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 rate
environment 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 and regulatory,
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: including
its impact on the global and
economy; the length and duration of the COVID-19 outbreak in
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 the
disruptions 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; the ability 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 our existing 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. 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" 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 theSEC , including quarterly reports on Form 10-Q, registration statements on Form N-2, annual reports on Form 10-K, and current reports on Form 8-K. 60 COVID-19 Developments COVID-19 has 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, includingthe 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 are closely monitoring 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 immediate 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 was 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 fromJune 30, 2021 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 endedJune 30, 2021 , 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 withU.S. 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 ofJune 30, 2021 ), any valuations conducted now or in the future in conformity withU.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 have adversely affected the performance of the Company and may continue to do so in the future. Further, the potential exists for variants of COVID-19, including the Delta variant,to impede the global economic recovery and exacerbate geographic differences in the spread of, and response to, COVID-19. Overview
We are a 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 forU.S. federal income tax purposes as a RIC under Subchapter M of the Code. ThroughDecember 31, 2020 , we were an externally managed company. OnNovember 18, 2020 , the board of directors of the Company approved the adoption of an internalized management structure, effectiveJanuary 1, 2021 . SinceJanuary 1, 2021 , we have operated under such internalized management structure. We commenced operations and completed our initial public offering onJanuary 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 publicU.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. 61
NYSE Continued Listing Status
OnApril 10, 2020 , the Company received written notification, from the NYSE that it was not in compliance with an NYSE continued listing standard in Section 802.01C of the NYSE Listed Company Manual ("Section 802.01C") because the average closing price of the Company's common stock over a period of 30 consecutive trading days was below$1.00 per share. The Company could regain compliance with Section 802.01C at any time during the six-month cure period if, on the last trading day of any calendar month during the cure period, it had (i) a closing share price of at least$1.00 per share and (ii) an average closing price of at least$1.00 per share over the 30 trading-day period ending on the last trading day of that month. As described in detail below, the Company effected the Reverse Stock Split (as defined below), effective as ofJuly 24, 2020 , which brought the Company into compliance with Section 802.01C. 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."
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). 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 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;
62
? administration fees payable under our administration agreement with
Bancorp;
? amounts payable to third parties relating to, or associated with, making
investments;
? transfer agent and custodial fees;
? registration fees and listing fees;
?
? independent director fees and expenses;
? costs of preparing and filing reports or other documents with the
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. Expense Support Agreement OnJune 12, 2020 , the Company entered into an expense support agreement (the "Expense Support Agreement") withMCC Advisors andMedley LLC , pursuant to whichMCC Advisors andMedley 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 onJune 1, 2020 and was to expire onSeptember 30, 2020 . OnSeptember 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 endingDecember 31, 2020 . The Expense Support Agreement expired by its terms at the close of business onDecember 31, 2020 , in connection with the adoption of the internalized management structure by the board of directors. For the three months endedDecember 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 endedDecember 31, 2020 and due fromMCC 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 endedMarch 31, 2021 . See "Note 6" for more information.
Portfolio and Investment Activity
As of
During the nine months endedJune 30, 2021 , we received proceeds from sale and settlements of investments of$87.8 million , including principal and dividend proceeds, realized net losses on investments of$46.5 million , and invested$31.0 million , of which$8.6 million was invested in seven new portfolio companies and one new security in an existing portfolio company during the quarter.
For the nine months ended
The following table summarizes the amortized cost and the fair value of our
average portfolio company, including until its sale on
June 30, 2021 September 30, 2020
Amortized Cost Fair Value Amortized Cost Fair ValueAverage portfolio company $ 3,366$ 3,707 $ 7,813$ 5,875 Largest portfolio company 19,469 33,383 37,987 40,807 63
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$ 165,696 73.4 %$ 90,280 49.6 % Senior Secured Second Lien Term Loans 2,600 1.2
2,483 1.4
Senior Secured Notes 3,757 1.7 3,726 2.1
Unsecured Debt 3,846 1.7 2,110 1.2
Equity/Warrants 49,631 22.0 83,020 45.7
Total Investments $ 225,530 100.0 % $ 181,619 100.0 %
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$ 178,843 54.5 %$ 106,463 43.2 % Senior Secured Second Lien Term Loans 15,476 4.7 13,927 5.6 Unsecured Debt 4,601 1.4 2,669 1.1 MCC Senior Loan Strategy JV I LLC 79,888 24.4
41,019 16.6
Equity/Warrants 49,327 15.0 82,666 33.5
Total $ 328,135 100.0 % $ 246,744 100.0 %
As of June 30, 2021 , our income-bearing investment portfolio represented 67.7%
of our total portfolio of which 71.2% bore interest based on floating rates,
such as the London Interbank Offering Rate ("LIBOR"), while 28.8% bore interest
at fixed rates. As of June 30, 2021 , the weighted average yield based upon cost
of our total portfolio was approximately 8.7%. The weighted average yield of
our total portfolio does not represent the total return to our stockholders.
MCC Advisors , while serving as our investment adviser, rated the risk profile of
each of our investments based on the following categories, which was referred to
as MCC Advisors' investment credit rating. The Company's new internal management
team will reassess the investments and rating system utilized.
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 impacted our investment ratings, causing downgrades of
certain portfolio companies. As the COVID-19 situation continues to evolve, 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
June 30, 2021 September 30, 2020
Fair Value Percentage Fair Value Percentage
1 $ 7,538 4.1 % $ 54,256 22.0 %
2 132,733 73.1 % 130,742 53.0 %
3 25,622 14.1 % 40,645 16.5 %
4 8,652 4.8 % 11,325 4.6 %
5 7,074 3.9 % 9,776 3.9 %
Total $ 181,619 100.0 % $ 246,744 100.0 %
64
Results of Operations
Operating results for the three and nine months ended
For the Three Months Ended For the Nine Months Ended
June 30 June 30
2021 2020 2021 2020
Total investment income $ 8,684 $ 4,309 $ 27,939 $ 17,102
Less: Net expenses 3,254 5,028 10,493 18,964
Net investment income/(loss) 5,430 (719 ) 17,446 (1,862 )
Net realized gains (losses) on
investments 61 (37,922 ) (46,485 ) (39,766 )
Net change in unrealized gains (losses)
on investments 1,478 46,906 37,479 (22,927 )
Change in provision for deferred taxes
on unrealized
(appreciation)/depreciation on
investments - 36 - (50 )
Loss on extinguishment of debt - (697 ) (122 ) (2,481 )
Net increase (decrease) in net assets
resulting
from operations $ 6,969 $ 7,604 $ 8,318 $ (67,086 )
Investment Income
For the three months ended June 30, 2021 , investment income totaled $8.7
million , of which $8.6 million was attributable to portfolio interest and
dividend income, and $0.1 million was attributable to fee income. For the nine
months ended June 30, 2021 , investment income totaled $27.9 million , of which
$27.2 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 from six investments.
For the three months ended June 30, 2020 , investment income totaled $4.3
million , of which $4.1 million was attributable to portfolio interest and
dividend income, and $0.2 million was attributable to fee income. For the nine
months ended June 30, 2020 , investment income totaled $17.1 million , of which
$16.5 million was attributable to portfolio interest and dividend income, and
$0.6 million was attributable to fee income.
Operating Expenses
Operating expenses for the three and nine months ended
For the Three Months Ended For the Nine Months Ended
June 30 June 30
2021 2020 2021 2020
Base management fees $ - $ 1,317 $ 1,146 $ 4,967
Interest and financing expenses 1,261 2,736 4,539 12,312
General and administrative 294 540 856 3,140
Salary and Benefit 679 - 1,012 -
Administrator expenses 107 615 546 1,743
Insurance 445 334 1,404 988
Directors fees 179 347 875 960
Professional fees, net 289 (512 ) 114 (4,797 )
Expenses before waivers and reimbursements 3,254 5,377 10,492 19,313
Expense support reimbursement - (349 ) - (349 )
Expenses, net of waivers and reimbursements 3,254 5,028 10,492 18,964
For the three months ended June 30, 2021 , total operating expenses before
management and incentive fee waivers and expense support reimbursements
decreased by $2.1 million , or 39.5%, compared to the three months ended June 30,
2020 . For the nine months ended June 30, 2021 , total operating expenses before
management and incentive fee waivers and expense support reimbursements
decreased by $8.8 million , or 45.7%, compared to the nine months ended June30, 2020. For the three months endedJune 30, 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. For the three months endedJune 30, 2021 , operating expenses decreased by$0.8 million or 19.9%, compared to the three months endedJune 30, 2020 , net of management and incentive fee waivers and expense support reimbursements. For the nine months endedJune 30, 2021 , operating expenses decreased by$5.0 million or 34.9%, compared to the nine months endedJune 30, 2020 , net of management and incentive fee waivers and expense support reimbursements. 65
Interest and Financing Expenses
Interest and financing expenses for the three months endedJune 30, 2021 decreased by$1.5 million , or 53.9%, compared to the three months endedJune 30, 2020 . The decrease in interest and financing expenses was primarily due to the Company's$74.0 million repayment of the 2021 Notes onNovember 20, 2020 and the full repayment of$120.2 million Series A Israeli Notes offered inIsrael (the "Israeli Notes") betweenAugust 12, 2019 andApril 14, 2020 . Interest and financing expenses for the nine months endedJune 30, 2021 decreased by$7.8 million , or 63.1%, compared to the nine months endedJune 30, 2020 . The decrease in interest and financing expenses was primarily due to the Company's$74.0 million repayment of the 2021 Notes onNovember 20, 2020 and the full repayment of$120.2 million Series A Israeli Notes offered inIsrael (the "Israeli Notes") betweenAugust 12, 2019 andApril 14, 2020 .
Base Management Fees and Incentive Fees
Base management fees for the three months endedJune 30, 2021 decreased by$1.3 million , or 100%, compared to the three months endedJune 30, 2020 as, sinceJanuary 1, 2021 , the Company no longer incurs management fees under its current internalized structure. Base management fees for the nine months endedJune 30, 2021 decreased by$3.8 million , or 76.9%, compared to the nine months endedJune 30, 2020 as, sinceJanuary 1, 2021 , the Company no longer incurs management fees under its current internalized structure.
No incentive fees were paid for the three and nine months ended
Professional Fees and Other General and Administrative Expenses
Professional fees and general and administrative expenses for the three months endedJune 30, 2021 increased by$0.6 million compared to the three months endedJune 30, 2020 primarily due to a decrease in the insurance proceeds received in 2021 which offset legal expenses. Professional fees and general and administrative expenses for the nine months endedJune 30, 2021 increased by$2.6 million , or 158.6%, compared to the nine months endedJune 30, 2020 primarily due to a decrease in the insurance proceeds received in 2021 which offset legal expenses.
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 endedJune 30, 2021 , we recognized$0.1 million of realized gains on our portfolio investments. The realized gains were primarily due to the sale of one investment. During the nine months endedJune 30, 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. During the three months endedJune 30, 2020 , we recognized$37.9 million of realized losses on our portfolio investments. The realized losses were primarily due to the sale of two investments and the partial sale of two investments. During the nine months endedJune 30, 2020 , we recognized$39.8 million of realized losses on our portfolio investments. The realized losses were primarily due to the sale of three investments.
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 months ended
During the nine months endedJune 30, 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 . During the three months endedJune 30, 2020 , the Company recognized a net loss on extinguishment of debt of$0.7 million , which was due to the Company's$21.1 million repayment of the Israeli Notes onApril 14, 2020 . During the nine months endedJune 30, 2020 , the Company recognized a net loss on extinguishment of debt of$2.5 million , which was due to the Company's$34.1 million repayment of the Israeli Notes onMarch 31, 2020 and$21.1 million repayment of the Israeli Notes onApril 14, 2020 . 66
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 endedJune 30, 2021 , we had$1.5 million of net unrealized appreciation on investments. The net unrealized appreciation was comprised of$7.9 million of net unrealized depreciation on investments and$9.4 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. For the nine months endedJune 30, 2021 , we had$37.4 million of net unrealized appreciation on investments. The net unrealized appreciation was comprised of$39.4 million of net unrealized depreciation on investments and$76.8 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 three months endedJune 30, 2020 , we had$46.9 million of net unrealized appreciation on investments. The net unrealized appreciation was comprised of$18.2 million of net unrealized appreciation on investments and$28.7 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 nine months endedJune 30, 2020 , we had$22.9 million of net unrealized depreciation on investments. The net unrealized depreciation was comprised of$53.7 million of net unrealized depreciation on investments offset by$30.8 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.
Changes in Net Assets from Operations
For the three months endedJune 30, 2021 , we recorded a net increase in net assets resulting from operations of$7.0 million compared to a net increase in net assets resulting from operations of$7.6 million for the three months endedJune 30, 2020 . This increase takes into account increased net income and net capital appreciation for the period, each as described above. Based on 2,683,093 and 2,723,711 weighted average common shares outstanding for the three months endedJune 30, 2021 and 2020, respectively, our per share net increase in net assets resulting from operations was$2.60 for the three months endedJune 30, 2021 and an increase of$2.79 for the three months endedJune 30, 2020 . For the nine months endedJune 30, 2021 , we recorded a net increase in net assets resulting from operations of$8.3 million compared to a net decrease in net assets resulting from operations of$67.1 million for the nine months endedJune 30, 2020 . This increase takes into account increased net income and net capital appreciation for the period, each as described above. Based on 2,707,794 and 2,723,711 weighted average common shares outstanding for the nine months endedJune 30, 2021 and 2020, respectively, our per share net increase in net assets resulting from operations was$3.07 for the nine months endedJune 30, 2021 and a decrease of$24.63 for the nine months endedJune 30, 2020 .
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 have been generated primarily from the net proceeds of public offerings of common stock, advances from the Revolving Credit Facility 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, 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.
67
Unsecured Notes
2021 Notes
On December 17, 2015 , the Company issued $70.8 million in aggregate principal
amount of 6.50% unsecured notes that mature on January 30, 2021 (the "2021
Notes"). On January 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 on January 30 , April 30 ,
July 30 and October 30 of each year, beginning January 30, 2016 .
On October 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 of February 7, 2012 , between the Company and U.S. Bank
National Association , as trustee, and Section 101(h) of the Third Supplemental
Indenture dated as of December 17, 2015 . The Company redeemed $74,012,825 in
aggregate principal amount of the issued and outstanding 2021 Notes on November
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 from October 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$0.4 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." Secured Notes Israeli Notes
On
68
On
During the quarter endedDecember 31, 2018 , the Company exchanged$1.0 million United States Dollars to New Israeli Shekels at a rate of3.73 USD /NIS in order to repurchase the Israeli Notes on the TASE. As the Israeli Notes were trading below par at the time of the repurchase, and the USD/NIS (foreign currency) spot rate was higher than the fixed exchange rate agreed upon in the deed of trust, the Company was able to repurchase and retire 3,812,000 units, which resulted in$1,119,201 aggregate principal amount of the Israeli Notes being retired. The redemption was accounted for as a debt extinguishment in accordance with ASC 470-50, Modifications and Extinguishments, which resulted in a realized gain of$0.1 million and was recorded on the Consolidated Statements of Operations as a gain on extinguishment of debt. OnDecember 31, 2019 in addition to the scheduled 12.5% quarterly amortization payment, the Company used proceeds from its principal collections inPhenixFIN SLF and PhenixFIN Small Business Fund to pre-pay an additional$19.1 million of the Israeli Notes. The pre-payment was accounted for as a debt extinguishment in accordance with ASC 470-50, Modifications and Extinguishments, which resulted in a realized loss of$0.9 million and was recorded on the Consolidated Statements of Operations as a net loss on extinguishment of debt. OnMarch 31, 2020 , in addition to the scheduled 12.5% quarterly amortization payment, the Company used proceeds from its principal repayments in assets held byPhenixFIN SLF and PhenixFIN Small Business Fund to pre-pay an additional$19.8 million of the Israeli Notes. The pre-payment was accounted for as a debt extinguishment in accordance with ASC 470-50, Modifications and Extinguishments, which resulted in a realized loss of$0.9 million and was recorded on the Consolidated Statements of Operations as a net loss on extinguishment of debt. OnApril 14, 2020 , the Company repaid the remaining$21.1 million of Israeli Notes outstanding, and as such is no longer subject to any covenants relating thereto. The Israeli Notes were redeemed at 100% of their principal amount, plus the accrued interest thereon, throughApril 14, 2020 . 69
Contractual Obligations and Off-Balance Sheet Arrangements
As ofJune 30, 2021 andSeptember 30, 2020 , we had commitments under loan and financing agreements to fund up to$5.1 million to seven portfolio companies and$3.9 million to five portfolio companies, respectively. These commitments are primarily composed of senior secured term loans and revolvers, and the determination of their fair value is included in the Consolidated Schedule of Investments. The commitments are generally subject to the borrowers meeting certain criteria such as compliance with covenants and certain operational metrics. The terms of the borrowings and financings subject to commitment are comparable to the terms of other loan and equity securities in our portfolio. A summary of the composition of the unfunded commitments as ofJune 30, 2021 andSeptember 30, 2020 is shown in the table below (dollars in thousands):June 30 ,September 30, 2021 2020
Redwood Services Group, LLC - Revolver$ 1,575 $
1,050
1888Industrial Services, LLC - Revolver 1,078
1,078
Alpine SG - Revolver 1,000
-
Kemmerer Operations, LLC - Delayed Draw Term Loan 908
908
NVTN LLC - DDTL 220
220
Black Angus Steakhouses, LLC - Super Priority DDTL 167
-
DataOnline Corp. - Revolver 107
179
NVTN LLC - Super Priority DDTL -
500
Total unfunded commitments $ 5,055 $ 3,935
We entered into an investment management agreement with MCC Advisors (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.
The Investment Management Agreement and administration agreement expired at the
close of business on
The following table shows our payment obligations for repayment of debt and
other contractual obligations at
Payments Due by Period
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
2023 Notes $ (77,846,800 ) $ - $
(77,846,800 ) $ - $ -
Total contractual obligations
On
70
MCC JV commenced operations on July 15, 2015 . On August 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 . On March 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. On March 29, 2019 , the JV Facility
reinvestment period was extended to June 28, 2019 from March 30, 2019 . On June
28, 2019 , the JV Facility reinvestment period was extended to October 28, 2019 .
On October 28, 2019 , the JV Facility reinvestment period was further extended
from October 28, 2019 to March 31, 2020 , the maturity date was extended to March
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.
On October 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 from July 1,
2020 through October 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
on October 8, 2020 , MCC JV repaid in full all outstanding borrowings under, and
terminated, its senior secured revolving credit facility, dated as of August 4,
2015 , as amended, administered by Deutsche Bank AG, New York Branch.
Distributions
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. 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 to U.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 to U.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, including the federal
excise tax described below.
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.
71
There were no dividend distributions during the nine 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
expired
Officer through
Advisors and Medley.
? Through
and administrative services necessary to conduct day-to-day operations pursuant
to our administration agreement. We reimbursed
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. OnJune 12, 2020 , the Company entered into the Expense Support Agreement withMCC Advisors andMedley LLC , pursuant to whichMCC Advisors andMedley 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 onJune 1, 2020 and was to expire onSeptember 30, 2020 . OnSeptember 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 endingDecember 31, 2020 . The Expense Support Agreement expired by its terms at the close of business onDecember 31, 2020 , in connection with the adoption of the internalized management structure by the board of directors.
OnNovember 25, 2013 , the Company obtained an exemptive order from theSEC that permits us to participate in negotiated co-investment transactions with certain affiliates, each of whose investment adviser isMedley, LLC or an investment adviser controlled byMedley, LLC in a manner consistent with our investment objective, strategies and restrictions, as well as regulatory requirements and other pertinent factors (the "Prior Exemptive Order"). OnMarch 29, 2017 , the Company,MCC Advisors and certain other affiliated funds and investment advisers received an exemptive order (the "Exemptive Order") that supersedes the Prior Exemptive Order and allows affiliated registered investment companies to participate in co-investment transactions with us that would otherwise have been prohibited under Section 17(d) and 57(a)(4) of the 1940 Act and Rule 17d-1 thereunder. OnOctober 4, 2017 , the Company,MCC Advisors and certain of our affiliates received an exemptive order that supersedes the Exemptive Order (the "Current Exemptive Order") and allows, in addition to the entities already covered by the Exemptive Order,Medley LLC and its subsidiary,Medley Capital LLC , to the extent they hold financial assets in a principal capacity, and any direct or indirect, wholly or majority owned subsidiary ofMedley LLC that is formed in the future, to participate in co-investment transactions with us that would otherwise be prohibited by either or both of Sections 17(d) and 57(a)(4) of the 1940 Act. However, neither we nor the affiliated funds are obligated to invest or co-invest when investment opportunities are referred to us or them. The Company does not expect to avail itself of the current exemptive order, given the internalization and termination of the Investment Management Agreement. In addition, we have adopted a formal code of ethics that governs the conduct of our officers, directors, employees and certain other individuals. Our officers and directors also remain subject to the duties imposed by both the 1940 Act and the Delaware General Corporation Law.
Investment Management Agreement
We entered into an investment management agreement withMCC Advisors (the "Investment Management Agreement"), which expiredDecember 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.
Under the terms of the Investment Management Agreement,
? determined the composition of our portfolio, the nature and timing of the
changes 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. 72
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 15, 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,September 30, 2020 . OnSeptember 29 , the Board, including all of the independent directors, extended the term of the Investment Management Agreement throughDecember 31, 2020 . 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 has 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. Beginning with the calendar quarter that commenced onJanuary 1, 2016 , the incentive fee on net investment income was determined and paid quarterly in arrears at the end of each calendar quarter by reference to our aggregate net investment income, as adjusted as described below, from the calendar quarter then ending and the eleven preceding calendar quarters (or if shorter, the number of quarters that have occurred sinceJanuary 1, 2016 ). We refer to such period as the "Trailing Twelve Quarters." The hurdle amount for the incentive fee on net investment income was determined on a quarterly basis and was equal to 1.5% multiplied by the Company's net asset value at the beginning of each applicable calendar quarter comprising the relevant Trailing Twelve Quarters. 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 incentive fee for any partial period was to be appropriately pro-rated. Any incentive fee on net investment income was to be paid toMCC Advisors on a quarterly basis and was to be based on the amount by which (A) aggregate net investment income ("Ordinary Income") in respect of the relevant Trailing Twelve Quarters exceeded (B) the hurdle amount for such Trailing Twelve Quarters. The amount of the excess of (A) over (B) described in this paragraph for such Trailing Twelve Quarters is referred to as the "Excess Income Amount." For the avoidance of doubt, Ordinary Income was net of all fees and expenses, including the reduced base management fee but excluding any incentive fee on Pre-Incentive Fee net investment income or on the Company's capital gains.
73
Determination of Quarterly Incentive Fee Based on Income
The incentive fee on net investment income for each quarter was determined as follows:
? No incentive fee on net investment income was payable to
calendar quarter for which there was no Excess Income Amount;
? 100% of the Ordinary Income, if any, that exceeded the hurdle amount, but was
less than or equal to an amount, which we refer to as the "Catch-up Amount,"
determined as the sum of 1.8182% multiplied by the Company's net assets at the
beginning of each applicable calendar quarter, as adjusted as noted above,
comprising the relevant Trailing Twelve Quarters was included in the
calculation of the incentive fee on net investment income; and
? 17.5% of the Ordinary Income that exceeds the Catch-up Amount was included in
the calculation of the incentive fee on net investment income. The amount of the incentive fee on net investment income that was to be paid toMCC Advisors for a particular quarter would equal the excess of the incentive fee so calculated minus the aggregate incentive fees on net investment income that were paid in respect of the first eleven calendar quarters (or the portion thereof) included in the relevant Trailing Twelve Quarters but not in excess of the IncentiveFee Cap (as described below). The incentive fee on net investment income that was paid toMCC Advisors for a particular quarter was subject to a cap (the "IncentiveFee Cap "). The IncentiveFee Cap for any quarter was an amount equal to (a) 17.5% of the Cumulative Net Return (as defined below) during the relevant Trailing Twelve Quarters minus (b) the aggregate incentive fees on net investment income that were paid in respect of the first eleven calendar quarters (or the portion thereof) included in the relevant Trailing Twelve Quarters. "Cumulative Net Return" means (x) the Ordinary Income in respect of the relevant Trailing Twelve Quarters minus (y) any Net Capital Loss (as described below), if any, in respect of the relevant Trailing Twelve Quarters. If, in any quarter, the IncentiveFee Cap was zero or a negative value, the Company would pay no incentive fee on net investment income toMCC Advisors for such quarter. If, in any quarter, the IncentiveFee Cap for such quarter was a positive value but is less than the incentive fee on net investment income that was payable toMCC Advisors for such quarter (before giving effect to the IncentiveFee Cap ) calculated as described above, the Company would pay an incentive fee on net investment income toMCC Advisors equal to the IncentiveFee Cap for such quarter. If, in any quarter, the IncentiveFee Cap for such quarter was equal to or greater than the incentive fee on net investment income that was payable toMCC Advisors for such quarter (before giving effect to the IncentiveFee Cap ) calculated as described above, the Company would pay an incentive fee on net investment income toMCC Advisors , calculated as described above, for such quarter without regard to the IncentiveFee Cap . "Net Capital Loss" in respect of a particular period means the difference, if positive, between (i) aggregate capital losses, whether realized or unrealized, and dilution to the Company's net assets due to capital raising or capital actions, in such period and (ii) aggregate capital gains, whether realized or unrealized and accretion to the Company's net assets due to capital raising or capital action, in such period. Dilution to the Company's net assets due to capital raising was calculated, in the case of issuances of common stock, as the amount by which the net asset value per share was adjusted over the transaction price per share, multiplied by the number of shares issued. Accretion to the Company's net assets due to capital raising was calculated, in the case of issuances of common stock (including issuances pursuant to our dividend reinvestment plan), as the excess of the transaction price per share over the amount by which the net asset value per share was adjusted, multiplied by the number of shares issued. Accretion to the Company's net assets due to other capital action was calculated, in the case of repurchases by the Company of its own common stock, as the excess of the amount by which the net asset value per share was adjusted over the transaction price per share multiplied by the number of shares repurchased by the Company. For the avoidance of doubt, the purpose of the incentive fee calculation under the Fee Waiver Agreement was to permanently reduce aggregate fees payable toMCC Advisors by the Company, effective as ofJanuary 1, 2016 . In order to ensure that the Company would payMCC Advisors lesser aggregate fees on a cumulative basis, as calculated beginningJanuary 1, 2016 , we had, at the end of each quarter, also calculated the base management fee and incentive fee on net investment income owed by the Company toMCC Advisors based on the formula in place prior toJanuary 1, 2016 . If, at any time beginningJanuary 1, 2016 , the aggregate fees on a cumulative basis, as calculated based on the formula in place afterJanuary 1, 2016 , were greater than the aggregate fees on a cumulative basis, as calculated based on the formula in place prior toJanuary 1, 2016 ,MCC Advisors were only entitled to the lesser of those two amounts. 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. Under GAAP, the Company calculated the second component of the incentive fee as if the Company had realized all assets at their fair values as of the reporting date. Accordingly, when applicable, the Company accrued a provisional capital gains incentive fee taking into account any unrealized gains or losses. As the provisional capital gains incentive fee was subject to the performance of investments until there was a realization event, the amount of the provisional capital gains incentive fee accrued at a reporting date may have varied from the capital gains incentive that was ultimately realized and the differences could have been material. 74 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.
Valuation of Portfolio Investments
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. 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 will undertake a multi-step valuation process each quarter, as described below:
? our quarterly valuation process begins with each portfolio investment being
initially valued by one or more Valuation Firms;
? 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; and
? the board of directors discusses the valuations and determines the fair value
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.
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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 June 30, 2021 , certain investments in ten portfolio
companies held by the Company were on non-accrual status with a combined fair
value of approximately $13.6 million , or 7.5% of the fair value of our
portfolio. At September 30, 2020 , certain investments in eight portfolio
companies held by the Company were on non-accrual status with a combined fair
value of approximately $21.7 million , or 8.8% 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, commencing with its first taxable year as a corporation, and it intends to operate in a manner so as to maintain its RIC tax treatment. As a RIC, among other things, the Company is required to meet certain source of income and asset diversification requirements. Once qualified as a RIC, the Company must timely distribute to its stockholders at least 90% of the sum of investment company taxable income ("ICTI"), as defined by the Code, including PIK interest, 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 in order to be eligible for tax treatment under Subchapter M of the Code. 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 we 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 regulations differ from GAAP, distributions in accordance with tax regulations 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
Subsequent to quarter endedJune 30, 2021 , the COVID-19 pandemic continues and may further continue to have adverse consequences on theU.S. and global economies. The ultimate economic fallout from the pandemic, and the long-term impact on economies, markets, industries and individual portfolio companies, remains uncertain. The Company cannot predict the extent to which its financial condition and results of operations will be affected. The potential impact to our results will depend to an extent on future developments and new information that may emerge regarding the duration and lasting severity of COVID-19. The Company continues to observe and respond to the evolving COVID-19 environment and its potential impact on areas across its business. Further, the potential exists for variants of COVID-19, including the Delta variant,to impede the global economic recovery and exacerbate geographic differences in the spread of, and response to, COVID-19. 76
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