PHENIXFIN CORPORATION The following discussion and analysis should be read in conjunction with our financial statements and related notes and other financial information appearing elsewhere in this quarterly report on Form 10-Q.
Except as otherwise specified, references to "we," "us," "our," or the
"Company," refer to
Forward-Looking Statements Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements, which relate to future events or our performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties, including statements as to:
? the introduction, withdrawal, success and timing of business initiatives
and strategies;
? changes in political, economic or industry conditions, the interest rateenvironment or conditions affecting the financial and capital markets,
which could result in changes in the value of our assets;
? the impact of increased competition;
? the impact of future acquisitions and divestitures;
? our business prospects and the prospects of our portfolio companies;
? the impact of legislative and regulatory actions and reforms andregulatory, supervisory or enforcement actions of government agencies
relating to us;
? our contractual arrangements and relationships with third parties;
? any future financings by us;
? fluctuations in foreign currency exchange rates;
? the impact of changes to tax legislation and, generally, our tax position;
? our ability to locate suitable investments for us and to monitor and
administer our investments;
? our ability to attract and retain highly talented professionals;
? market conditions and our ability to access alternative debt markets and
additional debt and equity capital;
? the unfavorable resolution of legal proceedings;
? uncertainties associated with the impact from the COVID-19 pandemic and
any variants thereof: including its impact on the global and
markets and the global and U.S. economy; the length and duration of the
COVID-19 outbreak in the United States as well as worldwide and the
magnitude of the economic impact of that outbreak; the effect of the
COVID-19 pandemic on our business prospects and the operational and
financial performance of our portfolio companies, including our and their
ability to achieve their respective objectives; and the effect of thedisruptions caused by the COVID-19 pandemic on our ability to continue to
effectively manage our business; and
? risks and uncertainties relating to the possibility that the Company may
explore strategic alternatives, including, but are not limited to: the
timing, benefits and outcome of any exploration of strategic alternatives
by the Company; potential disruptions in the Company's business and stock
price as a result of our exploration of any strategic alternatives; theability to realize anticipated efficiencies, or strategic or financial
benefits; potential transaction costs and risks; and the risk that any
exploration of strategic alternatives may have an adverse effect on ourexisting business arrangements or relationships, including our ability to
retain or hire key personnel. There is no assurance that any exploration
of strategic alternatives will result in a transaction or other strategic
change or outcome.
48
Such forward-looking statements may include statements preceded by, followed by
or that otherwise include the words "trend," "opportunity," "pipeline,"
"believe," "comfortable," "expect," "anticipate," "current," "intention,"
"estimate," "position," "assume," "potential," "outlook," "continue," "remain,"
"maintain," "sustain," "seek," "achieve," and similar expressions, or future or
conditional verbs such as "will," "would," "should," "could," "may," or similar
expressions. The forward looking statements contained in this quarterly report
on Form 10-Q involve risks and uncertainties. Our actual results could differ
materially from those implied or expressed in the forward-looking statements for
any reason, including the factors set forth as "Risk Factors" and elsewhere in
this quarterly report on Form 10-Q.
We have based the forward-looking statements included in this report on
information available to us on the date of this report, and we assume no
obligation to update any such forward-looking statements. Actual results could
differ materially from those anticipated in our forward-looking statements, and
future results could differ materially from historical performance. Although we
undertake no obligation to revise or update any forward-looking statements,
whether as a result of new information, future events or otherwise, you are
advised to consult any additional disclosures that we may make directly to you
or through reports that we have filed or in the future may file with the
Securities and Exchange Commission ("SEC"), including annual reports on Form
10-K, registration statements on Form N-2, quarterly reports on Form 10-Q and
current reports on Form 8-K.
COVID-19 Developments
COVID-19 and variants thereof have severely impacted global economic activity
and caused significant volatility and negative pressure in financial markets.
The global impact of COVID-19 continues to evolve and many countries, including
the United States , have reacted at various stages of the pandemic by instituting
quarantines, restricting travel, and temporarily closing or limiting capacity at
many corporate offices, retail stores, restaurants, fitness clubs and
manufacturing facilities and factories in affected jurisdictions. Such actions
have created disruption in global supply chains and adversely impacted a number
of industries. The outbreak has had and could continue to have an adverse impact
on economic and market conditions and trigger a period of global economic
slowdown.
We continue to closely monitor the impact of the outbreak of COVID-19 on all
aspects of our business, including how it will impact our portfolio companies,
employees, due diligence and underwriting processes, and financial markets.
Given the continuing development and fluidity of this situation, we cannot
estimate the long-term impact of COVID-19 on our business, future results of
operations, financial position or cash flows at this time. Further, the
operational and financial performance of the portfolio companies in which we
make investments may be significantly impacted by COVID-19, which may in turn
impact the valuation of our investments. We believe our portfolio companies have
taken actions to effectively and efficiently respond to the challenges posed by
COVID-19 and related orders imposed by state and local governments, including
developing liquidity plans supported by internal cash reserves, shareholder
support, and, as appropriate, accessing their ability to participate in the
government Paycheck Protection Program. The Company's performance has been
negatively impacted during the pandemic. The longer-term impact of COVID-19 on
the operations and the performance of the Company (including certain portfolio
companies) is difficult to predict, but may also be adverse. The longer-term
potential impact on such operations and performance could depend to a large
extent on future developments and actions taken by authorities and other
entities to mitigate COVID-19 and its economic impact. The impacts, as well as
the uncertainty over impacts to come, of COVID-19 have adversely affected the
performance of the Company (including certain portfolio companies) and may
continue to do so in the future. Furthermore, the impacts of a potential
worsening of global economic conditions and the continued disruptions to and
volatility in the financial markets remain unknown. 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, increased costs of operations, changes in law and/or regulation,
and uncertainty regarding government and regulatory policy.
We have evaluated subsequent events from March 31, 2022 through the filing date
of this quarterly report on Form 10-Q. 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 quarterly
period ended March 31, 2022 , the analysis contained herein may not fully account
for impacts relating to the COVID-19 pandemic. In that regard, for example, as
of March 31, 2022 , the Company valued its portfolio investments in conformity
with U.S. generally accepted accounting principles ("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
may have caused during the months following our most recent valuation (as of
March 31, 2022 ), any valuations conducted now or in the future in conformity
with U.S. GAAP could result in a lower fair value of our portfolio. The
longer-term impact of COVID-19 on the operations and the performance of the
Company (including certain portfolio companies) is difficult to predict, but may
also be adverse. The longer-term potential impact on such operations and
performance could depend to a large extent on future developments and actions
taken by authorities and other entities to contain COVID-19 and its economic
impact. The impacts, as well as the uncertainty over impacts to come, of
COVID-19 (including any variants thereof) have adversely affected the
performance of the Company and may continue to do so in the future. Further, the
potential exists for additional variants of COVID-19 to impede the global
economic recovery and exacerbate geographic differences in the spread of, and
response to, COVID-19.
49
Overview
We are an internally-managed non-diversified closed-end management investment
company that has elected to be regulated as a BDC under the 1940 Act. In
addition, we have elected, and intend to qualify annually, to be treated for
U.S. federal income tax purposes as a RIC under Subchapter M of the Code.
Through December 31, 2020 , we were an externally managed company. On November
18, 2020 , the board of directors of the Company approved the adoption of an
internalized management structure, effective January 1, 2021 . Since January 1,
2021 , we have operated under such internalized management structure.
We commenced operations and completed our initial public offering on January 20,
2011 . Under our internalized management structure, our activities are managed by
our senior professionals and are supervised by our board of directors, of which
a majority of the members are independent of us.
The Company's investment objective is to generate current income and capital
appreciation. The management team seeks to achieve this objective primarily
through making loans, private equity or other investments in privately-held
companies. The Company may also make debt, equity or other investments in
publicly-traded companies. (These investments may also include investments in
other BDCs, closed-end funds or REITS.) We may also pursue other strategic
opportunities and invest in other assets or operate other businesses to achieve
our investment objective. The portfolio generally consists of senior secured
first lien term loans, senior secured second lien term loans, senior secured
bonds, preferred equity and common equity. Occasionally, we will receive
warrants or other equity participation features which we believe will have the
potential to increase total investment returns. Our loan and other debt
investments are primarily rated below investment grade or are unrated.
Investments in below investment grade securities are considered predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal when due.
As a BDC, we are required to comply with certain regulatory requirements. For
instance, we generally have to invest at least 70% of our total assets in
"qualifying assets," including securities of private or thinly traded public
U.S. companies, cash, cash equivalents, U.S. government securities and
high-quality debt investments that mature in one year or less. In addition, we
are only allowed to borrow money such that our asset coverage, as defined in the
1940 Act, equals at least 200% (or 150% if, pursuant to the 1940 Act, certain
requirements are met) after such borrowing, with certain limited exceptions. To
maintain our RIC tax treatment, we must meet specified source-of-income and
asset diversification requirements. In addition, to maintain our RIC tax
treatment, we must timely distribute at least 90% of our net ordinary income and
realized net short-term capital gains in excess of realized net long-term
capital losses, if any, for the taxable year.
Reverse Stock Split; Authorized Share Reduction
At the Company's 2020 Annual Meeting of Stockholders held onJune 30, 2020 (the "Annual Meeting"), stockholders approved a proposal to grant discretionary authority to the Company's board of directors to amend the Company's Certificate of Incorporation (the "Certificate of Incorporation") to effect a reverse stock split of its common stock, of 1-20 (the "Reverse Stock Split") and with the Reverse Stock Split to be effective at such time and date, if at all, as determined by the board of directors, but not later than 60 days after stockholder approval thereof and, if and when the reverse stock split is effected, reduce the number of authorized shares of common stock by the approved reverse stock split ratio (the "Authorized Share Reduction"). Following the Annual Meeting, onJuly 7, 2020 , the board of directors determined that it was in the best interests of the Company and its stockholders to implement the Reverse Stock Split and the Authorized Share Reduction. Accordingly, onJuly 13, 2020 , the Company filed a Certificate of Amendment (the "Certificate of Amendment") to the Certificate of Incorporation with the Secretary of State of theState of Delaware to effect the Reverse Stock Split and the Authorized Share Reduction. Pursuant to the Certificate of Amendment, effective as of5:00 p.m., Eastern Time , onJuly 24, 2020 (the "Effective Time"), each twenty (20) shares of common stock issued and outstanding, immediately prior to the Effective Time, automatically and without any action on the part of the respective holders thereof, were combined and converted into one (1) share of common stock. In connection with the Reverse Stock Split, the Certificate of Amendment provided for a reduction in the number of authorized shares of common stock from 100,000,000 to 5,000,000 shares of common stock. No fractional shares were issued as a result of the Reverse Stock Split. Instead, any stockholder who would have been entitled to receive a fractional share as a result of the Reverse Stock Split received cash payments in lieu of such fractional shares (without interest and subject to backup withholding and applicable withholding taxes). OnDecember 21, 2020 , the Company announced that it completed the application process for and was authorized to transfer the listing of its shares of common stock to the NASDAQ Global Market. The listing and trading of the common stock on the NYSE ceased at the close of trading onDecember 31, 2020 . SinceJanuary 4, 2021 , the common stock trades on the NASDAQ Global Market under the trading symbol "PFX." 50 Revenues
We generate revenue in the form of interest income on the debt that we hold and capital gains, if any, on warrants or other equity interests that we may acquire in portfolio companies. We invest our assets primarily in privately held companies with enterprise or asset values between$25 million and$250 million and generally focus on investment sizes of$10 million to$50 million . We believe that pursuing opportunities of this size offers several benefits including reduced competition, a larger investment opportunity set and the ability to minimize the impact of financial intermediaries. We expect our debt investments to bear interest at either a fixed or floating rate. Interest on debt will be payable generally either monthly or quarterly. In some cases our debt investments may provide for a portion of the interest to be PIK. To the extent interest is PIK, it will be payable through the increase of the principal amount of the obligation by the amount of interest due on the then-outstanding aggregate principal amount of such obligation. The principal amount of the debt and any accrued but unpaid interest will generally become due at the maturity date. In addition, we may generate revenue in the form of commitment, origination, structuring or diligence fees, fees for providing managerial assistance or investment management services and possibly consulting fees. Any such fees will be generated in connection with our investments and recognized as earned. Expenses In periods prior toDecember 31, 2020 , our primary operating expenses included management and incentive fees pursuant to the investment management agreement we had withMCC Advisors and overhead expenses, including our allocable portion of our administrator's overhead under the administration agreement, which were paid during the quarter endedMarch 31, 2021 . Our management and incentive fees compensatedMCC Advisors for its work in identifying, evaluating, negotiating, closing and monitoring our investments. OnNovember 18, 2020 , the board of directors adopted an internally managed structure, effectiveJanuary 1, 2021 , under which we bear all costs and expenses of our operations and transactions, including those relating to: ? our organization and continued corporate existence;
? calculating our NAV (including the cost and expenses of any independent
valuation firms);
? salaries, compensation and benefits for our employees and any consultants,
including investment professionals;
? interest payable on debt, if any, incurred to finance our investments;
? the costs of all offerings of common stock and other securities, if any;
? distributions on our shares;
? administration fees payable under our administration agreement with U.S.
Bancorp;
? amounts payable to third parties relating to, or associated with, making
investments;
? transfer agent and custodial fees;
? registration fees and listing fees;
? U.S. federal, state and local taxes;
? independent director fees and expenses;
? costs of preparing and filing reports or other documents with the
other regulators;
? the costs of any reports, proxy statements or other notices to our
stockholders, including printing costs;
? our fidelity bond;
? directors and officers/errors and omissions liability insurance, and any
other insurance premiums;
? indemnification payments;
? direct costs and expenses of administration, including audit and legal
costs; and
? all other expenses reasonably incurred by us in connection with
administering our business, such as rent for our office space.
51
Expense Support Agreement
On June 12, 2020 , the Company entered into an expense support agreement (the
"Expense Support Agreement") with MCC Advisors and Medley LLC , pursuant to which
MCC Advisors and Medley LLC agreed (jointly and severally) to cap the management
fee and all of the Company's other operating expenses (except interest expenses,
certain extraordinary strategic transaction expenses, and other expenses
approved by the Special Committee of the Board (as described in Note 10)), at
$667,000 per month (the "Cap"). Under the Expense Support Agreement, the Cap
became effective on June 1, 2020 and was to expire on September 30, 2020 . On
September 29, 2020 , the board of directors, including all of the independent
directors, extended the term of the Expense Support Agreement through the end of
quarter ending December 31, 2020 . The Expense Support Agreement expired by its
terms at the close of business on December 31, 2020 , in connection with the
adoption of the internalized management structure by the board of directors.
For the three months ended December 31, 2020 , the total management fee and the
other operating expenses subject to the Cap (as described above) were $2.5
million , which resulted in $0.3 million of expense support incurred during the
quarter ended December 31, 2020 and due from MCC Advisors . The $0.3 million of
expense support due was netted against Administrator expenses payable in the
accompanying Consolidated Statements of Assets and Liabilities and paid during
the quarter ended March 31, 2021 . See "Note 6" for more information.
Portfolio and Investment Activity
As of
During the six months endedMarch 31, 2022 , we received proceeds from sale and settlements of investments of$89.8 million including principal and dividend proceeds, net realized gains (losses) on investments of$15.7 million , and invested$119.8 million . Since our internalization onJanuary 1, 2021 , we have monetized 20 positions totaling$126.4 million and deployed capital into 25 investments, aggregating$155.5 million . During the six months endedMarch 31, 2021 , we received proceeds from sale and settlements of investments of$74.9 million , including principal and dividend proceeds, and realized net losses on investments of$46.5 million . We invested$6.8 million in one new portfolio company. The following table summarizes the amortized cost and the fair value of our average portfolio company: March 31, 2022 September 30, 2021 Amortized Cost Fair Value Amortized Cost Fair Value
Average portfolio company $ 3,788$ 3,631 $ 3,100$ 2,263 Largest portfolio company 25,305 25,305 19,469 26,863
The following table summarizes the amortized cost and the fair value of
investments as of
Amortized
Cost Percentage Fair Value PercentageSenior Secured First Lien Term Loans$ 135,310 53.3 %$ 89,769 47.5 % Senior Secured Second Lien Term Loans 2,602 1.0
2,487 1.3
Senior Secured Notes 11,638 4.6 11,278 6.0
Unsecured Debt 182 0.1 - -
Equity/Warrants 104,056 41.0 85,271 45.2
Total Investments $ 253,788 100.0 % $ 188,805 100.0 %
The following table summarizes the amortized cost and the fair value of
investments as of
Amortized
Cost Percentage Fair Value PercentageSenior Secured First Lien Term Loans$ 136,740 65.7 %$ 61,934 40.9 % Senior Secured Second Lien Term Loans 2,600 1.3
2,490 1.6
Senior Secured Notes 9,306 4.5 9,270 6.1
Secured Debt 2,500 1.2 2,500 1.6
Unsecured Debt 1,561 0.8 - -
Equity/Warrants 54,961 26.5 75,446 49.8
Total Investments $ 207,668 100.0 % $ 151,640 100.0 %
52
As of March 31, 2022 , our income-bearing investment portfolio based upon cost
represented 68.7% of our total portfolio of which 77.7% bore interest based on
floating rates, such as the London Interbank Offering Rate ("LIBOR"), while
22.3% bore interest at fixed rates. As of March 31, 2022 , the Company had a
weighted average yield to maturity of 8.32% on debt investments. This yield does
not represent the total return to our stockholders.
We rate the risk profile of each of our investments based on the following categories:
Credit
Rating Definition
1 Investments that are performing above expectations.
2 Investments that are performing within expectations, with risks that
are neutral or favorable compared to risks at the time oforigination.
All new loans are rated '2'.
3 Investments that are performing below expectations and that require
closer monitoring, but where no loss of interest, dividend or principal
is expected. Companies rated '3' may be out of compliance with
financial covenants, however, loan payments are generally not past due.
4 Investments that are performing below expectations and for which risk
has increased materially since origination. Some loss ofinterest or
dividend is expected but no loss of principal. In addition to the
borrower being generally out of compliance with debt covenants, loan
payments may be past due (but generally not more than 180 days past
due).
5 Investments that are performing substantially below expectations and
whose risks have increased substantially since origination. Most or all
of the debt covenants are out of compliance and payments are
substantially delinquent. Some loss of principal is expected.
The COVID-19 pandemic has at times impacted our investment ratings, causing downgrades of certain portfolio companies. As the COVID-19 pandemic continues, we continue to maintain close communications with our portfolio companies to proactively assess and manage potential risks across our investment portfolio. We have also increased oversight and analysis of credits in vulnerable industries in an attempt to improve loan performance and reduce credit risk.
The following table shows the distribution of our investments on the 1 to 5
investment performance rating scale at fair value as of
March 31, 2022 September 30, 2021
Fair Value Percentage Fair Value Percentage
1 $ - 0.0 % $ - 0.0 %
2 161,929 85.8 % 121,508 80.1 %
3 10,196 5.4 % 13,416 8.8 %
4 7,221 3.8 % 9,925 6.6 %
5 9,459 5.0 % 6,791 4.5 %
Total $ 188,805 100.0 % $ 151,640 100.0 %
Results of Operations
Operating results for three and six months ended
For the Three Months Ended For the Six Months Ended
March 31 March 31
2022 2021 2022 2021
Total investment income $ 3,657 $ 6,454 $ 6,790 $ 19,256
Less: Total expenses 2,507 2,767 5,440 7,239
Net investment income/(loss) 1,150 3,687 1,350 12,017
Net realized gains (losses) on
investments 454 161 15,677 (46,546 )
Net change in unrealized gains (losses)
on investments 1,369 3,939 (8,956 ) 36,001
Loss on extinguishment of debt - - (296 ) (122 )
Net increase (decrease) in net assets
resulting from operations $ 2,973 $ 7,787 $ 7,775 $ 1,350
Investment Income
For the three months ended March 31, 2022 , investment income totaled $3.7
million , of which $2.7 million was attributable to portfolio interest, $0.9
million was attributable to dividend income, and $0.1 million was attributable
to fee income. For the six months ended March 31, 2022 , investment income
totaled $6.8 million , of which $4.6 million was attributable to portfolio
interest, $1.6 million was attributable to dividend income, $0.4 million was
attributable to fee income, and $0.2 million was attributable to other income.
Dividend income was received from 11 investments during the six months ended
March 31, 2022 .
53
For the three months ended March 31, 2021 , investment income totaled $6.4
million , of which $6.1 million was attributable to portfolio interest and
dividend income, $0.2 million was attributable to fee income, and $0.1 million
was attributable to other income. For the six months ended March 31, 2021 ,
investment income totaled $19.3 million , of which $18.6 million was attributable
to portfolio interest and dividend income, $0.6 million was attributable to fee
income, and $0.1 million was attributable to other income. Dividend income was
received primarily from one investment during the six months ended March 31,
2021 .
Operating Expenses
Operating expenses for the three and six months ended
For the Three Months Ended For the Six Months Ended
March 31 March 31
2022 2021 2022 2021Base management fees $ - $ - $ -$ 1,146 Interest and financing expenses 1,221 1,260 2,709 3,278 General and administrative expenses 290 105 487 467 Salaries and benefits 430 332 936 332 Administrator expenses 82 (45 ) 151 440 Insurance expenses 156 474 314 959 Directors fees 167 221 376 696 Professional fees, net 161 420 467 (79 ) Total expenses$ 2,507 $ 2,767 $ 5,440 $ 7,239 For the three months endedMarch 31, 2022 , total operating expenses decreased by$0.3 million , or 9.4% compared to the three months endedMarch 31, 2021 . For the six months endedMarch 31, 2022 , total operating expenses before base management fees decreased by$0.7 million , or 10.7% compared to the six months endedMarch 31, 2021 . Effective beginningJanuary 1, 2021 , the Company did not incur any management or incentive fees, nor was it subject to expense support arrangements due to its transition to an internal management structure. As a result, there were no management or incentive fee waivers or expense support reimbursements for such period.
Interest and Financing Expenses
Interest and financing expenses for the three months endedMarch 31, 2022 were comparable to the three months endedMarch 31, 2021 . Interest and financing expenses for the six months endedMarch 31, 2022 decreased by$0.6 million , or 17.4% compared to the six months endedMarch 31, 2021 . The decrease in interest and financing expenses for the six months endedMarch 31, 2022 was primarily due to the partial repayment of the 2023 Notes onDecember 16, 2021 and the full repayment of the 2021 Notes onNovember 20, 2020 , partially offset by an increase due to the issuance of the 2028 Notes which became effective onNovember 16, 2021 .
Base Management Fees and Incentive Fees
No base management fees were incurred for the three months endedMarch 31, 2022 and 2021. Base management fees for the six months endedMarch 31, 2022 decreased by$1.1 million , or 100.0%, compared to the six months endedMarch 31, 2021 . SinceJanuary 1, 2021 , the Company no longer incurs management fees under its current internalized structure.
No incentive fees were paid for the three and six months ended
Professional Fees and General and Administrative Expenses
Professional fees and general and administrative expenses for the three months
ended
Professional fees and general and administrative expenses for the six months endedMarch 31, 2022 increased by$0.6 million , or 146.5%, compared to the six months endedMarch 31, 2021 primarily due to a decrease in the insurance proceeds received in 2021 which offset legal expenses. 54
Net Realized Gains/Losses from Investments
We measure realized gains or losses by the difference between the net proceeds from the disposition and the amortized cost basis of an investment, without regard to unrealized gains or losses previously recognized.
During the three months endedMarch 31, 2022 , we recognized$0.5 million of realized gains on our portfolio investments. The realized gains were primarily due to the partial repayment of one investment. During the six months endedMarch 31, 2022 , we recognized$15.7 million of realized gains on our portfolio investments. The realized gains were primarily due to the partial repayment of one investment and the restructuring of three investments. During the three months endedMarch 31, 2021 , we recognized$0.2 million of realized gains on our portfolio investments. The realized gains were primarily due to the sale of one investment. During the six months endedMarch 31, 2021 , we recognized$46.5 million of realized losses on our portfolio investments. The realized losses were primarily due to the sale of one investment.
Realized loss on extinguishment of debt
In the event that we modify or extinguish our debt prior to maturity, we account for it in accordance with ASC 470-50, Modifications and Extinguishments, in which we measure the difference between the reacquisition price of the debt and the net carrying amount of the debt, which includes any unamortized debt issuance costs. During the three and six months endedMarch 31, 2022 , the Company recognized a net loss on extinguishment of debt of$0.0 and$0.3 million , which was due to the Company's$55.3 million repayment of the 2023 Notes onDecember 16, 2021 . During the three months endedMarch 31, 2021 , the Company did not recognize a net loss on extinguishment of debt. During the six months endedMarch 31, 2021 , the Company recognized a net loss on extinguishment of debt of$0.1 million , which was due to the Company's$74.0 million repayment of the 2021 Notes onNovember 20, 2020 .
Net Unrealized Appreciation/Depreciation on Investments
Net change in unrealized appreciation or depreciation on investments reflects the net change in the fair value of our investment portfolio.
For the three months endedMarch 31, 2022 , we had$1.4 million of net unrealized appreciation on investments. The net unrealized appreciation resulted from the reversal of previously recorded unrealized depreciation due to the repayment of one investment and net mark-to-market adjustments on investments. For the six months endedMarch 31, 2022 , we had$9.0 million of net unrealized depreciation on investments. The net unrealized depreciation resulted from the reversal of previously recorded net unrealized depreciation on nine investments that were realized, partially sold, or written-off during the year and net mark-to-market adjustments on investments. For the three months endedMarch 31, 2021 , we had$3.9 million of net unrealized appreciation on investments. The net unrealized appreciation comprised of$7.2 million of net unrealized depreciation on investments and$11.1 million of net unrealized appreciation that resulted from the reversal of previously recorded unrealized depreciation on investments that were realized, partially sold,
or written-off during the year. For the six months endedMarch 31, 2021 , we had$36.0 million of net unrealized appreciation on investments. The net unrealized appreciation comprised of$31.4 million of net unrealized depreciation on investments and$67.4 million of net unrealized appreciation that resulted from the reversal of previously recorded unrealized depreciation on investments that were realized, partially sold,
or
written-off during the year.
55
Provision for Deferred Taxes on Unrealized Depreciation on Investments
Certain consolidated subsidiaries of ours are subject toU.S. federal and state income taxes. These taxable subsidiaries are not consolidated with the Company for income tax purposes, but are consolidated for GAAP purposes, and may generate income tax liabilities or assets from temporary differences in the recognition of items for financial reporting and income tax purposes at the subsidiaries. For the three and six months endedMarch 31, 2022 and 2021, the Company did not record a change in provision for deferred taxes on the unrealized (appreciation)/depreciation on investments.
Changes in Net Assets from Operations
For the three months endedMarch 31, 2022 , we recorded a net increase in net assets resulting from operations of$3.0 million compared to a net increase in net assets resulting from operations of$7.8 million for the three months endedMarch 31, 2021 . Total Net Assets decreased from the last quarter due to share repurchases in the amount of$12.5 million . Based on 2,397,911 and 2,716,627 weighted average common shares outstanding for the three months endedMarch 31, 2022 and 2021, respectively, our per share net increase in net assets resulting from operations was$1.24 for the three months endedMarch 31, 2022 and$2.87 for the three months endedMarch 31, 2021 . For the six months endedMarch 31, 2022 , we recorded a net increase in net assets resulting from operations of$7.8 million compared to a net increase in net assets resulting from operations of$1.3 million for the six months endedMarch 31, 2021 . This increase takes into account increased net income and net capital appreciation for the period, each as described above. Based on 2,458,222 and 2,720,226 weighted average common shares outstanding for the six months endedMarch 31, 2022 and 2021, respectively, our per share net increase in net assets resulting from operations was$3.16 for the six months endedMarch 31, 2022 and an increase of$0.50 for the six months endedMarch 31, 2021 .
Financial Condition, Liquidity and Capital Resources
As a RIC, we distribute substantially all of our net income to our stockholders and have an ongoing need to raise additional capital for investment purposes. To fund growth, we have a number of alternatives available to increase capital, including raising equity, increasing debt, and funding from operational cash flow. Our liquidity and capital resources historically have been generated primarily from the net proceeds of public offerings of common stock, advances from the Revolving Credit Facility (which the Company voluntarily satisfied and terminated) and net proceeds from the issuance of notes as well as cash flows from operations. In the future, we may generate cash from future offerings of securities, future borrowings and cash flows from operations, including interest earned from the temporary investment of cash inU.S. government securities and other high-quality debt investments that mature in one year or less. Our primary use of funds is investments in our targeted asset classes, cash distributions to our stockholders, and other general corporate purposes.
As of
In order to maintain our RIC tax treatment under the Code, we intend to
distribute to our stockholders substantially all of our taxable income, but we
may also elect to periodically spill over certain excess undistributed taxable
income from one tax year into the next tax year. In addition, as a BDC, for each
taxable year we generally are required to meet a coverage ratio of total assets
to total senior securities, which include borrowings and any preferred stock we
may issue in the future, of at least 200% (or 150% if, pursuant to the 1940 Act,
certain requirements are met). This requirement limits the amount that we may
borrow.
56
On January 11, 2021 , the Company announced that its board of directors approved
a share repurchase program. On February 9, 2022 , the Board of Directors approved
the expansion of the amount authorized for repurchase under the Company's share
repurchase program from $15 million to $25 million . Under the share repurchase
program, the Company repurchased an aggregate of 516,443 shares of common stock
through March 31, 2022 , or 19.0% of shares outstanding as of the program's
inception, with a total cost of approximately $20.7 million . Taking into account
such prior repurchases, the total remaining amount authorized under the expanded
share repurchase program at March 31, 2022 was approximately $4.3 million .Unsecured Notes 2021 Notes OnDecember 17, 2015 , the Company issued$70.8 million in aggregate principal amount of 6.50% unsecured notes that mature onJanuary 30, 2021 (the "2021 Notes"). OnJanuary 14, 2016 , the Company closed an additional$3.25 million in aggregate principal amount of the 2021 Notes, pursuant to the partial exercise of the underwriters' option to purchase additional notes. The 2021 Notes bore interest at a rate of 6.50% per year, payable quarterly onJanuary 30 ,April 30 ,July 30 andOctober 30 of each year, beginningJanuary 30, 2016 . OnOctober 21, 2020 , the Company caused notices to be issued to the holders of the 2021 Notes regarding the Company's exercise of its option to redeem, in whole, the issued and outstanding 2021 Notes, pursuant to Section 1104 of the Indenture dated as ofFebruary 7, 2012 , between the Company andU.S. Bank National Association , as trustee, and Section 101(h) of the Third Supplemental Indenture dated as ofDecember 17, 2015 . The Company redeemed$74,012,825 in aggregate principal amount of the issued and outstanding 2021 Notes onNovember 20, 2020 (the "Redemption Date"). The 2021 Notes were redeemed at 100% of their principal amount ($25 per 2021 Note), plus the accrued and unpaid interest thereon fromOctober 31, 2020 , through, but excluding, the Redemption Date. The Company funded the redemption of the 2021 Notes with cash on hand. 2023 Notes
OnMarch 18, 2013 , the Company issued$60.0 million in aggregate principal amount of 2023 Notes. As ofMarch 30, 2016 , the 2023 Notes may be redeemed in whole or in part at any time or from time to time at the Company's option. OnMarch 26, 2013 , the Company closed an additional$3.5 million in aggregate principal amount of 2023 Notes, pursuant to the partial exercise of the underwriters' option to purchase additional notes. The 2023 Notes bear interest at a rate of 6.125% per year, payable quarterly onMarch 30 ,June 30 ,September 30 andDecember 30 of each year, beginningJune 30, 2013 . OnDecember 12, 2016 , the Company entered into an "At-The-Market" ("ATM") debt distribution agreement withFBR Capital Markets & Co. , through which the Company could offer for sale, from time to time, up to$40.0 million in aggregate principal amount of the 2023 Notes. The Company sold 1,573,872 of the 2023 Notes at an average price of$25.03 per note, and raised$38.6 million in net proceeds, through the ATM debt distribution agreement. OnMarch 10, 2018 , the Company redeemed$13.0 million in aggregate principal amount of the 2023 Notes. The redemption was accounted for as a debt extinguishment in accordance with ASC 470-50, Modifications and Extinguishments, which resulted in a realized loss of$0.3 million and was recorded on the Consolidated Statements of Operations as a loss on extinguishment of debt. OnDecember 31, 2018 , the Company redeemed$12.0 million in aggregate principal amount of the 2023 Notes. The redemption was accounted for as a debt extinguishment in accordance with ASC 470-50, Modifications and Extinguishments, which resulted in a realized loss of$0.2 million and was recorded on the Consolidated Statements of Operations as a loss on extinguishment of debt. OnDecember 21, 2020 , the Company announced that it completed the application process for and was authorized to transfer the listing of the 2023 Notes to the NASDAQ Global Market. The listing and trading of the 2023 Notes on the NYSE ceased at the close of trading onDecember 31, 2020 . EffectiveJanuary 4, 2021 , the 2023 Notes trade on the NASDAQ Global Market under the trading symbol "PFXNL." OnNovember 15, 2021 , the Company caused notices to be issued to the holders of the 2023 Notes regarding the Company's exercise of its option to redeem$55,325,000 in aggregate principal amount of the issued and outstanding 2023 Notes onDecember 16, 2021 . The redemption was accounted for as a debt extinguishment in accordance with ASC 470-50, Modifications and Extinguishments, which resulted in a realized loss of$0.3 million and was recorded on the Consolidated Statements of Operations as a loss on extinguishment of debt.
2028 Notes
OnNovember 9, 2021 , the Company entered into an underwriting agreement, by and between the Company andOppenheimer & Co. Inc. , as representative of the several underwriters named in Exhibit A thereto, in connection with the issuance and sale (the "Offering") of$57,500,000 (including the underwriters' option to purchase up to$7,500,000 aggregate principal amount) in aggregate principal amount of its 5.25% Notes due 2028 (the "2028 Notes"). The Offering occurred onNovember 15, 2021 , pursuant to the Company's effective shelf registration statement on Form N-2 previously filed with theSEC , as supplemented by a preliminary prospectus supplement datedNovember 8, 2021 , the pricing term sheet datedNovember 9, 2021 and a final prospectus supplement datedNovember 9, 2021 . EffectiveNovember 16, 2021 , the 2028 Notes began trading on the NASDAQ Global Market under the trading symbol "PFXNZ." OnNovember 15, 2021 , the Company andU.S. Bank National Association , as trustee entered into a Fourth Supplemental Indenture to its base Indenture, datedFebruary 7, 2012 , between the Company and the Trustee. The Fourth Supplemental Indenture relates to the Offering of the 2028 Notes. 57
Contractual Obligations and Off-Balance Sheet Arrangements
As ofMarch 31, 2022 andSeptember 30, 2021 , we had commitments under loan and financing agreements to fund up to$13.3 million to seven portfolio companies and$4.9 million to six portfolio companies, respectively. These commitments are primarily composed of senior secured term loans and revolvers, and the determination of their fair value is included in the Consolidated Schedule of Investments. The commitments are generally subject to the borrowers meeting certain criteria such as compliance with covenants and certain operational metrics. The terms of the borrowings and financings subject to commitment are comparable to the terms of other loan and equity securities in our portfolio. A summary of the composition of the unfunded commitments as ofMarch 31, 2022 andSeptember 30, 2021 is shown in the table below (dollars in thousands):March 31 ,September 30, 2022 2021
$ 5,000 $ -
4,000 -
Redwood Services Group, LLC - Revolving Credit Facility 1,575 1,575
Kemmerer Operations, LLC - Senior Secured First Lien Delayed
Draw Term Loan 908 908
1888 Industrial Services, LLC - Revolving Credit Facility 899 1,078
517 -
NVTN LLC - Senior Secured First Lien Delayed Draw Term Loan 220 220
167 167
Alpine SG, LLC - Revolving Credit Facility -
1,000
Total unfunded commitments $ 13,286 $ 4,948
We entered into an investment management agreement with MCC Advisors on January
11, 2011 (the "Investment Management Agreement") in accordance with the 1940
Act. The Investment Management Agreement became effective upon the pricing of
our initial public offering. Under the Investment Management Agreement, MCC
Advisors agreed to provide us with investment advisory and management services.
For these services, we agreed to pay a base management fee equal to a percentage
of our gross assets and an incentive fee based on our performance.
We also entered into an administration agreement with MCC Advisors as our
administrator. The administration agreement became effective upon the pricing of
our initial public offering. Under the administration agreement, MCC Advisors
agreed to furnish us with office facilities and equipment, provide us clerical,
bookkeeping and record keeping services at such facilities and provide us with
other administrative services necessary to conduct our day-to-day operations.
MCC Advisors also provided on our behalf significant managerial assistance to
those portfolio companies to which we are required to provide such assistance
while the Investment Management Agreement and administration agreement werein effect.
The Investment Management Agreement and administration agreement expired at the
close of business on
58
The following table shows our payment obligations for repayment of debt and
other contractual obligations at
Payments Due by Period
2022 2023 2024 2025 2026 Thereafter Total
2023 Notes $ - $ 22,521,800 $ - $ - $ - $ - $ 22,521,800
2028 Notes - - - - - 57,500,000 57,500,000
Operating
Lease
Obligation (1) 72,000 144,000 144,000 144,000 144,000 24,000 672,000
Total
contractual
obligations $ 72,000 $ 22,665,800 $ 144,000 $ 144,000 $ 144,000 $ 57,524,000 $ 80,693,800 (1) Operating Lease Obligation means a rent payment obligation under a lease
classified as an operating lease and disclosed pursuant to ASC 842, as may be
modified or supplemented.
On
MCC JV commenced operations onJuly 15, 2015 . OnAugust 4, 2015 , MCC JV entered into a senior secured revolving credit facility (the "JV Facility") led by Credit Suisse, AG with commitments of$100 million . OnMarch 30, 2017 , the Company amended the JV Facility previously administered by CS and facilitated the assignment of all rights and obligations of CS under the JV Facility to Deutsche Bank AG,New York Branch, ("DB") and increased the total loan commitments to$200 million . The JV Facility bears interest at a rate of LIBOR (with no minimum + 2.75% per annum. OnMarch 29, 2019 , the JV Facility reinvestment period was extended toJune 28, 2019 fromMarch 30, 2019 . OnJune 28, 2019 , the JV Facility reinvestment period was extended toOctober 28, 2019 . OnOctober 28, 2019 , the JV Facility reinvestment period was further extended fromOctober 28, 2019 toMarch 31, 2020 , the maturity date was extended toMarch 31, 2023 and the interest rate was modified from bearing an interest rate of LIBOR (with no minimum) + 2.50% per annum to LIBOR (with no minimum) + 2.75% per annum. The Company has determined that MCC JV is an investment company under ASC 946, however in accordance with such guidance, the Company will generally not consolidate its investment in a company other than a wholly owned investment company subsidiary or a controlled operating company whose business consists of providing services to the Company. Accordingly, the Company does not consolidate its interest in MCC JV. OnOctober 8, 2020 , the Company, GALIC, MCC JV, and an affiliate of Golub entered into a Membership Interest Purchase Agreement pursuant to which a fund affiliated with and managed by Golub concurrently purchased all of the Company's interest in the MCC JV and all of GALIC's interest in the MCC JV for a pre-adjusted gross purchase price of$156.4 million and an adjusted gross purchase price (which constitutes the aggregate consideration for the membership interests) of$145.3 million (giving effect to adjustments primarily for principal and interest payments from portfolio companies of MCC JV fromJuly 1, 2020 throughOctober 7, 2020 ), resulting in net proceeds (before transaction expenses) of$41.0 million and$6.6 million for MCC and GALIC, respectively, on the terms and subject to the conditions set forth in the Membership Interest Purchase Agreement, including the representations, warranties, covenants and indemnities contained therein. In connection with the closing of the transaction onOctober 8, 2020 , MCC JV repaid in full all outstanding borrowings under, and terminated, its senior secured revolving credit facility, dated as ofAugust 4, 2015 , as amended, administered by Deutsche Bank AG,New York Branch. Distributions We have elected, and intend to qualify annually, to be treated forU.S. federal income tax purposes as a RIC under Subchapter M of the Code. As a RIC, in any taxable year with respect to which we timely distribute at least 90 percent of the sum of our (i) investment company taxable income (which is generally our net ordinary income plus the excess of realized net short-term capital gains over realized net long-term capital losses) determined without regard to the deduction for dividends paid and (ii) net tax exempt interest income (which is the excess of our gross tax exempt interest income over certain disallowed deductions), we (but not our stockholders) generally will not be subject toU.S. federal income tax on investment company taxable income and net capital gains that we distribute to our stockholders. We intend to distribute annually all or substantially all of such income, but we may also elect to periodically spill over certain excess undistributed taxable income from one tax year to the next tax year. To the extent that we retain our net capital gains or any investment company taxable income, we will be subject toU.S. federal income tax. We may choose to retain our net capital gains or any investment company taxable income, and pay the associated federal corporate income tax or excise tax, described below. 59 Amounts not distributed on a timely basis in accordance with a calendar year distribution requirement are subject to a nondeductible 4%U.S. federal excise tax payable by us. To avoid this tax, we must distribute (or be deemed to have distributed) during each calendar year an amount equal to the sum of:
1) at least 98.0% of our ordinary income (not taking into account any capital
gains or losses) for the calendar year;
2) at least 98.2% of the amount by which our capital gains exceed our capital
losses (adjusted for certain ordinary losses) for a one-year period ending on
October 31st of the calendar year; and
3) income realized, but not distributed, in preceding years and on which we did
not pay federal income tax.
While we intend to distribute any income and capital gains in the manner
necessary to minimize imposition of the 4% U.S. federal excise tax, sufficient
amounts of our taxable income and capital gains may not be distributed to avoid
entirely the imposition of the tax. In that event, we will be liable for the tax
only on the amount by which we do not meet the foregoing distribution
requirement.
We intend to pay quarterly dividends to our stockholders out of assets legally
available for distribution. We cannot assure you that we will achieve investment
results that will allow us to pay a specified level of dividends or year-to-year
increases in dividends. In addition, the inability to satisfy the asset coverage
test applicable to us as a BDC could limit our ability to pay dividends. All
dividends will be paid at the discretion of our board of directors and will
depend on our earnings, our financial condition, maintenance of our RIC tax
treatment, compliance with applicable BDC regulations and such other factors as
our board of directors may deem relevant from time to time. We cannot assure you
that we will pay dividends to our stockholders in the future.
To the extent our taxable earnings fall below the total amount of our
distributions for a taxable year, a portion of those distributions may be deemed
a return of capital to our stockholders for U.S. federal income tax purposes.
Stockholders should read any written disclosure accompanying a distribution
carefully and should not assume that the source of any distribution is our
ordinary income or gains.
We have adopted an "opt out" dividend reinvestment plan for our common
stockholders. As a result, if we declare a cash dividend or other distribution,
each stockholder that has not "opted out" of our dividend reinvestment plan will
have their dividends automatically reinvested in additional shares of our common
stock rather than receiving cash dividends. Stockholders who receive
distributions in the form of shares of common stock will be subject to the same
federal, state and local tax consequences as if they received cash
distributions.
There were no dividend distributions during the six months ended
Related Party Transactions
Concurrent with the pricing of our IPO, we entered into a number of business relationships with affiliated or related parties, including the following:
? We entered into the Investment Management Agreement with
which expired
Executive Officer through
21, 2021 and Mr. Seth Taube , director through January 21, 2021 , are both
affiliated with MCC Advisors and Medley.
? Through December 31, 2020 , MCC Advisors provided us with the officefacilities and administrative services necessary to conduct day-to-day
operations pursuant to our administration agreement. We reimbursed MCC
Advisors for the allocable portion (subject to the review and approval of
our board of directors) of overhead and other expenses incurred by it in
performing its obligations under the administration agreement, including
rent, the fees and expenses associated with performing compliance
functions, and our allocable portion of the cost of our Chief Financial
Officer and Chief Compliance Officer and their respective staffs.
On June 12, 2020 , the Company entered into the Expense Support Agreement with
MCC Advisors and Medley LLC , pursuant to which MCC Advisors and Medley LLC
agreed (jointly and severally) to cap the management fee and all of the
Company's other operating expenses (except interest expenses, certain
extraordinary strategic transaction and expenses, and other expenses approved by
the Special Committee) at $667,000 per month (the "Cap"). Under the Expense
Support Agreement, the Cap became effective on June 1, 2020 and was to expire on
September 30, 2020 . On September 29, 2020 , the board of directors, including all
of the independent directors, extended the term of the Expense Support Agreement
through the end of quarter ending December 31, 2020 . The Expense Support
Agreement expired by its terms at the close of business on December 31, 2020 , in
connection with the adoption of the internalized management structure by the
board of directors.
60
In addition, we have adopted a formal business code of conduct and ethics that
governs the conduct of our CEO, CFO, chief accounting officer (which role is
currently fulfilled by our CFO) and controller (Covered Officers). Our officers
and directors also remain subject to the duties imposed by both the 1940 Act and
the Delaware General Corporation Law. Our Code of Business Conduct and Ethics
requires that all Covered Officers promote honest and ethical conduct, including
the ethical handling of actual or apparent conflicts of interest between an
individual's personal and professional relationships. Pursuant to our Code of
Business Conduct and Ethics, each Covered Officer must disclose to the Company's
CCO any conflicts of interest, or actions or relationships that might give rise
to a conflict. Any approvals or waivers under our Code of Business Conduct and
Ethics must be considered by the disinterested directors.
Investment Management Agreement
We entered into an investment management agreement withMCC Advisors onJanuary 11, 2011 (the "Investment Management Agreement"), which expiredDecember 31, 2020 .
Under the terms of the Investment Management Agreement,
? determined the composition of our portfolio, the nature and timing of thechanges to our portfolio and the manner of implementing such changes;
? identified, evaluated and negotiated the structure of the investments we
made (including performing due diligence on our prospective portfolio
companies); and
? executed, closed, monitored and administered the investments we made,
including the exercise of any voting or consent rights.
Pursuant to the Investment Management Agreement, we paidMCC Advisors a fee for investment advisory and management services consisting of a base management
fee and a two-part incentive fee.
OnDecember 3, 2015 ,MCC Advisors recommended and, in consultation with the Board, agreed to reduce fees under the Investment Management Agreement. BeginningJanuary 1, 2016 , the base management fee was reduced to 1.50% on gross assets above$1 billion . In addition,MCC Advisors reduced its incentive fee from 20% on pre-incentive fee net investment income over an 8% hurdle, to 17.5% on pre-incentive fee net investment income over a 6% hurdle. Moreover, the revised incentive fee includes a netting mechanism and is subject to a rolling three-year look back fromJanuary 1, 2016 forward. Under no circumstances would the new fee structure result in higher fees toMCC Advisors than fees under the prior investment management agreement. The following discussion of our base management fee and two-part incentive fee reflect the terms of the fee waiver agreement executed byMCC Advisors onFebruary 8, 2016 (the "Fee Waiver Agreement"). The terms of the Fee Waiver Agreement were effective as ofJanuary 1, 2016 , and were a permanent reduction in the base management fee and incentive fee on net investment income payable toMCC Advisors for the investment advisory and management services it provided under the Investment Management Agreement. The Fee Waiver Agreement did not change the second component of the incentive fee, which was the incentive fee on capital gains.
OnJanuary 15, 2020 , the Company's board of directors, including all of the independent directors, approved the renewal of the Investment Management Agreement through the later ofApril 1, 2020 or so long as the Amended and Restated Agreement and Plan of Merger, dated as ofJuly 29, 2019 (the "Amended MCC Merger Agreement"), by and between the Company and Sierra (the "Amended MCC Merger Agreement") was in effect, but no longer than a year; provided that, if the Amended MCC Merger Agreement is terminated by Sierra, then the termination of the Investment Management Agreement would be effective on the 30th day following receipt of Sierra's notice of termination to the Company. OnMay 1, 2020 , the Company received a notice of termination of the Amended MCC Merger Agreement from Sierra. Under the Amended MCC Merger Agreement, either party was permitted, subject to certain conditions, to terminate the Amended MCC Merger Agreement if the merger was not consummated byMarch 31, 2020 . Sierra elected to do so onMay 1, 2020 . As result of the termination by Sierra of the Amended MCC Merger Agreement onMay 1, 2020 , the Investment Management Agreement would have been terminated effective as ofMay 31, 2020 . OnMay 21, 2020 , the Board, including all of the independent directors, extended the term of the Investment Management Agreement through the end of the then-current quarter,June 30, 2020 . OnJune 12, 2020 , the Board, including all of the independent directors, extended the term of the Investment Management Agreement throughSeptember 30, 2020 . OnSeptember 29, 2020 , the Board, including all of the independent directors, extended the term of the Investment Management Agreement throughDecember 31, 2020 . Mr.Brook Taube , Chairman and Chief Executive Officer throughDecember 31, 2020 and director throughJanuary 21, 2021 and Mr.Seth Taube , director throughJanuary 21, 2021 are affiliated withMCC Advisors and Medley. 61 OnNovember 18, 2020 , the Board approved the adoption of an internalized management structure effectiveJanuary 1, 2021 . The new management structure replaces the current Investment Management and Administration Agreements withMCC Advisors LLC , which expired onDecember 31, 2020 . To lead the internalized management team, the Board approved the appointment ofDavid Lorber , who had served as an independent director of the Company sinceApril 2019 , as interim Chief Executive Officer, andEllida McMillan as Chief Financial Officer of the Company, each effectiveJanuary 1, 2021 . In connection with his appointment,Mr. Lorber stepped down from the Compensation Committee of the Board, theNominating and Corporate Governance Committee of the Board, and the Special Committee
of the Board. Base Management Fee
ThroughDecember 31, 2020 , for providing investment advisory and management services to us,MCC Advisors received a base management fee. The base management fee was calculated at an annual rate of 1.75% (0.4375% per quarter) of up to$1.0 billion of the Company's gross assets and 1.50% (0.375% per quarter) of any amounts over$1.0 billion of the Company's gross assets and was payable quarterly in arrears. The base management fee was to be calculated based on the average value of the Company's gross assets at the end of the two most recently completed calendar quarters and was to be appropriately pro-rated for any partial quarter. Incentive Fee
Through
Incentive Fee Based on Income
The first component of the incentive fee was payable quarterly in arrears and was based on our pre-incentive fee net investment income earned during the calendar quarter for which the incentive fee was being calculated.MCC Advisors was entitled to receive the incentive fee on net investment income from us if our Ordinary Income (as defined below) exceeded a quarterly "hurdle rate" of 1.5%. The hurdle amount was calculated after making appropriate adjustments to the Company's net assets, as determined as of the beginning of each applicable calendar quarter, in order to account for any capital raising or other capital actions as a result of any issuances by the Company of its common stock (including issuances pursuant to our dividend reinvestment plan), any repurchase by the Company of its own common stock, and any dividends paid by the Company, each as may have occurred during the relevant quarter. The second component of the incentive fee was determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Management Agreement as of the termination date) and equaled 20.0% of our cumulative aggregate realized capital gains less cumulative realized capital losses, unrealized capital depreciation (unrealized depreciation on a gross investment-by-investment basis at the end of each calendar year) and all capital gains upon which prior performance-based capital gains incentive fee payments were previously made to the investment adviser. Critical Accounting Policies The preparation of financial statements and related disclosures in conformity withU.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified the following items as critical accounting policies. 62
Valuation of Portfolio Investments
The Company follows ASC 820 for measuring the fair value of portfolio
investments. Fair value is the price that would be received in the sale of an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. Where available, fair value is based on
observable market prices or parameters, or derived from such prices or
parameters. Where observable prices or inputs are not available, valuation
models are applied. These valuation models involve some level of management
estimation and judgment, the degree of which is dependent on the price
transparency for the instruments or market and the instruments' complexity. The
Company's fair value analysis includes an analysis of the value of any unfunded
loan commitments. Financial investments recorded at fair value in the
consolidated financial statements are categorized for disclosure purposes based
upon the level of judgment associated with the inputs used to measure their
value. The valuation hierarchical levels are based upon the transparency of the
inputs to the valuation of the investment as of the measurement date.
Investments which are valued using NAV as a practical expedient are excluded
from this hierarchy, and certain prior period amounts have been reclassified to
conform to the current period presentation. The three levels are defined below:
? Level 1 - Valuations based on quoted prices in active markets for
identical assets or liabilities at the measurement date.
? Level 2 - Valuations based on inputs other than quoted prices in active
markets included in Level 1, which are either directly or indirectly
observable at the measurement date. This category includes quoted prices
for similar assets or liabilities in active markets, quoted prices foridentical or similar assets or liabilities in non-active markets including
actionable bids from third parties for privately held assets or
liabilities, and observable inputs other than quoted prices such as yield
curves and forward currency rates that are entered directly into valuation
models to determine the value of derivatives or other assets or
liabilities.
? Level 3 - Valuations based on inputs that are unobservable and where there
is little, if any, market activity at the measurement date. The inputs for
the determination of fair value may require significant management
judgment or estimation and are based upon management's assessment of the
assumptions that market participants would use in pricing the assets or
liabilities. These investments include debt and equity investments in
private companies or assets valued using the Market or Income Approach and
may involve pricing models whose inputs require significant judgment or
estimation because of the absence of any meaningful current market data
for identical or similar investments. The inputs in these valuations may
include, but are not limited to, capitalization and discount rates, beta
and EBITDA multiples. The information may also include pricing information
or broker quotes which include a disclaimer that the broker would not be
held to such a price in an actual transaction. The non-binding nature of
consensus pricing and/or quotes accompanied by disclaimer would result in
classification as Level 3 information, assuming no additional
corroborating evidence.
We value investments for which market quotations are readily available at their
market quotations, which are generally obtained from an independent pricing
service or multiple broker-dealers or market makers. We weight the use of
third-party broker quotes, if any, in determining fair value based on our
understanding of the level of actual transactions used by the broker to develop
the quote and whether the quote was an indicative price or binding offer.
However, a readily available market value is not expected to exist for many of
the investments in our portfolio, and we value these portfolio investments at
fair value as determined in good faith by our board of directors under our
valuation policy and process. We may seek pricing information with respect to
certain of our investments from pricing services or brokers or dealers in order
to value such investments.
Valuation methods may include comparisons of financial ratios of the portfolio
companies that issued such private equity securities to peer companies that are
public, the nature and realizable value of any collateral, the portfolio
company's ability to make payments and its earnings and discounted cash flows,
the markets in which the portfolio company does business, and other relevant
factors. When an external event such as a purchase transaction, public offering
or subsequent equity sale occurs, we will consider the pricing indicated by the
external event to corroborate the private equity valuation. 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 the investments may differ
significantly from the values that would have been used had a readily available
market value existed for such investments, and the differences could be
material.
63
Our board of directors is ultimately and solely responsible for determining the fair value of the investments in our portfolio that are not publicly traded, whose market prices are not readily available on a quarterly basis or any other situation where portfolio investments require a fair value determination.
With respect to investments for which market quotations are not readily available, our board of directors undertake a multi-step valuation process each quarter, as described below:
? Our quarterly valuation process generally begins with each investment
being initially valued by a Valuation Firm.
? Preliminary valuation conclusions will then be documented and discussed
with senior management.
? The audit committee of the board of directors reviews the preliminary
valuations with management and the Valuation Firms.
? The board of directors discusses the valuations and determines the fairvalue of each investment in the Company's portfolio in good faith based on
the input of management, the respective Valuation Firms and the audit
committee.
In following these approaches, the types of factors that are taken into account
in fair value pricing investments include available current market data,
including relevant and applicable market trading and transaction comparables;
applicable market yields and multiples; security covenants; call protection
provisions; information rights; the nature and realizable value of any
collateral; the portfolio company's ability to make payments; the portfolio
company's earnings and discounted cash flows; the markets in which the portfolio
company does business; comparisons of financial ratios of peer companies that
are public; comparable merger and acquisition transactions; and the principal
market and enterprise values.
Determination of fair values involves subjective judgments and estimates made by
management. The notes to our financial statements refer to the uncertainty with
respect to the possible effect of such valuations, and any change in such
valuations, on our consolidated financial statements.
Revenue Recognition
Our revenue recognition policies are as follows:
Investments and Related Investment Income We account for investment transactions
on a trade-date basis and interest income, adjusted for amortization of premiums
and accretion of discounts, is recorded on an accrual basis. For investments
with contractual PIK interest, which represents contractual interest accrued and
added to the principal balance that generally becomes due at maturity, we will
not accrue PIK interest if the portfolio company valuation indicates that the
PIK interest is not collectible. Origination, closing and/or commitment fees
associated with investments in portfolio companies are recognized as income when
the investment transaction closes. Other fees are capitalized as deferred
revenue and recorded into income over the respective period. Prepayment
penalties received by the Company for debt instruments paid back to the Company
prior to the maturity date are recorded as income upon receipt. Realized gains
or losses on investments are measured by the difference between the net proceeds
from the disposition and the amortized cost basis of investment, without regard
to unrealized gains or losses previously recognized. We report changes in the
fair value of investments that are measured at fair value as a component of the
net change in unrealized appreciation/(depreciation) on investments in our
Consolidated Statements of Operations.
64
Non-accrual We place loans on non-accrual status when principal and interest
payments are past due by 90 days or more, or when there is reasonable doubt that
we will collect principal or interest. Accrued interest is generally reversed
when a loan is placed on non-accrual. Interest payments received on non-accrual
loans may be recognized as income or applied to principal depending upon
management's judgment. Non-accrual loans are restored to accrual status when
past due principal and interest is paid and, in our management's judgment, are
likely to remain current. At March 31, 2022 , certain investments in six
portfolio companies held by the Company were on non-accrual status with a
combined fair value of approximately $12.8 million , or 6.8% of the fair value of
our portfolio. At September 30, 2021 , certain investments in nine portfolio
companies held by the Company were on non-accrual status with a combined fair
value of approximately $13.9 million , or 9.2% of the fair value of our
portfolio.
Federal Income Taxes
The Company has elected, and intends to qualify annually, to be treated forU.S. federal income tax purposes as a RIC under Subchapter M of the Code and it intends to operate in a manner so as to maintain its RIC tax treatment. To do so, among other things, the Company is required to meet certain source of income and asset diversification requirements and must timely distribute to its stockholders at least 90% of the sum of investment company taxable income ("ICTI") including PIK, as defined by the Code, and net tax exempt interest income (which is the excess of our gross tax exempt interest income over certain disallowed deductions) for each taxable year. The Company will be subject to a nondeductibleU.S. federal excise tax of 4% on undistributed income if it does not distribute at least 98% of its net ordinary income for any calendar year and 98.2% of its capital gain net income for each one-year period ending onOctober 31 of such calendar year and any income realized, but not distributed, in preceding years and on which it did not pay federal income tax. Depending on the level of ICTI earned in a tax year, the Company may choose to carry forward ICTI in excess of current year dividend distributions into the next tax year and pay a 4% excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions for excise tax purposes, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned. Any such carryover ICTI must be distributed before the end of that next tax year through a dividend declared prior to filing the final tax return related to the year which generated such ICTI. Because federal income tax requirements differ from GAAP, distributions in accordance with tax requirements may differ from net investment income and realized gains recognized for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the consolidated financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain or loss are recognized at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes. Recent Developments
Under the share repurchase program, the Company repurchased an aggregate of
3,991 shares of common stock through
OnMay 9, 2022 , the Board of Directors (the "Board") of the Company adopted thePhenixFIN 2022 Long-Term Cash Incentive Plan (the "CIP"), pursuant to the recommendation by the Compensation Committee of the Board (the "Committee"). See Part II, Item 5 (Other Information) of this quarterly report on Form 10-Q for more information.
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