLC 1.1
Gurobi Optimization, LLC Sold 50% of equity investment - 1.0
Hub Acquisition Sub, LLC Sold 50% of equity investment -
(dbaHub Pen ) 0.6
-
Inc. 0.5
Pugh Lubricants, LLC Sold 50% of equity investment - 0.4
Microbiology Research Sold 50% of equity investment -
Associates, Inc. 0.4
ControlScan, Inc. Sold 50% of equity investment - 0.3
Alzheimer's Research and Sold 50% of equity investment -
Treatment Center, LLC 0.3
- 0.2
Software Technology, LLC Sold 50% of equity investment - 0.2
-
Energy) 0.2
Wheel Pros, Inc. Sold 50% of equity investment - 0.1
New Era Technology, Inc. Escrow distribution 0.1 0.1
Apex Microtechnology, Inc. Escrow distribution 0.1 0.1
Allied 100 Group, Inc. Sold 50% of equity investment - 0.1
Restaurant Finance Co, LLC Escrow distribution - 0.1
Other - 0.1
Palisade Company, LLC Sale of portfolio company - (0.1 )
Net realized gain (loss) on 0.2
investments 31.6 Income tax provision from realized gains on investments - (1.1 ) Net realized gain (loss), net of income tax provision, on$ 0.2 investments $ (30.5 ) (1) As it relates to realization events, we define an 'exit' of a portfolio company as situations where we have completely exited our position in all of the portfolio company's securities and no longer carry the portfolio company on our schedule of investments. We define a 'sale' of a portfolio company, distinguished from an exit, as situations where the underlying operations of a portfolio company have been sold, but where we retain a residual ownership interest in the legacy entity (we generally distinguish these residual portfolio company investments from 'active' portfolio company investments). During the three and six months endedJune 30, 2021 and 2020, we recorded a net change in unrealized appreciation (depreciation) on investments attributable to the following (dollars in millions): Three Months Six Months Ended June 30, Ended June 30, Unrealized Appreciation (Depreciation) 2021 2020 2021 2020 Exit, sale or restructuring of investments$ (1.7 ) $ -$ (3.3 ) $ (30.0 ) Fair value adjustments to debt investments 0.7 (7.3 ) (4.5 ) (30.0 ) Fair value adjustments to equity investments 18.3 5.8
24.5 (16.1 )
Net change in unrealized appreciation (depreciation)
Net Increase in Net Assets Resulting From Operations
Net increase (decrease) in net assets resulting from operations during the three
months ended
Net increase (decrease) in net assets resulting from operations during the six
months ended
Liquidity and Capital Resources
As ofJune 30, 2021 , we had$54.2 million in cash and cash equivalents and our net assets totaled$429.4 million . We believe that our current cash and cash equivalents on hand, our Credit Facility, our continued access to SBA-guaranteed debentures, and our anticipated cash flows from investments will provide adequate capital resources with which to operate and finance our investment business and make distributions to our stockholders for at least the next 12 months. We intend to generate additional cash primarily from the future offerings of securities (including the "at-the-market" program) and future borrowings, as well as cash flows from operations, including income earned from investments in our portfolio companies. On both a short-term 52
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FIDUS INVESTMENT CORPORATION
Notes to Consolidated Financial Statements (unaudited)
(in thousands, except shares and per share data)
and long-term basis, our primary use of funds will be investments in portfolio
companies and cash distributions to our stockholders. During the six months
ended June 30, 2021 , we repaid $19.2 million of SBA debentures which would have
matured during the period September 1, 2025 through March 1, 2028 . Our remaining
outstanding SBA debentures continue to mature in 2025 and subsequent years
through 2031, which will require repayment on or before the respective maturity
dates.
Cash Flows
For the six months ended June 30, 2021 , we experienced a net decrease in cash
and cash equivalents in the amount of $70.1 million . During that period, we
received proceeds of $44.0 million of cash for operating activities, which
included proceeds received from sales and repayments of investments of
$191.6 million , which were partially offset by the funding of $167.3 million of
investments. During the same period, received proceeds of $13.5 million on our
secured borrowings, made repayments on outstanding notes of $100.0 million , made
repayments of SBA debentures of $19.2 million ; which were partially offset by
proceeds from the issuances of SBA debentures of $11.5 million , paid cash
dividends paid to stockholders of $18.8 million , and made payment of deferred
financing costs related to our debt financings of $1.0 million .
Capital Resources
We anticipate that we will continue to fund our investment activities on a long-term basis through a combination of additional debt and equity capital.
SBA debentures
The Funds are licensed SBICs, and have the ability to issue debentures guaranteed by the SBA at favorable interest rates. Under the Small Business Investment Act and the SBA rules applicable to SBICs, an SBIC can have outstanding at any time debentures guaranteed by the SBA in an amount up to twice its regulatory capital. The SBA regulations currently limit the amount that is available to be borrowed by any SBIC and guaranteed by the SBA to 300.0% of an SBIC's regulatory capital or$175.0 million , whichever is less. For two or more SBICs under common control, the maximum amount of outstanding SBA debentures cannot exceed$350.0 million . SBA debentures have fixed interest rates that approximate prevailing 10-year Treasury Note rates plus a spread and have a maturity of ten years with interest payable semi-annually. The principal amount of the SBA debentures is not required to be paid before maturity but may be pre-paid at any time. As ofJune 30, 2021 , Fund II and Fund III had$114.3 million and$25.0 million of outstanding SBA debentures, respectively. Subject to SBA regulatory requirements and approval, Fund III may access up to$150.0 million of additional SBA debentures under the SBIC debenture program. For more information on the SBA debentures, please refer to Note 6 to our consolidated financial statements.
Credit Facility
InJune 2014 , we entered into the Credit Facility to provide additional funding for our investment and operational activities. OnApril 24, 2019 , we entered into the Amended Credit Agreement, which amends, restates, and replaces the Credit Facility. OnJune 26, 2020 , the Company amended the Amended Credit Agreement, however the material terms were unchanged. Among other revisions, the amendment to the Amended Credit Agreement modifies certain covenants therein, including to amend the minimum consolidated interest coverage ratio to be 2.25 to 1.00 for the four quarter period ending onJune 30, 2020 , 2.00 to 1.00 for the four quarter periods ending on each ofSeptember 30, 2020 andDecember 31, 2020 , and 1.75 to 1.00 for each four quarter period ending at the end of each quarter thereafter. The Credit Facility is secured by substantially all of our assets, excluding the assets of the Funds. Under the Amended Credit Agreement, (i) revolving commitments by lenders were increased from$90.0 million to$100.0 million , with an accordion feature that allows for an increase in total commitments up to$250.0 million , subject to satisfaction of certain conditions at the time of any such future increase, (ii) the maturity date of the credit facility was extended fromJune 16, 2019 toApril 24, 2023 , and (iii) borrowings under the Credit Facility bear interest, at our election, at a rate per annum equal to (a) 3.00% (or 2.75% if certain conditions are satisfied, including if (x) no equity interests are included in the borrowing base, (y) the contribution to the borrowing base of eligible portfolio investments that are performing first lien bank loans is greater than or equal to 35%, and (z) the contribution to the borrowing base of eligible portfolio investments that are performing first lien bank loans, performing last out loans, or performing second lien loans is greater than or equal to 60%) plus the one, two, three or six month LIBOR rate, as applicable, or (b) 2.00% (or 1.75% if the above conditions are satisfied) plus the highest of (A) a prime rate, (B) the Federal Funds rate plus 0.5%, (C) three month LIBOR plus 1.0%, and (D) zero. We pay a commitment fee that varies depending on the size of the unused portion of the Credit Facility: 3.00% per annum on the unused portion of the Credit Facility at or below 35% of the commitments and 0.50% per annum on any remaining unused portion of the Credit Facility between the total commitments and the 35% minimum utilization. The Amended Credit Agreement also modifies certain covenants in the Credit Facility, including to provide for a minimum asset coverage ratio of 2.00 to 1 (on a regulatory basis). The Credit Facility is secured by a first priority security interest in all of our assets, excluding the assets of our SBIC subsidiaries. Amounts available to borrow under the Credit Facility are subject to a minimum borrowing/collateral base that applies an advance rate to certain portfolio investments held by us, excluding investments held by the Funds. We are subject to limitations with respect to the investments securing the Credit Facility, including, but not limited to, restrictions on sector concentrations, loan size, payment frequency and status and collateral interests, as well as restrictions on portfolio company leverage, which may also affect the borrowing base and therefore amounts available to borrow. 53
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FIDUS INVESTMENT CORPORATION
Notes to Consolidated Financial Statements (unaudited)
(in thousands, except shares and per share data)
We have made customary representations and warranties and are required to comply
with various covenants, reporting requirements and other customary requirements
for similar credit facilities. These covenants are subject to important
limitations and exceptions that are described in the documents governing the
Credit Facility. As of June 30, 2021 , we were in compliance with all covenants
of the Credit Facility and there were no borrowings outstanding under the Credit
Facility.
Notes
On February 2, 2018 , we closed the public offering of approximately
$43.5 million in aggregate principal amount of our 5.875% notes due 2023, or the
"2023 Notes." On February 22, 2018 , the underwriters exercised their option to
purchase an additional $6.5 million in aggregate principal of the 2023 Notes.
The total net proceeds to us from the 2023 Notes, including the exercise of the
underwriters' option, after deducting underwriting discounts of approximately
$1.5 million and offering expenses of $0.4 million , were approximately
$48.1 million . The 2023 Notes will mature on February 1, 2023 and bear interest
at a rate of 5.875%. The 2023 Notes may be redeemed in whole or in part at any
time or from time to time at our option on or after February 1, 2020 . On
January 19, 2021 , we redeemed $50.0 million of the aggregate principal amount on
the 2023 Notes, resulting in a realized loss on extinguishment of debt of
approximately $0.8 million .
On February 8, 2019 , we closed the public offering of approximately
$60.0 million in aggregate principal amount of our 6.000% notes due 2024, or the
"2024 Notes". On February 19, 2019 , the underwriters exercised their option to
purchase an additional $9.0 million in aggregate principal of the 2024 Notes.
The total net proceeds to us from the 2024 Notes, including the exercise of the
underwriters' option, after deducting underwriting discounts of approximately
$2.1 million and offering expenses of $0.4 million , were approximately
$66.5 million . The 2024 Notes will mature on February 15, 2024 and bear interest
at a rate of 6.000%. The 2024 Notes may be redeemed in whole or in part at any
time or from time to time at our option on or after February 15, 2021 . Interest
on the 2024 Notes is payable quarterly on February 15 , May 15 , August 15 and
November 15 of each year, beginning May 15, 2019 . The 2024 Notes are listed on
the NASDAQ Global Select Market under the trading symbol "FDUSZ." On
February 16, 2021 , we redeemed $50.0 million of the $69.0 million aggregate
principal amount on the February 2024 Notes, resulting in a realized loss on
extinguishment of debt of approximately $1.1 million . As of June 30, 2021 , the
outstanding principal balance of the 2024 Notes was $19.0 million .
On October 16, 2019 , we closed the public offering of approximately
$55.0 million in aggregate principal amount of our 5.375% notes due 2024, or the
"November 2024 Notes" (and collectively with the 2023 Notes and the February
2024 Notes, the "Public Notes"). On October 23, 2019 , the underwriters exercised
their option to purchase an additional $8.3 million in aggregate principal of
the November 2024 Notes. The total net proceeds to us from the November 2024
Notes, including the exercise of the underwriters' option, after deducting
underwriting discounts of approximately $1.9 million and offering expenses of
$0.3 million , were approximately $61.1 million . The November 2024 Notes will
mature on November 1, 2024 and bear interest at a rate of 5.375%. The November
2024 Notes may be redeemed in whole or in part at any time or from time to time
at our option on or after November 1, 2021 . Interest on the November 2024 Notes
is payable quarterly on February 1 , May 1 , August 1 and November 1 of each year,
beginning February 1, 2020 . The November 2024 Notes are listed on the NASDAQ
Global Select Market under the trading symbol "FDUSG." As of June 30, 2021 , the
outstanding principal balance of the November 2024 Notes was approximately
$63.3 million .
On December 23, 2020 , we closed the offering of approximately $125.0 million in
aggregate principal amount of our 4.75% notes due 2026, or the "2026 Notes"
(collectively with the Public Notes, the "Notes"). The total net proceeds to us
from the 2026 Notes after deducting underwriting discounts of approximately
$2.5 million and estimated offering expenses of $0.4 million , were approximately
$122.1 million . The 2026 Notes will mature on January 31, 2026 and bear interest
at a rate of 4.75%. The 2026 Notes may be redeemed in whole or in part at any
time or from time to time at our option subject to a make whole provision if
redeemed more than three months prior to maturity. Interest on the 2026 Notes is
payable on January 31 and July 31 of each year, beginning July 31, 2021 . We do
not intend to list the 2026 Notes on any securities exchange or automated dealer
quotation system.
The Notes are unsecured obligations and rank pari passu with our future
unsecured indebtedness; effectively subordinated to all of our existing and
future secured indebtedness; and structurally subordinated to all existing and
future indebtedness and other obligations of any of our subsidiaries, financing
vehicles, or similar facilities we may form in the future, with respect to
claims on the assets of any such subsidiaries, financing vehicles, or similar
facilities.
As of June 30, 2021 , the weighted average stated interest rates for our SBA
debentures and Notes were 3.002% and 5.055%, respectively. As of June 30, 2021 ,
the weighted average stated interest rate on total debt outstanding was 4.23%
(excluding secured borrowings).
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FIDUS INVESTMENT CORPORATION
Notes to Consolidated Financial Statements (unaudited)
(in thousands, except shares and per share data)
Secured Borrowing
As ofJune 30, 2021 , secured borrowings at fair value totaled$13.5 million and the fair value of the associated loans included in investments was$13.5 million . As ofDecember 31, 2020 , there were no secured borrowings outstanding. These secured borrowings were created as a result of our completion of partial loan sales of certain unitranche loan assets that did not meet the definition of a "participating interest." As a result, sale treatment was not permitted and these partial loan sales were treated as secured borrowings. The weighted average interest rate on our secured borrowings was approximately 4.5% as ofJune 30, 2021 . As a BDC, we are generally required to meet an asset coverage ratio of at least 150.0% (defined as the ratio which the value of our consolidated total assets, less all consolidated liabilities and indebtedness not represented by senior securities, bears to the aggregate amount of senior securities representing indebtedness), which includes borrowings and any preferred stock we may issue in the future. This requirement limits the amount that we may borrow. We have received exemptive relief from theSEC to allow us to exclude any indebtedness guaranteed by the SBA and issued by the Funds from the 150.0% asset coverage requirements, which, in turn, will enable us to fund more investments with debt capital. As a BDC, we are generally not permitted to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common stock, or warrants, options or rights to acquire our common stock, at a price below the then-current net asset value per share of our common stock if the Board, including the Independent Directors, determines that such sale is in the best interests of us and our stockholders, and if our stockholders approve such sale. OnJuly 14, 2021 , our stockholders voted to allow us to sell or otherwise issue common stock at a price below net asset value per share for a period of one year ending on the earlier ofJune 14, 2022 or the date of our 2022 Annual Meeting of Stockholders. We expect to present to our stockholders a similar proposal at our 2022 Annual Meeting of Stockholders. Our stockholders specified that the cumulative number of shares sold in each offering during the one-year period ending on the earlier ofJune 14, 2022 or the date of our 2022 Annual Meeting of Stockholders may not exceed 25.0% of our outstanding common stock immediately prior to each such sale. Stock Repurchase Program We have an open market stock repurchase program (the "Stock Repurchase Program") under which we may acquire up to$5.0 million of our outstanding common stock. Under the Stock Repurchase Program, we may, but are not obligated to, repurchase outstanding common stock in the open market from time to time provided that we comply with the prohibitions under our insider trading policies and the requirements of Rule 10b-18 of the Securities Exchange Act of 1934, as amended, including certain price, market value and timing constraints. The timing, manner, price and amount of any share repurchases will be determined by our management, in its discretion, based upon the evaluation of economic and market conditions, stock price, capital availability, applicable legal and regulatory requirements and other corporate considerations. OnOctober 26, 2020 , the Board extended the Stock Repurchase Program throughDecember 31, 2021 , or until the approved dollar amount has been used to repurchase shares. The Stock Repurchase Program does not require us to repurchase any specific number of shares and we cannot assure that any shares will be repurchased under the Stock Repurchase Program. The Stock Repurchase Program may be suspended, extended, modified or discontinued at any time. We did not make any repurchases of common stock during the three and six months endedJune 30, 2021 . During the three and six months endedJune 30, 2020 , we repurchased zero and 25,719 shares of common stock on the open market for zero and$0.3 million , respectively. Refer to Note 8 to our consolidated financial statements for additional information concerning stock repurchases.
Critical Accounting Policies and Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make certain estimates and assumptions affecting amounts reported in the financial statements. We have identified investment valuation, revenue recognition and transfers of financial assets as our most critical accounting policies and estimates. We continuously evaluate our policies and estimates, including those related to the matters described below. These estimates are based on the information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from those estimates under different assumptions or conditions. A discussion of our critical accounting policies follows.
Valuation of Portfolio Investments
As a BDC, we report our assets and liabilities at fair value at all times consistent with GAAP and the 1940 Act. Accordingly, we are required to periodically determine the fair value of all of our portfolio investments.
Our investments generally consist of illiquid securities including debt and
equity investments in lower middle-market companies. Investments for which
market quotations are readily available are valued at such market quotations.
Because we expect that there will not be a readily available market for
substantially all of the investments in our portfolio, we value substantially
all of our portfolio investments at fair value as determined in good faith by
the Board using a documented valuation policy and consistently applied valuation
process. Due to the inherent uncertainty of determining the fair value of
investments that do not have a readily available market value, the fair value of
our investments may differ significantly from the values that would have been
used had a readily available market value existed for such investments, and the
difference could be material.
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FIDUS INVESTMENT CORPORATION
Notes to Consolidated Financial Statements (unaudited)
(in thousands, except shares and per share data)
With respect to investments for which market quotations are not readily available, the Board undertakes a multi-step valuation process each quarter, as described below:
• our quarterly valuation process begins with each portfolio company or
investment being initially evaluated and rated by the investment
professionals of the Investment Advisor responsible for the portfolio
investment;
• preliminary valuation conclusions are then documented and discussed with
the investment committee of the Investment Advisor;
• the Board engages one or more independent valuation firm(s) to conductindependent appraisals of a selection of our portfolio investments for
which market quotations are not readily available. Each portfolio company
investment is generally appraised by the valuation firm(s) at least once
every calendar year and each new portfolio company investment is
appraised at least once in the twelve-month period following the initial
investment. In certain instances, we may determine that it is not
cost-effective, and as a result it is not in our stockholders' bestinterest, to request the independent appraisal of certain portfolio
company investments. Such instances include, but are not limited to,
situations where we determine that the fair value of the portfolio
company investment is relatively insignificant to the fair value of the
total portfolio. The Board consulted with the independent valuation
firm(s) in arriving at our determination of fair value for 9 and 12 of
our portfolio company investments representing 18.3% and 25.8% of thetotal portfolio investments at fair value (exclusive of new portfolio
company investments made during the three months ended
December 31, 2020 , respectively) as ofJune 30, 2021 andDecember 31, 2020 , respectively;
• the audit committee of the Board reviews the preliminary valuations of
the Investment Advisor and of the independent valuation firm(s) and
responds and supplements the valuation recommendations to reflect any
comments; and
• the Board discusses the valuations and determines the fair value of each
investment in our portfolio in good faith, based on the input of the
Investment Advisor, the independent valuation firm(s) and the audit
committee.
In making the good faith determination of the value of portfolio investments, we
start with the cost basis of the security. The transaction price is typically
the best estimate of fair value at inception. When evidence supports a
subsequent change to the carrying value from the original transaction price,
adjustments are made to reflect the expected exit values.
Consistent with the policies and methodologies adopted by the Board, we perform
detailed valuations of our debt and equity investments, including an analysis on
the Company's unfunded debt investment commitments, using both the market and
income approaches as appropriate. Under the market approach, we typically use
the enterprise value methodology to determine the fair value of an investment.
There is no one methodology to estimate enterprise value and, in fact, for any
one portfolio company, enterprise value is generally best expressed as a range
of values, from which we derive a single estimate of enterprise value. Under the
income approach, we typically prepare and analyze discounted cash flow models to
estimate the present value of future cash flows of either an individual debt
investment or of the underlying portfolio company itself.
We evaluate investments in portfolio companies using the most recent portfolio
company financial statements and forecasts. We also consult with the portfolio
company's senior management to obtain further updates on the portfolio company's
performance, including information such as industry trends, new product
development and other operational issues.
For our debt investments the primary valuation technique used to estimate the
fair value is the discounted cash flow method. However, if there is
deterioration in credit quality or a debt investment is in workout status, we
may consider other methods in determining the fair value, including the value
attributable to the debt investment from the enterprise value of the portfolio
company or the proceeds that would be received in a liquidation analysis. Our
discounted cash flow models estimate a range of fair values by applying an
appropriate discount rate to the future cash flow streams of our debt
investments, based on future interest and principal payments as set forth in the
associated debt investment agreements. We prepare a weighted average cost of
capital for use in the discounted cash flow model for each investment, based on
factors including, but not limited to: current pricing and credit metrics for
similar proposed or executed investment transactions of private companies; the
portfolio company's historical financial results and outlook; and the portfolio
company's current leverage and credit quality as compared to leverage and credit
quality as of the date the investment was made. We may also consider the
following factors when determining the fair value of debt investments: the
portfolio company's ability to make future scheduled payments; prepayment
penalties and other fees; estimated remaining life; the nature and realizable
value of any collateral securing such debt investment; and changes in the
interest rate environment and the credit markets that generally may affect the
price at which similar investments may be made. We estimate the remaining life
of our debt investments to generally be the legal maturity date of the
instrument, as we generally intend to hold debt investments to maturity.
However, if we have information available to us that the debt investment is
expected to be repaid in the near term, we would use an estimated remaining life
based on the expected repayment date.
For our equity investments, including equity securities and warrants, we
generally use a market approach, including valuation methodologies consistent
with industry practice, to estimate the enterprise value of portfolio companies.
Typically, the enterprise value of a private company is based on multiples of
EBITDA, net income, revenues, or in limited cases, book value. In estimating the
enterprise value of a portfolio company, we analyze various factors consistent
with industry practice, including but not limited to original transaction
multiples, the portfolio company's historical and projected financial results,
applicable market trading and transaction comparables, applicable market yields
and leverage levels, the nature and realizable value of any collateral, the
markets in which the portfolio company does business, and comparisons of
financial ratios of peer companies that are public.
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FIDUS INVESTMENT CORPORATION
Notes to Consolidated Financial Statements (unaudited)
(in thousands, except shares and per share data)
We may also utilize an income approach when estimating the fair value of our
equity securities, either as a primary methodology if consistent with industry
practice or if the market approach is otherwise not applicable, or as a
supporting methodology to corroborate the fair value ranges determined by the
market approach. We typically prepare and analyze discounted cash flow models
based on projections of the future free cash flows (or earnings) of the
portfolio company. We consider various factors, including but not limited to the
portfolio company's projected financial results, applicable market trading and
transaction comparables, applicable market yields and leverage levels, the
markets in which the portfolio company does business, and comparisons of
financial ratios of peer companies that are public.
Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our consolidated financial statements express the uncertainties with respect to the possible effect of such valuations, and any changes in such valuations, on the consolidated financial statements.
Revenue Recognition
Investments and related investment income. Realized gains or losses on investments are recorded upon the sale or disposition of a portfolio investment and are calculated as the difference between the net proceeds from the sale or disposition and the cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized. Net change in unrealized appreciation or depreciation on the consolidated statements of operations includes changes in the fair value of investments from the prior period, as determined by the Board through the application of our valuation policy, as well as reclassifications of any prior period unrealized appreciation or depreciation on exited investments to realized gains or losses on investments. Interest and dividend income. Interest and dividend income are recorded on the accrual basis to the extent that we expect to collect such amounts. Interest is accrued daily based on the outstanding principal amount and the contractual terms of the debt. Dividend income is recorded as dividends are declared or at the point an obligation exists for the portfolio company to make a distribution, and is generally recognized when received. Distributions from portfolio companies are evaluated to determine if the distribution is a distribution of earnings or a return of capital. Distributions of earnings are included in dividend income while a return of capital is recorded as a reduction in the cost basis of the investment. Estimates are adjusted as necessary after the relevant tax forms are received from the portfolio company. PIK income. Certain of our investments contain a PIK income provision. The PIK income, computed at the contractual rate specified in the applicable investment agreement, is added to the principal balance of the investment, rather than being paid in cash, and recorded as interest or dividend income, as applicable, on the consolidated statements of operations. Generally, PIK can be paid-in-kind or all in cash. We stop accruing PIK income when there is reasonable doubt that PIK income will be collected. PIK income that has been contractually capitalized to the principal balance of the investment prior to the non-accrual designation date is not reserved against interest or dividend income, but rather is assessed through the valuation of the investment (with corresponding adjustments to unrealized depreciation, as applicable). PIK income is included in our taxable income and, therefore, affects the amount we are required to pay to our stockholders in the form of dividends in order to maintain our tax treatment as a RIC and to avoid paying corporate-levelU.S. federal income tax, even though we have not yet collected the cash. Non-accrual. Debt investments or preferred equity investments (for which we are accruing PIK dividends) are placed on non-accrual status when principal, interest or dividend payments become materially past due, or when there is reasonable doubt that principal, interest or dividends will be collected. Any original issue discount and market discount are no longer accreted to interest income as of the date the loan is placed on full non-accrual status. Interest and dividend payments received on non-accrual investments may be recognized as interest or dividend income or applied to the investment principal balance based on management's judgment. Non-accrualinvestments are restored to accrual status when past due principal, interest or dividends are paid and, in management's judgment, are likely to remain current. Warrants. In connection with our debt investments, we will sometimes receive warrants or other equity-related securities (Warrants). We determine the cost basis of Warrants based upon their respective fair values on the date of receipt in proportion to the total fair value of the debt and Warrants received. Any resulting difference between the face amount of the debt and its recorded fair value resulting from the assignment of value to the Warrants is treated as OID and accreted into interest income using the effective interest method over the term of the debt investment. Upon the prepayment of a debt investment, any unaccreted OID is accelerated into interest income. Fee income. All transaction fees earned in connection with our investments are recognized as fee income and are generally non-recurring. Such fees typically include fees for services, including structuring and advisory services, provided to portfolio companies. We recognize income from fees for providing such structuring and advisory services when the services are rendered or the transactions are completed. Upon the prepayment of a debt investment, any prepayment penalties are recorded as fee income when earned. In 2020, the Company elected to change the manner in which it presents the recognition of management services fees income. Previously, the Company classified management services fees as a component of interest on idle 57
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FIDUS INVESTMENT CORPORATION
Notes to Consolidated Financial Statements (unaudited)
(in thousands, except shares and per share data)
funds and other income on the Consolidated Statement of Operations. Comparative
prior periods presented have been reclassified retrospectively to conform to the
revised presentation. There is no change in historical net increase in net
assets resulting from operations due to this change in presentation.
We also typically receive debt investment origination or closing fees in
connection with investments. Such debt investment origination and closing fees
are capitalized as unearned income and offset against investment cost basis on
our consolidated statements of assets and liabilities and accreted into interest
income over the term of the investment. Upon the prepayment of a debt
investment, any unaccreted debt investment origination and closing fees are
accelerated into interest income.
Transfers of Financial Assets
Partial loan and equity sales. The Company follows the guidance in ASC 860, Transfers and Servicing, when accounting for loan (debt investment) participations, equity assignments and other partial loan sales. Such guidance requires a participation, assignment or other partial loan or equity sale to meet the definition of a "participating interest," as defined in the guidance, in order for sale treatment to be allowed. Participations, assignments or other partial loan or equity sales which do not meet the definition of a participating interest should remain on the Company's consolidated statements of assets and liabilities and the proceeds recorded as a secured borrowing until the definition is met.
Recently Issued Accounting Standards
InMarch 2020 , theFinancial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2020-04, "Reference Rate Reform (Topic 848)," which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. ASU 2020-04 is effective for all entities as ofMarch 12, 2020 throughDecember 31, 2022 . The expedients and exceptions provided by the amendments do not apply to contract modifications and hedging relationships entered into or evaluated afterDecember 31, 2022 , except for hedging transactions as ofDecember 31, 2022 , that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The Company did not utilize the optional expedients and exceptions provided by ASU 2020-04 during the six months endedJune 30, 2021 . SEC Rule 1-02(w)(2) Update InMay 2020 , theSEC adopted rule amendments that will impact the requirement of investment companies, including BDCs, to disclose the financial statements of certain of their portfolio companies or certain acquired funds (the "Final Rules"). The Final Rules adopted a new definition of "significant subsidiary" set forth in Rule 1-02(w)(2) of Regulation S-X under the Securities Act. Rules 3-09 and 4-08(g) of Regulation S-X require investment companies to include separate financial statements or summary financial information, respectively, in such investment company's periodic reports for any portfolio company that meets the definition of "significant subsidiary." The Final Rules adopt a new definition of "significant subsidiary" applicable only to investment companies that (i) modifies the investment test and the income test, and (ii) eliminates the asset test currently in the definition of "significant subsidiary" in Rule 1-02(w) of Regulation S-X. The new Rule 1-02(w)(2) ofRegulation S-X is intended to more accurately capture those portfolio companies that are more likely to materially impact the financial condition of an investment company. The Final Rules became effective onJanuary 1, 2021 , however the Company elected to early adopt this rule change as ofDecember 31, 2020 . The adoption of this guidance did not have a material impact on the Company's Consolidated Financial Statements. SEC Regulation S-K Update InNovember 2020 , theSEC issued a final rule that modernized and simplifies Management's Discussion and Analysis of Financial Condition and Results of Operations and certain financial disclosure requirements in Regulation S-K (the "Amendments"). Specifically, the Amendments: (i) eliminate Item 301 of Regulation S-K (Selected Financial Data); (ii) simplify Item 302 of Regulation S-K (Supplementary Financial Information); and (iii) amend certain aspects of Item 303 of Regulation S-K (Managements Discussion and Analysis of Financial Condition and Results of Operations). The Amendments became effective onFebruary 10, 2021 and compliance will be required for the registrant's fiscal year ending on or afterAugust 9, 2021 . Early adoption of the Amendments is permitted on an item-by-item basis after the effective date; however, a registrant must fully comply with each adopted item in its entirety. The Company adopted the Amendments on the effective date which did not have a material impact on the Company's Consolidated Financial Statements. 58
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FIDUS INVESTMENT CORPORATION
Notes to Consolidated Financial Statements (unaudited)
(in thousands, except shares and per share data)
Off-Balance Sheet Arrangements
We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. We had off-balance sheet arrangements consisting of outstanding commitments to fund various undrawn revolving loans, other debt investments and capital commitments totaling$45.4 and$5.6 million as ofJune 30, 2021 andDecember 31, 2020 , respectively. Such outstanding commitments are summarized in the following table (dollars in millions): June 30, 2021 December 31, 2020 Total Unfunded Total Unfunded Portfolio Company-Investment Commitment Commitment Commitment CommitmentAmerican AllWaste LLC (dba WasteWater Transport Services)-Delayed Draw Commitment$ 3.9 $ 3.9 $ - $ - Combined Systems, Inc.-Revolving Loan 4.0 0.6 4.0 1.0CRS Solutions Holdings, LLC (dba CRS Texas)-Common Equity (Units) 0.2 - - - Elements Brands, LLC-Revolving Loan 3.0 0.8 3.0 0.8 Ipro Tech, LLC-First Lien Debt 14.3 14.3 - - Rhino Assembly Company, LLC-Delayed Draw Commitment 0.9 0.9 0.9 0.9 Safety Products Group, LLC-Common Equity (Units) 2.9 (1) 2.9 (1) 2.9 (1) 2.9 (1)Spectra A&D Acquisition, Inc. (fka FDS Avionics Corp.)-Revolving Loan - - 0.2 -Wonderware Holdings, LLC (dba CORE Business Technologies)-Delayed Draw Term Loan 2.0 2.0 - -Worldwide Express Operations, LLC -Senior Subordinated Note 20.0 20.0 - - Total$ 51.2 $ 45.4 $ 11.0 $ 5.6
(1) Portfolio company was no longer held at period end. The commitment represents
our maximum potential liability related to certain guaranteed obligations
stemming from the prior sale of the portfolio company's underlying
operations.
Additional detail for each of the commitments above is provided in our consolidated schedules of investments.
Related Party Transactions
We have entered into a number of business relationships with affiliated or related parties, including the following:
• We have entered into the Investment Advisory Agreement with Fidus the Investment Advisor manages our day-to-day operating and investing
activities. We pay the Investment Advisor a fee for its services under
the Investment Advisory Agreement consisting of two components - a basemanagement fee and an incentive fee. See Note 5 to our consolidated
financial statements.
• Edward H. Ross , our Chairman and Chief Executive Officer, and Thomas C.
Lauer, our President, are managers of Fidus Investment Advisors . In May
2015 , Fidus Investment Advisors entered into a combination with Fidus
Advisors and
respective membership interest in
to a newly formed limited liability company,
("Holdings"). As a result,
subsidiary of Holdings, which is a limited liability company organized
under the laws of Delaware .
• We entered into the Administration Agreement with Fidus Investment Advisors to provide us with the office facilities and administrative
services necessary to conduct day-to-day operations. See Note 5 to our
consolidated financial statements.
• We entered into a license agreement with
which
license to use the name "Fidus ."
• On
Agreement (the "Agreement") with Fidus Equity Fund I, L.P. ("FEF I").
Pursuant to the Agreement, we will serve as the General Partner of FEF
I. Owned by third-party investors, FEF I was formed to purchase 50% of
select equity investments from us. On February 25, 2020 , we sold 50% of
our equity investments in 20 portfolio companies to FEF I and received
net proceeds of $35.9 million , resulting in a realized gain, net of
estimated taxes, of approximately
fees from FEF I for any services provided in our capacity as the General
Partner of FEF I.
• The Investment Advisor, in consultation with the Board, agreed to
voluntarily waive
and six months ended June 30, 2020 . There was no income incentive fee
waiver for the three and six months ended June 30, 2021 .
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FIDUS INVESTMENT CORPORATION
Notes to Consolidated Financial Statements (unaudited)
(in thousands, except shares and per share data)
• The Investment Advisor, in consultation with the Board, agreed to
voluntarily waive base management fees on any assets accounted for as
secured borrowings as defined under GAAP for the three and six months
ended June 30, 2021 . There were no secured borrowings included in total
assets for the three and six months ended June 30, 2020 .
In connection with the IPO and our election to be regulated as a BDC, we applied
for and received exemptive relief from the SEC on March 27, 2012 to allow us to
take certain actions that would otherwise be prohibited by the 1940 Act, as
applicable to BDCs. Effective June 30, 2014 , pursuant to separate exemptive
relief from the SEC , any SBA debentures issued by Fund II and Fund III are not
considered senior securities for purposes of the asset coverage requirements.
While we may co-invest with investment entities managed by the Investment
Advisor or its affiliates, to the extent permitted by the 1940 Act and the rules
and regulations thereunder, the 1940 Act imposes significant limits on
co-investment. The SEC staff has granted us relief sought in an exemptive
application that expands our ability to co-invest in portfolio companies with
other funds managed by the Investment Advisor or its affiliates ("Affiliated
Funds") in a manner consistent with our investment objective, positions,
policies, strategies and restrictions as well as regulatory requirements and
other pertinent factors, subject to compliance with certain conditions (the
"Order"). Pursuant to the Order, we are permitted to co-invest with our
affiliates if a "required majority" (as defined in Section 57(o) of the 1940
Act) or the Independent Directors make certain conclusions in connection with a
co-investment transaction, including that (1) the terms of the transactions,
including the consideration to be paid, are reasonable and fair to us and our
stockholders and do not involve overreaching by us or our stockholders on the
part of any person concerned, and (2) the transaction is consistent with the
interests of our stockholders and is consistent with our investment objective
and strategies.
In addition, we and our Investment Advisor have each adopted a joint code of
ethics pursuant to Rule 17j-1 under the 1940 Act that governs the conduct of our
and the Investment Advisor's officers, directors and employees. Additionally,
the Investment Advisor has adopted a code of ethics pursuant to
rule 204A-1 under the Advisers Act of 1940 and in accordance with
Rule 17j-1(c) under the 1940 Act. We have also adopted a code of business
conduct that is applicable to all officers, directors and employees of Fidus and
our Investment Advisor. Our officers and directors also remain subject to the
duties imposed by both the 1940 Act and the Maryland General Corporation Law.
Recent Developments
OnJuly 16, 2021 , we exited our debt investments in Hilco Technologies. We received payment in full of$10.3 million on our first lien debt and revolving loan. We received a distribution on our equity investments for a realized loss of approximately($1.0) million .
On
OnJuly 26, 2021 , we exited our debt and equity investments inWorldwide Express Operations, LLC , which was acquired under a new holding company,Accord Topco, LP (dbaWorldwide Express ). We received payment in full of$20.0 million on our second lien debt. We sold a portion of our common equity investment for a realized gain of approximately$3.0 million . In conjunction with the transaction, we invested$1.5 million in common equity, of which$0.8 million was rolled over from our original common equity investment and funded a$20.0 million second lien loan commitment. OnAugust 2, 2021 , our Board declared a regular quarterly dividend of$0.32 per share, a supplemental dividend of$0.06 per share, and a special dividend of$0.04 per share payableSeptember 28, 2021 , to stockholders of record as ofSeptember 14, 2021 .
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