SILVER SPIKE INVESTMENT CORP. The following discussion and analysis or our financial condition and results of operations should be read together with the consolidated financial statements and the related notes that are included in Item 8 of Part II of this annual report on Form 10-K. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under the section entitled "Item 1A. Risk Factors." Please also see the section entitled "Special Note Regarding Forward-Looking Statements."
Overview
We are a specialty finance company formed to invest across the cannabis
ecosystem through investments in the form of direct loans to, and equity
ownership of, privately held cannabis companies. All of our investments are
designed to be compliant with all applicable laws and regulations within the
jurisdictions in which they are made or to which we are otherwise subject,
including
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SILVER SPIKE INVESTMENT CORP. financing alternatives to support buyouts, recapitalizations, growth initiatives, refinancings and acquisitions across cannabis companies, including cannabis-enabling technology companies, cannabis-related health and wellness companies, and hemp and CBD distribution companies. Under normal circumstances, each such cannabis company derives at least 50% of its revenues or profits from, or commits at least 50% of its assets to, activities related to cannabis at the time of our investment in the cannabis company. We are not required to invest a specific percentage of our assets in such cannabis companies, and we may make debt and equity investments in other companies in the health and wellness sector.
Our investment objective is to maximize risk-adjusted returns on equity for our shareholders. We will seek to capitalize on what we believe to be nascent cannabis industry growth and drive return on equity by generating current income from our debt investments and capital appreciation from our equity and equity-related investments. We intend to achieve our investment objective by investing primarily in secured debt, unsecured debt, equity warrants and direct equity investments in privately held businesses. We intend that our debt investments will often be secured by either a first or second priority lien on the assets of the portfolio company, can include either fixed or floating rate terms and will generally have a term of between three and six years from the original investment date. We expect our secured loans to be secured by various types of assets of our borrowers. While the types of collateral securing any given secured loan will depend on the nature of the borrower's business, common types of collateral we expect to secure our loans include real property and certain personal property, including equipment, inventory, receivables, cash, intellectual property rights and other assets to the extent permitted by applicable laws and the regulations governing our borrowers. Certain attractive assets of our borrowers, such as cannabis licenses and cannabis inventory, may not be able to be used as collateral or transferred to us. See "Item 1A. Risk Factors-Risks Relating to Our Investments-Certain assets of our borrowers may not be used as collateral or transferred to us due to applicable state laws and regulations governing the cannabis industry, and such restrictions could negatively impact our profitability." In some of our portfolio investments, we expect to receive nominally priced equity warrants and/or make direct equity investments in connection with a debt investment. In addition, a portion of our portfolio may be comprised of derivatives, including total return swaps.
Generally, the loans in which we expect to invest will have a complete set of financial maintenance covenants, which are used to proactively address materially adverse changes in a portfolio company's financial performance. However, to a lesser extent, we may invest in "covenant-lite" loans. We use the term "covenant-lite" to refer generally to loans that do not have a complete set of financial maintenance covenants. Generally, "covenant-lite" loans provide borrower companies more freedom to negatively impact lenders because their covenants are incurrence-based, which means they are only tested and can only be breached following an affirmative action of the borrower, rather than by a deterioration in the borrower's financial condition. Accordingly, to the extent we invest in "covenant-lite" loans, we may have fewer rights against a borrower and may have a greater risk of loss on such investments as compared to investments in or exposure to loans with a complete set of financial maintenance covenants.
The loans in which we tend to invest typically pay interest at rates which are
determined periodically on the basis of the London-Interbank Offered Rate, or
"LIBOR", or Secured Overnight Financing Rate ("SOFR"), plus a premium. The loans
in which we expect to invest are typically made to
We expect to invest in loans made primarily to private leveraged middle-market
companies with approximately
We will be externally managed by
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SILVER SPIKE INVESTMENT CORP. We were formed in
Revenues
We intend to generate revenues primarily in the form of interest income from the investments we hold. In addition, we may generate income from dividends on either direct equity investments or equity interests obtained in connection with originating loans, such as options, warrants or conversion rights. Our debt investments typically have a term of three to six years. We expect that the majority of our loan portfolio will bear interest at a floating rate, subject to interest rate floors in certain cases. Interest on our debt investments will generally be payable either monthly or quarterly.
Our investment portfolio will consist primarily of floating rate loans, and our credit facilities will bear interest at floating rates. Macro trends in base interest rates like LIBOR may affect our net investment income over the long term. However, because we generally originate loans to a small number of portfolio companies each quarter, and those investments vary in size, our results in any given period, including the interest rate on investments that were sold or repaid in a period compared to the interest rate of new investments made during that period, often are idiosyncratic, and reflect the characteristics of the particular portfolio companies that we invested in or exited during the period and not necessarily any trends in our business or macro trends.
Loan origination fees, OID and market discount or premium are capitalized, and
we accrete or amortize such amounts under accounting principles generally
accepted in
Dividend income on equity investments is recorded on the record date for private portfolio companies or on the ex-dividend date for publicly traded companies.
Our portfolio activity will also reflect the proceeds from sales of investments. We recognize realized gains or losses on investments based on the difference between the net proceeds from the disposition and the amortized cost basis of the investment without regard to unrealized gains or losses previously recognized. We record current-period changes in fair value of investments that are measured at fair value as a component of the net change in unrealized gains (losses) on investments in the Statements of Operations.
Expenses
For the reporting periods, the majority of expenses were offering and organizational costs, as the initial public offering was made during the reporting period. Going forward, our primary operating expenses will be the payment of a base management fee and any incentive fees under the Investment Advisory Agreement and the allocable portion of overhead and other expenses incurred by SSC in performing its obligations under the Administration Agreement. Our investment management fee compensates our Adviser for its work in identifying, evaluating, negotiating, executing, monitoring, servicing and realizing our investments. See "Item 1. Business-Investment Advisory Agreement."
Except as specifically provided below, all investment professionals and staff of the Adviser, when and to the extent engaged in providing investment advisory and management services to us, the base compensation, bonus and benefits, and the routine overhead expenses of such personnel allocable to such services, are provided and paid for by the Adviser. We bear our allocable portion of the compensation paid by the Adviser (or its affiliates) to our CFO and CCO and their respective staffs (based on a percentage of time such individuals devote, on an estimated basis, to our business affairs). We bear all other expenses of our operations and transactions, including (without limitation) fees and expenses relating to:
• the cost of our organization and offerings;
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SILVER SPIKE INVESTMENT CORP. • the cost of calculating our NAV, including the cost of any third-party
valuation services;
• the cost of effecting sales and repurchases of shares of our common stock and
other securities;
• fees and expenses payable under any underwriting agreements, if any;
• debt service and other costs of borrowings or other financing arrangements;
• costs of hedging;
• expenses, including travel expenses, incurred by the Adviser, or members of the
investment team, or payable to third-parties, performing due diligence on prospective portfolio companies and, if necessary, enforcing our rights;
• management and incentive fees payable pursuant to the Investment Advisory
Agreement;
• fees payable to third-parties relating to, or associated with, making
investments and valuing investments (including third-party valuation firms);
• costs, including legal fees, associated with compliance under cannabis laws;
• transfer agent and custodial fees;
• fees and expenses associated with marketing efforts (including attendance at
industry and investor conferences and similar events);
• federal and state registration fees;
• any exchange listing fees and fees payable to rating agencies;
• federal, state and local taxes;
• independent directors' fees and expenses, including travel expenses;?
• cost of preparing financial statements and maintaining books and records and
filing reports or other documents with theSEC (or other regulatory bodies) and other reporting and compliance costs, and the compensation of professionals responsible for the preparation of the foregoing;
• the cost of any reports, proxy statements or other notices to our stockholders
(including printing and mailing costs), the costs of any stockholder or director meetings and the compensation of investor relations personnel responsible for the preparation of the foregoing and related matters;
• brokerage commissions and other compensation payable to brokers or dealers;
• research and market data;
• fidelity bond, directors' and officers' errors and omissions liability
insurance and other insurance premiums;
• direct costs and expenses of administration, including printing, mailing and
staff;
• fees and expenses associated with independent audits, and outside legal and
consulting costs;
• costs of winding up;
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SILVER SPIKE INVESTMENT CORP. • costs incurred in connection with the formation or maintenance of entities or
vehicles to hold our assets for tax or other purposes;
• extraordinary expenses (such as litigation or indemnification); and
• costs associated with reporting and compliance obligations under the 1940 Act
and applicable federal and state securities laws.
We expect, but cannot assure, that our general and administrative expenses will increase in dollar terms during periods of asset growth, but will decline as a percentage of total assets during such periods.
Hedging
To the extent that any of our loans and other investments are denominated in a
currency other than
Financial Condition, Liquidity and Capital Resources
We will generate cash primarily from the net proceeds of any future offerings of
securities and cash flows from operations, including interest earned from the
temporary investment of cash in
In addition, we expect to enter into a credit facility in the near future. The
amount of leverage that we employ will depend on our assessment of market
conditions and other factors at the time of any proposed borrowing, such as the
maturity, covenant package and rate structure of the proposed borrowings, our
ability to raise funds through the issuance of shares of our common stock and
the risks of such borrowings within the context of our investment outlook.
Ultimately, we only intend to use leverage if the expected returns from
borrowing to make investments will exceed the cost of such borrowing. We are
currently targeting a debt-to-equity ratio of 0.50x (i.e., we aim to have
Our primary use of funds will be investments in portfolio companies, cash
distributions to holders of our common stock, and the payment of operating
expenses. As of
Critical Accounting Policies Basis of Presentation
The preparation of financial statements in accordance with
Investment Valuation
Investments for which market quotations are readily available are typically valued at the bid price of those market
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SILVER SPIKE INVESTMENT CORP. quotations. To validate market quotations, we utilize a number of factors to determine if the quotations are representative of fair value, including the source and number of the quotations. Debt and equity securities that are not publicly traded or whose market prices are not readily available, as is the case for substantially all of our investments, are valued at fair value as determined in good faith by our Board of Directors, based on, among other things, the input of the Adviser, our Audit Committee and independent third-party valuation firm(s) engaged at the direction of the Board of Directors.
As part of the valuation process, the Board of Directors takes into account relevant factors in determining the fair value of our investments, including: the estimated enterprise value of a portfolio company (i.e., the total fair value of the portfolio company's debt and equity), the nature and realizable value of any collateral, the portfolio company's ability to make payments based on its earnings and cash flow, the markets in which the portfolio company does business, a comparison of the portfolio company's securities to any similar publicly traded securities, and overall changes in the interest rate environment and the credit markets that may affect the price at which similar investments may be made in the future. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, the Board of Directors considers whether the pricing indicated by the external event corroborates its valuation.
The Board of Directors undertakes a multi-step valuation process, which includes, among other procedures, the following:
• With respect to investments for which market quotations are readily available,
those investments will typically be valued at the bid price of those market quotations;
• With respect to investments for which market quotations are not readily
available, the valuation process begins with the independent valuation firm(s) providing a preliminary valuation of each investment to the Adviser's valuation committee;
• Preliminary valuation conclusions are documented and discussed with the
Adviser's valuation committee. Agreed-upon valuation recommendations are presented to the Audit Committee;
• The Audit Committee reviews the valuation recommendations and recommends values
for each investment to the Board of Directors; and
• The Board of Directors reviews the recommended valuations and determines the
fair value of each investment.
We conduct this valuation process on a quarterly basis.
We apply Financial Accounting Standards Board Accounting Standards Codification
820, Fair Value Measurement ("ASC 820"), which establishes a framework for
measuring fair value in accordance with
• Level 1 - Valuations based on quoted prices in active markets for identical
assets or liabilities that we have the ability to access;
• Level 2 - Valuations based on quoted prices in markets that are not active or
for which all significant inputs are observable, either directly or indirectly; and
• Level 3 - Valuations based on inputs that are unobservable and significant to
the overall fair value measurement.
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SILVER SPIKE INVESTMENT CORP. Transfers between levels, if any, are recognized at the beginning of the quarter in which the transfer occurred. In addition to using the above inputs in investment valuations, we apply the valuation policy approved by our Board of Directors that is consistent with ASC 820. Consistent with the valuation policy, we evaluate the source of the inputs, including any markets in which our investments are trading (or any markets in which securities with similar attributes are trading), in determining fair value. When an investment is valued based on prices provided by reputable dealers or pricing services (that is, broker quotes), we subject those prices to various criteria in making the determination as to whether a particular investment would qualify for treatment as a Level 2 or Level 3 investment. For example, we, or the independent valuation firm(s), review pricing support provided by dealers or pricing services in order to determine if observable market information is being used, versus unobservable inputs.
Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may fluctuate from period to period. Additionally, the fair value of such investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values that may ultimately be realized. Further, such investments are generally less liquid than publicly traded securities and may be subject to contractual and other restrictions on resale. If we were required to liquidate a portfolio investment in a forced or liquidation sale, it could realize amounts that are different from the amounts presented and such differences could be material.
In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the unrealized gains or losses reflected previously.
In
Revenue Recognition Interest Income
Loans are generally placed on non-accrual status when there is reasonable doubt that principal or interest will be collected in full. Accrued interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management's judgment regarding collectability. If at any point we believe PIK interest is not expected to be realized, the investment generating PIK interest will be placed on non-accrual status. When a PIK investment is placed on non-accrual status, the accrued, uncapitalized interest are generally reversed through interest income. Non-accrual loans are restored to accrual status when past-due principal and interest are paid current and, in management's judgment, are likely to remain current. Management may make exceptions to this treatment and determine to not place a loan on non-accrual status if the loan has sufficient collateral value and is in the process of collection.
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SILVER SPIKE INVESTMENT CORP.
Other Contractual Obligations
We will have certain commitments pursuant to our Investment Advisory Agreement that we have entered into with SSC. We have agreed to pay a fee for investment advisory services consisting of two components: a base management fee and an incentive fee. Payments under the Investment Advisory Agreement will be equal to (1) a percentage of the value of our average gross assets and (2) a two-part incentive fee, as described in more detail below. See "Item 1. Business-Investment Advisory Agreement." We have also entered into a contract with SSC to serve as our administrator. Payments under the Administration Agreement will equal an amount based upon our allocable portion of our administrator's overhead in performing its obligation under the agreement, including rent, fees and other expenses inclusive of our allocable portion of the compensation of our CFO and CCO and their respective staffs (based on a percentage of time such individuals devote, on an estimated basis, to our business affairs). See "Item 1. Business-Administration Agreement."
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