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 annual report on Form 10-K.
Overview
We make impact investments in SMEs that provide the opportunity to achieve both competitive financial returns and positive measurable impact. We were organized as aDelaware limited liability company onApril 30, 2012 . We have operated and intend to continue to operate our business in a manner that will permit us to maintain our exemption from registration under the Investment Company Act of 1940, as amended. We use the proceeds raised from the issuance of units to invest in SMEs through local market sub-advisors in a diversified portfolio of financial assets, including direct loans, loan participations, convertible debt instruments, trade finance, structured credit and preferred and common equity investments. A substantial portion of our assets consists of collateralized private debt instruments, which we believe offer opportunities for competitive risk-adjusted returns and income generation. We are externally managed and advised byTriLinc Advisors, LLC , or the Advisor. The Advisor is an investment advisor registered with theSEC . Our business strategy is to generate competitive financial returns and positive economic, social and environmental impact by providing financing to SMEs, which we define as those business having less than 500 employees, primarily in developing economies. To a lesser extent, we may also make impact investments in companies that may not meet our technical definition of SMEs due to a larger number of employees but that also provide the opportunity to achieve both competitive financial returns and positive measurable impact. We generally expect that such investments will have similar investment characteristics as SMEs as defined by us. Our style of investment is referred to as impact investing, whichJ.P. Morgan Global Research andRockefeller Foundation in a 2010 report called "an emerging alternative asset class" and defined as investing with the intent to create positive impact beyond financial return. We believe it is possible to generate competitive financial returns while creating positive, measurable impact. We measure the economic, social and environmental impact of our investments using industry-standard metrics, including the Impact Reporting and Investment Standards. Through our investments in SMEs, we intend to enable job creation and stimulate economic growth. We commenced the Offering onFebruary 25, 2013 . Pursuant to the Offering, we were offering on a continuous basis up to$1.5 billion in units of our limited liability company interest, consisting of up to$1.25 billion of units in the primary offering consisting of Class A and Class C units at initial offering prices of$10.00 and$9.576 per unit, respectively, and Class I units at$9.025 per unit, and up to$250 million of units pursuant to our Distribution Reinvestment Plan.SC Distributors, LLC was the dealer manager for the Offering. InMay 2012 , the Advisor purchased 22,161 Class A units for aggregate gross proceeds of$200,000 . OnJune 11, 2013 , we satisfied the minimum offering requirement of$2,000,000 when the Sponsor purchased 321,330 Class A units for aggregate gross proceeds of$2,900,000 and we commenced operations. The Offering terminated onMarch 31, 2017 . Through the termination of the Offering, we raised approximately$361,776,000 in gross proceeds, including approximately$13,338,000 raised through our Distribution Reinvestment Plan. Upon termination of the primary portion of the Offering, we registered$75 million in Class A, Class C and Class I units to continue to be offered pursuant to our Distribution Reinvestment Plan to the investors who have purchased units in the Offering. Units issued pursuant to our Distribution Reinvestment Plan are being offered at the price equal to the net asset value per unit of each class of units, as most recently disclosed by the Company in a public filing with theSEC at the time of reinvestment. Our Distribution Reinvestment Plan was amended, effectiveMay 25, 2020 , to allow holders of all classes of units other than Class Z units to participate, including holders who purchased units in our private placements. The offering must be registered or exempt from registration in every state in which we offer or sell units. If the offering is not exempt from registration, the required registration generally is for a period of one year. Therefore, we may have to stop selling units in any state in which the registration is not renewed annually and the offering is not otherwise exempt from registration. From time to time we opportunistically seek to raise capital through sales of our common units in private placements that are exempt from registration under the Securities Act, as amended (the "Securities Act"). For example, we currently are seeking to raise up to$500,000,000 in a continuous private offering of our Class Y and Class Z units that will expire onAugust 25, 2022 , unless extended or terminated earlier by us. For the year endedDecember 31, 2021 , we issued 1,069,529 of our units pursuant to our Distribution Reinvestment Plan for gross proceeds of approximately$8,000,000 . In addition, for the year endedDecember 31, 2021 , we issued 814,444 of our units for gross proceeds of approximately$6,106,000 pursuant to our ongoing private placement described above. As ofDecember 31, 2021 ,$29,429,000 in units remained available for sale pursuant to the Distribution Reinvestment Plan. For the year endedDecember 31, 2020 , we issued 1,181,117 of our units pursuant to our Distribution Reinvestment Plan for gross proceeds of approximately$9,274,000 . In addition, for the year endedDecember 31, 2020 , we issued 667,151 of our units for gross proceeds of approximately$5,276,000 pursuant to a private placement. 37 -------------------------------------------------------------------------------- From our inception toDecember 31, 2021 , we have issued an aggregate of 55,218,582 of our units, including 7,037,116 units issued under our Distribution Reinvestment Plan, for gross proceeds of approximately$507,136,000 including approximately$58,909,000 reinvested under our Distribution Reinvestment Plan (before dealer manager fees of approximately$4,800,000 and selling commissions of$16,862,000 ), for net proceeds of$485,474,000 .
Impact of COVID-19
The ongoing COVID-19 pandemic (more commonly referred to as the Coronavirus), including the recent spread of the Delta variant and emergence of the Omicron and other variants, continues to adversely impact many industries and businesses directly or indirectly. Adverse impacts include disrupted global travel and supply chains, which adversely impact global commercial activity. Many businesses across the globe have seen a downturn in production and productivity due to the suspension of business and temporary closure of offices and factories that was prevalent during most of 2020 and continued into 2021 in certain areas, including particularly in developing markets, in an attempt to curb the spread of the Coronavirus. Although economic contractions associated with such suspensions and closures have subsided either in whole for most advanced economies or in part for most developing economies, the economic recovery has been significantly affected by supply chain disruptions and higher input costs. These issues have more acutely affected developing economies. The Company believes that most regions in which it invests are poised to achieve economic normalization once the supply chain disruptions and input cost increases dissipate. However, the Company expects economic recovery to be slower in Sub-Saharan Africa, where vaccination rates have been lower than in the rest of the world and the impact of COVID-19 is likely to impede economic recovery more so than in other regions. Any of these adverse developments could have a material adverse effect on our business, financial condition and results of operations. In addition, if COVID-19 cases began to spike again globally, as we saw with recent variants, it could further adversely impact the Company's borrowers' businesses, financial condition and results of operations, which could result in their inability to make required payments in the near term and impact the fair value of the Company's investments. Although multiple vaccines have been approved for use in certain countries and the vaccination rates inthe United States and most advanced economies have been encouraging, there is still uncertainty as to when a sufficient portion of the population will be vaccinated such that restrictions and safety protocols can be fully relaxed in certain of the regions in which the Company invests. During the years endedDecember 31, 2021 and 2020, the Company made material adjustments to the fair value of certain of its investments, in part due to the impact of COVID-19. These adjustments, which amounted to approximately$6,368,000 and$6,418,000 , respectively, in the aggregate during the years endedDecember 31, 2021 and 2020, were made with respect to 18.5% and 23.0%, respectively, of the Company's investments (calculated based on the aggregate fair value of the Company's total investments). Although the Coronavirus has created material uncertainty and economic disruption, due to the rapidly evolving nature of the situation, the Company cannot predict the ultimate impact it will have on us. The Company is managing the situation through active engagement with its borrowers and is analyzing the potential effects COVID-19 may have on the portfolio or any potential capital deployments. Additionally, our Advisor has implemented its business continuity plan and additional procedures designed to protect against the introduction of the Coronavirus to the workforce, including permitting employees to work remotely and significantly enhanced office sterilization procedures to minimize the probability of contagion. While many of the Company's borrowers' businesses have experienced some disruption related to COVID-19, degrees of effect have varied. For example, as indicated under "Watch List Investments," below, the borrowers with respect to the investment added to the Watch List for the year endedDecember 31, 2021 and three of the six investments added to the Watch List for the year endedDecember 31, 2020 have not made required payments in part due to adverse impacts they have experienced related to the COVID-19 pandemic, as well as due to the adverse impacts of supply chain disruptions and higher input costs associated with shortages of goods and labor. Where appropriate, the Company and/or the Company's sub-advisors are working with borrowers to restructure facilities and may restructure additional facilities to provide relief needed by certain borrowers, without necessarily providing concessions that are out of market. Due in part to the disruptions associated with COVID-19 as well as due to the supply chain disruptions and increased input costs, the Company can provide no assurances that it will be able to continue to collect interest and principal payments at levels comparable to those prior to the pandemic. Further, the Company can provide no assurances that it will be able to recover all past due amounts from delinquent borrowers. The economic uncertainty and disruption described above is expected to continue and the Company may see further defaults and additional investments may be added to the Watch List in subsequent quarters. The adverse impact of COVID-19 was one of the material contributors to the approximate$0.48 decline in our NAV per unit as ofDecember 31, 2021 , as compared to the Company's NAV per unit as ofDecember 31, 2020 . In addition, the Company saw a slowdown in transaction volume due to the impact of the pandemic through most of 2021, as smaller SMEs and those in industries most affected by COVID-19 (travel and hospitality, retail sales, etc.) were no longer in a position to appropriately add debt capital. While transaction volume has increased in recent months, it has not yet recovered to pre-pandemic levels and may continue to be affected by restrictions on travel and other shelter in place orders, making it more difficult to conduct in-person visits with potential borrowers. Additionally, in future periods, the Company may hold higher levels of cash than before the pandemic to ensure it has sufficient cash available to meet its cash obligations. Uncertain or inconsistent deployment of capital or higher cash balances each have the potential to further reduce cash flow generated to cover the Company's distributions to its unitholders and/or cause the Company to further reduce its NAV in future periods. 38
--------------------------------------------------------------------------------
Outlook
As noted above, the pandemic has had an adverse impact on many of our borrowers. The adverse impact on the global supply chain has been one of the largest challenges for our borrowers, as most of them are exporters directly tied to global trade. Some of these challenges include: demand from suppliers to be paid in cash rather than supplier credit, significant increases in shipping costs (when and if shipping is reliably available), and delays in the payment of receivables, all of which put pressure on borrowers' working capital needs. Similarly, our borrowers experienced challenges related to the decrease in global demand during 2021, which resulted in declines in revenue for many of them. While many of our borrowers have been able to manage these declines by proactively reducing their operating expenses, a return to pre-pandemic global demand levels will be critical to our borrowers seeing a sustainable recovery with respect to revenue. As conditions continue to improve, due to the easing of restrictions and lockdowns that were put in place to curb the spread of COVID-19, global demand has recovered. However, in order to see a full normalization of economic conditions, supply chain challenges must be eased. As noted above, we have seen improvement in conditions as vaccinations are deployed globally in greater numbers, but we believe the effective distribution of vaccines to the populations of emerging market countries will remain critical to a full economic recovery for our affected borrowers. The delay of vaccination distribution in emerging market countries, where many of our borrowers are located, caused a lag in their economic recovery in 2021, which we expect to improve in coming quarters, particularly if supply chain disruptions and input costs normalize. Investments Our investment objectives are to provide our unitholders current income, capital preservation, and modest capital appreciation. These objectives are achieved primarily through SME trade finance and term loan financing, while employing rigorous risk-mitigation and due diligence practices, and transparently measuring and reporting the economic, social and environmental impacts of our investments. The majority of our investments are senior and other collateralized loans to SMEs with established, profitable businesses in developing economies. To a lesser extent, we may also make investments in financing to companies that may not meet our technical definition of SMEs due, for example, to the companies having a larger number of employees, but that also provide the opportunity to achieve both competitive financial returns and positive measurable impact. Furthermore, we may also make investments in developed economies, includingthe United States . With the sub-advisors that our Advisor has contracted with to assist the Advisor in implementing the Company's investment program, we expect to provide growth capital financing generally ranging in size from$5-20 million per transaction for direct SME loans and$500,000 to$15 million for trade finance transactions. We seek to protect and grow investor capital by: (1) targeting countries with favorable economic growth and investor protections; (2) partnering with sub-advisors with significant experience in local markets; (3) focusing on creditworthy lending targets who have at least 3-year operating histories and demonstrated cash flows enabling loan repayment; (4) making primarily debt investments, backed by collateral and borrower guarantees; (5) employing best practices in our due diligence and risk mitigation processes; and (6) monitoring our portfolio on an ongoing basis. By providing additional liquidity to growing small businesses, we believe we support both economic growth and the expansion of the global middle class. Investments will continue to be primarily credit facilities and participations in credit facilities to developing economy SMEs, including trade finance and term loans, through the Advisor's team of professional sub-advisors with a local presence in the markets where they invest. As ofDecember 31, 2021 , more than a majority of our investments were in the form of participations and we expect that future investments will continue to be primarily participations. We typically provide financing that is collateralized, has a short to medium-term maturity and is self-liquidating through the repayment of principal. Our counterparty for participations generally will be the respective sub-advisor or its affiliate that originates the loan in which we are participating. We will not have a contract with the underlying borrower and therefore, in the event of default, we will not have the ability to directly seek recovery against the collateral and instead will have to seek recovery through our sub-advisor counterparty, which increases the risk of full recovery. Certain investments, including loans and participations, may carry equity warrants on borrowers, which allow us to buy shares of the portfolio company at a given price, which we will exercise at our discretion during the life of the portfolio company. Our goal is to ultimately dispose of such equity interests and realize gains upon the disposition of such interests. However, these warrants and equity interests are illiquid and it may be difficult for the Company to dispose of them. In addition, we expect that any warrants or other return enhancements received when we make or invest in loans may require several years to appreciate in value and may not appreciate at all.
LIBOR
InJuly 2017 , theUnited Kingdom's Financial Conduct Authority ("FCA") announced it intends to stop compelling banks to submit rates for the calculation of LIBOR. As a result, theU.S. Federal Reserve , in conjunction with the Alternative Reference Rates Committee, identified the Secured Overnight Financing Rate ("SOFR") as its preferred alternative rate for LIBOR in derivatives and other financial contracts. Any changes adopted by theFCA or other governing bodies in the method used for determining LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR. If that were to occur, interest rates of our debt could decrease, which could adversely affect our operating results. In addition, uncertainty about the extent and manner of future changes may result in interest rates that are higher or lower than if LIBOR were to remain available in the current form. 39 -------------------------------------------------------------------------------- LIBOR is expected to be phased out or modified byJune 2023 , and new contracts ceased to be written using LIBOR at the beginning of 2022. As ofDecember 31, 2021 , 18% of the fair value of the Company's total investments bore interest at floating rates based on LIBOR, with an alternative rate to be designated by the Company in the event that LIBOR is unavailable. There can be no assurances as to whether such replacement or alternative rate will be more or less favorable than LIBOR. We intend to monitor the developments with respect to the potential phasing out of LIBOR afterJune 2023 and work with our sub-advisors to seek to ensure any transition away from LIBOR will have minimal impact on our investments, but we can provide no assurances regarding the impact of the discontinuation of LIBOR.
Revenues
Since we anticipate that the majority of our assets will continue to consist of trade finance instruments and term loans, we expect that the majority of our revenue will continue to be generated in the form of interest. Our senior and subordinated debt investments may bear interest at a fixed or floating rate. Interest on debt securities is generally payable monthly, quarterly or semi-annually. In some cases, some of our investments provide for deferred interest payments or PIK interest. The principal amount of the debt securities and any accrued but unpaid interest generally is due at the maturity date. In addition, we generate revenue in the form of acquisition and other fees in connection with some transactions. Original issue discounts and market discounts or premiums are capitalized, and we accrete or amortize such amounts as interest income. We record prepayment premiums on loans and debt securities as interest income. Dividend income, if any, will be recognized on an accrual basis to the extent that we expect to collect such amounts.
Expenses
Our primary operating expenses include the payment of asset management fees and expenses reimbursable to our Advisor under the Advisory Agreement
We bear all other costs and expenses of our operations and transactions.
From our inception throughDecember 31, 2017 , under the terms of the Responsibility Agreement, our Sponsor assumed substantially all our operating expenses. Our Sponsor has not assumed any of our operating expenses subsequent toDecember 31, 2017 . As ofDecember 31, 2017 , the Sponsor had agreed to pay a cumulative total of approximately$16.7 million of operating expenses, of which approximately$16.3 million have not been reimbursed to the Sponsor as ofDecember 31, 2021 .
Portfolio and Investment Activity
During the year endedDecember 31, 2021 , we invested approximately$52.3 million across six separate portfolio companies, including three new borrowers. Our investments consisted of senior secured trade finance participations, senior secured term loan participations, senior secured term loans, other investments, and equity warrants. Additionally, we received proceeds from repayments of investment principal of approximately$40.9 million . During the year endedDecember 31, 2020 , we invested approximately$25.5 million across four portfolio companies. Our investments consisted of senior secured trade finance participations, senior secured term loan participations, senior secured term loans and other investments. Additionally, we received proceeds from repayments of investment principal of approximately$82.5 million .
At
As of December 31, 2021 As of December 31, 2020 Investments Percentage of Investments Percentage of at Fair Value Total Investments at Fair Value Total Investments
Senior secured term loans$ 119,374,062 39.6 %$ 106,899,154 37.2 % Senior secured term loan participations 132,290,743 43.9 % 129,917,253 45.2 % Senior secured trade finance participations 45,092,689 15.0 % 45,800,210 15.9 % Other investments * 3,758,063 1.2 % 3,758,063 1.3 % Equity warrants 1,088,168 0.4 % 1,199,618 0.4 % Total investments$ 301,603,725 100.0 %$ 287,574,298 100.0 %
* This investment was originally classified as an investment in a credit facility
originated by
As ofDecember 31, 2021 , the weighted average yields, based upon the cost of our portfolio, on trade finance participations, term loan participations, senior secured term loans, and other investments were 10.5%, 11.7%, 11.6%, and 8.8%, respectively, for a weighted average yield on investments of approximately 11.4% on our total portfolio. 40 -------------------------------------------------------------------------------- As ofDecember 31, 2020 , the weighted average yields, based upon the cost of our portfolio, on trade finance participations, term loan participations, senior secured term loans, and other investments were 10.4%, 12.3%, 11.4%, and 8.8%, respectively, for a weighted average yield on investments of approximately 11.6% on our total portfolio. Concentration Limits
The Company is subject to the following concentration limits:
• Maximum 45% regional exposure • Maximum 20% country exposure • Maximum 5% individual investment exposure We may only make investments that do not cause us to exceed these limits on the date of investment. These limits are calculated as a percentage of the aggregate of all outstanding principal balances on our investments and our cash balances on the date of investment. As ofDecember 31, 2021 and 2020, the Company was in compliance with all of the above concentration limits.
Watch List Investments
Please see "Notes to Consolidated Financial Statements-Note 3. Investments-Watch List Investments."
Interest Receivable Depending on the specific terms of our investments, interest earned by us is payable either monthly, quarterly, or, in the case of most trade finance investments, at maturity. As such, some of our investments have up to a year or more of accrued interest receivable as ofDecember 31, 2021 . Our interest receivable balances atDecember 31, 2021 and 2020 are recorded at the amounts that we expect to collect. In addition, certain of our investment in term loans accrue deferred interest, which is not payable until the maturity of the loans. Accrued deferred interest included in the interest receivable balance as ofDecember 31, 2021 and 2020 amounted to approximately$3,487,000 and$3,418,000 , respectively. Results of Operations Consolidated operating results for the years endedDecember 31, 2021 and 2020 are as follows: Year Ended December 31, 2021 December 31, 2020 Investment income Interest income$ 36,414,948 $ 42,240,413 Interest from cash 41,937 96,445 Total investment income 36,456,885 42,336,858 Expenses Asset management fees 7,065,751 7,334,178 Incentive fees 3,320,467 5,320,776 Professional fees 3,237,170 3,842,481 General and administrative expenses 1,314,923 1,414,586 Interest expense 195,056 254,682 Board of managers fees 257,500 257,500 Total expenses 15,390,867 18,424,203 Net investment income$ 21,066,018 $ 23,912,655 Revenues For the years endedDecember 31, 2021 and 2020, total investment income amounted to$36,456,885 and$42,336,858 , respectively. Interest income decreased by$5,825,465 during 2021 as a result of a decrease in the weighted average yield of approximately 0.2% from a weighted average yield of 11.6% for 2020 to approximately 11.4% for 2021. The decrease in yield was primarily due to the annualized impact of certain non-performing positions having been previously put on non-accrual status for approximately$1.5 million , a one-time positive adjustment to investment income due to a final settlement of an investment position in 2020 for approximately$2.7 million and the remainder is primarily attributable to lower variable interest rates in our portfolio. 41 -------------------------------------------------------------------------------- During the year endedDecember 31, 2021 ,$22,057,685 or 60.6% of the interest income earned came from loan and trade finance participations and$14,357,263 or 39.4% came from direct loans. In addition, we earned$41,937 in interest income on our cash balances. During the year endedDecember 31, 2020 ,$28,152,629 or 66.7% of the interest income earned came from loan and trade finance participations and$14,087,784 or 33.3% came from direct loans. In addition, we earned$96,445 in interest income on our cash balances. Expenses Total operating expenses, excluding the asset management and incentive fees, incurred for the year endedDecember 31, 2021 decreased by$764,600 to$5,004,649 from$5,769,249 for the year endedDecember 31, 2020 . The decrease was primarily due to the following: 1) a decrease in interest expense of$59,626 , which was attributable to a decrease in outstanding indebtedness, 2) a decrease in general and administrative expenses of$99,663 which was primarily due to a decrease in travel expenses, and 3) decrease in professional fees of$605,311 which was primarily due to less fees incurred for legal, valuation and accounting services in connection with the valuation of our portfolio and our ongoing efforts to recover amounts outstanding with respect to investments for which IIG was the sub-advisor. For the years endedDecember 31, 2021 and 2020, the asset management fees amounted to$7,065,751 and$7,334,178 , respectively. The incentive fees for the years endedDecember 31, 2021 and 2020 amounted to$3,320,467 and$5,320,776 , respectively. The decrease in incentive fees is due to the decrease in revenue during the year endedDecember 31, 2021 .
Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation on Investments.
We measure net realized gains or losses by the difference between the net proceeds from the repayment or sale of an investment and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized upfront fees and prepayment penalties. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment fair market values during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized. We recorded realized losses of$4,008,719 and$0 for the years endedDecember 31, 2021 and 2020. We recorded unrealized losses of$13,643,894 and$15,037,022 for the years endedDecember 31, 2021 and 2020, respectively. These realized and unrealized losses were primarily driven by macro events, including the uncertainty created by the COVID-19 pandemic and its impact on the future cash flows generated by our investments as well as the ultimate realization of the underlying collateral.
Financial Condition, Liquidity and Capital Resources
As ofDecember 31, 2021 , we had approximately$16.8 million in cash. We generate cash primarily from cash flows from interest, dividends and fees earned from our investments and principal repayments, proceeds from sales of our investments and from sales of promissory notes, and proceeds from private placements of our units. We may also generate cash in the future from debt financing. Our primary use of cash will be to make loans, either directly or through participations, payments of our expenses, payments on our notes and any other borrowings, and cash distributions to our unitholders. We expect to maintain cash reserves from time to time for investment opportunities, working capital and distributions. As noted above, the combination of a slower pace of deployment of capital with higher cash balances may further reduce cash flows generated to cover our distributions to our unitholders and/or cause us to further reduce our NAV in future periods. From the beginning of the Company's operations to date, our Sponsor has assumed a significant portion of our operating expenses under the Responsibility Agreement in the amount of approximately$16.7 million . The Company may only reimburse the Sponsor for expenses assumed by the Sponsor pursuant to the Responsibility Agreement to the extent the Company's investment income in any quarter, as reflected on the statement of operations, exceeds the sum of (a) total distributions to unitholders incurred during the quarter and (b) the Company's expenses as reflected on the statement of operations for the same quarter (the "Reimbursement Hurdle"). To the extent the Company is not successful in satisfying the Reimbursement Hurdle, no amount will be payable in that quarter by the Company for reimbursement to the Sponsor of the Company's cumulative operating expenses. The Company did not meet the Reimbursement Hurdle for the quarter endedDecember 31, 2021 . Therefore, none of the expenses of the Company covered by the Responsibility Agreement have been recorded as expenses of the Company for the quarter endedDecember 31, 2021 . As ofDecember 31, 2021 , there is a remaining aggregate balance of approximately$16.3 million in operating expenses assumed by the Sponsor pursuant to the Responsibility Agreement which have not been recorded by the Company. Thus, such amounts are not yet reimbursable by the Company to the Sponsor. Such reimbursements to the Sponsor would affect the amount of cash available to the Company to pay distributions and/or make investments. We may borrow additional funds to make investments. We have not decided to what extent going forward we will finance portfolio investments using debt or the specific form that any such financing would take, but we believe that obtaining financing is necessary for us to fully achieve our long-term goals. We have been, and still are, actively seeking further financing through both development banks and several commercial banks. Accordingly, we cannot predict with certainty what terms any such financing would have or the 42 -------------------------------------------------------------------------------- costs we would incur in connection with any such arrangement. OnAugust 7, 2017 , TGIFC issued$5 million in the first of a Series 1 Senior Secured Promissory Notes private offering to State Street Australia Ltd ACF Christian Super ("Christian Super"). OnDecember 18, 2018 , TGIFC issued$5 million of Series 2 Senior Secured Promissory Notes toChristian Super . As ofDecember 31, 2021 , TGIFC has$5.0 million total outstanding under the Christian Super notes. For more information on this note, please see "Notes to Consolidated Financial Statements- Note 7. Notes Payable-Christian Super Promissory Note." As ofDecember 31, 2021 , we had$5.0 million in total debt outstanding with a debt to equity ratio of 1.5%. We extended and repaid the CS Note in full inJanuary 2022 .
Company Strategy
Although the Company has a perpetual duration, we disclosed previously that if we do not consummate a liquidity event byAugust 25, 2021 , we would commence an orderly liquidation of our assets unless a majority of the board of managers, including a majority of the independent managers, determines that liquidation is not in the best interests of our unitholders. In light of this previous disclosure, beginning in late 2020, the board of managers, together with our management, conducted a review of the risks and benefits of various potential strategic alternatives, with the goal of determining what is in the best interests of the Company and our unitholders. The board of managers engaged a nationally recognized investment bank to evaluate possible strategic alternatives, including: liquidation; continuing as an operating company; listing the Company's units on a national securities exchange; and merger with another company. After review and discussion of the strategic alternatives and market conditions, the board of managers, including all of the independent managers, determined inMay 2021 that the commencement of a liquidation of our assets inAugust 2021 was not in the best interests of the unitholders and approved the continuation of operations for at least an additional 12 months thereafter, untilAugust 26, 2022 . This decision was consistent with the recommendation of management and the investment bank. The board of managers and management believe that this will provide the Company with time to stabilize its portfolio and NAV as the world begins to emerge from the adverse impact of the pandemic. In addition, the Company will continue to pursue leverage, which, if obtained, is expected to be accretive as the portfolio stabilizes. The board of managers will revisit this analysis no later thanAugust 26, 2022 and then may continue to reassess strategic alternatives annually, or may determine to extend the period between its considerations of alternatives for a longer period.
Distributions
We have paid distributions commencing with the month beginningJuly 1, 2013 , and we intend to continue to pay distributions on a monthly basis. From time to time, we may also pay interim distributions at the discretion of our board. Distributions are subject to the board of managers' discretion and applicable legal restrictions and accordingly, there can be no assurance that we will make distributions at a specific rate or at all. Distributions are made on all classes of our units at the same time. The cash distributions received by our unitholders with respect to the Class C units, Class W units and certain Class I units, are and will continue to be lower than the cash distributions with respect to Class A and certain other Class I units because of the distribution fee relating to Class C units, the ongoing dealer manager fee relating to Class W units and Class I units issued pursuant to a private placement and the ongoing service fee relating to the Class W units, which are expenses specific to those classes of units. Amounts distributed to each class are allocated among the unitholders in such class in proportion to their units. Distributions are paid in cash or reinvested in units, for those unitholders participating in the Distribution Reinvestment Plan. For the year endedDecember 31, 2021 , we paid a total of$26,030,110 in distributions, comprised of$18,030,422 paid in cash and$7,999,688 reinvested under our Distribution Reinvestment Plan.
Related Party Transactions
For the years ended
From our inception throughSeptember 30, 2017 , pursuant to the terms of the Responsibility Agreement, the Sponsor has paid approximately$12,421,000 of operating expenses, asset management fees, and incentive fees on our behalf and will reimburse us an additional$4,240,231 of expenses, which we had paid as ofSeptember 30, 2017 . Such expenses, in the aggregate of approximately$16,274,000 since the Company's inception, may be expensed and payable by the Company to the Sponsor only if the Company satisfies the Reimbursement Hurdle. The Company did not meet the Reimbursement Hurdle for the quarter endedDecember 31, 2021 . Therefore, none of the expenses of the Company covered by the Responsibility Agreement have been recorded as expenses of the Company for the quarter endedDecember 31, 2021 . As ofDecember 31, 2021 and 2020, due from affiliates on the Consolidated Statements of Assets and Liabilities in the amount of$4,240,231 and$4,057,734 , respectively was due from the Sponsor pursuant to the Responsibility Agreement for operating expenses which were paid by the Company, but, under the terms of the Responsibility Agreement, are the responsibility of the Sponsor. The Sponsor anticipates paying this receivable in the due course of business. For the years endedDecember 31, 2021 and 2020, we paid SC Distributors, the dealer manager for certain of our offerings, approximately$432,000 and$468,000 , respectively in ongoing distributions fees, dealer manager fees and service fees. 43
--------------------------------------------------------------------------------
Legal Proceedings
As of
Critical Accounting Policies and Use of Estimates
In preparing our Consolidated Financial Statements in accordance with GAAP and pursuant to the rules and regulations promulgated by theSEC , we make assumptions, judgments and estimates that can have a significant impact on our net income/loss and affect the reported amounts of certain assets, liabilities, revenue and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and discuss our critical accounting policies and estimates with the audit committee of our board of managers. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. There have been no significant changes to our critical accounting policies, estimates and judgments during year endedDecember 31, 2021 , compared to the critical accounting policies, estimates and judgments disclosed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . The preparation of financial statements in conformity with GAAP requires the Company's management to make estimates and assumptions that affect the amounts reported in the financial statements. Although these estimates are based on management's knowledge of current events and actions it may undertake in the future, actual results may differ from these estimates. In particular, the COVID-19 pandemic has adversely impacted and is likely to further adversely impact the Company's business, the businesses of the Company's borrowers and the global markets generally. The full extent to which the pandemic will directly or indirectly impact the Company's business, results of operations and financial condition, including fair value measurements, will depend on future developments that are highly uncertain and difficult to predict. These developments include, but are not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or address its impact, governmental actions to contain the spread of the pandemic and respond to the reduction in global economic activity, and how quickly and to what extent normal economic and operating conditions can resume.
Revenue Recognition
The Company records interest income on an accrual basis to the extent that we expect to collect such amounts. The Company does not accrue as a receivable interest on loans for accounting purposes if there is reason to doubt the ability to collect such interest. Structuring, upfront and similar fees are recorded as a discount on investments purchased and are accreted into interest income, on a straight line basis, which we have determined not to be materially different from the effective yield method.
The Company records prepayment fees for loans and debt securities paid back to us prior to the maturity date as interest income upon receipt.
The Company generally place loans on non-accrual status when there is a reasonable doubt that principal or interest will be collected. If, however, management believes the principal and interest will be collected, a loan may be left on accrual status during the period the Company is pursuing repayment of the loan. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management's judgment of the financial condition of the borrower. Non-accrual loans are generally restored to accrual status when past due principal and interest is paid and, in our management's judgment, is likely to remain current over the remainder of the term. Valuation of Investments The Company accounts for all of its investments at fair value with changes in fair value recognized in the consolidated statement of operations. Fair value is the price that would be received when selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company has categorized its investments into a three-level fair value hierarchy as discussed in Note 2. Most of the Company's investments are loans to private companies, which are not actively traded in any market and for which quotations are not available. For those investments for which market quotations are not readily available, or when such market quotations are deemed by the Advisor not to represent fair value, the Company's board of managers has approved a multi-step valuation process to be followed each fiscal quarter, as described below:
1. Each investment is valued by the Advisor in collaboration with the relevant
sub-advisor;
2. For all investments with a stated maturity of greater than 12 months, the
Company engages a third-party independent valuation firm to perform certain
limited procedures that we have identified and requested the independent
valuation firm perform a review on the reasonableness of the Company's
internal estimates of fair value on each asset on a quarterly rotating basis,
with 44
--------------------------------------------------------------------------------
each of such investments being reviewed at least annually. In addition, the
Company engaged an independent valuation firm to perform certain limited
procedures that the Company identified and requested the independent valuation
firm to perform to provide an estimate of the range of fair value of material
investments on the Watch List. The analysis performed by the independent
valuation firm was based upon data and assumptions provided to it by the
Company and received from third party sources, which the independent valuation
firm relied upon as being accurate without independent verification. The
results of the analyses performed by the independent valuation firm are among
the factors taken into consideration by the Company and its management in
making its determination with respect to the fair value of such investments,
but are not determinative. The Company and its management are solely and
ultimately responsible for determining the fair value of the Company's investments in good faith;
3. The audit committee of the Company's board of managers reviews and discusses
the preliminary valuation prepared by the Advisor and any report rendered by
the independent valuation firm; and
4. The board of managers discusses the valuations and determines the fair value
of each investment in the Company's portfolio in good faith based on the inputs which include but are not limited to, inputs of the Advisor, the
independent valuation firm and the audit committee. The Company's board of
managers and the Company is solely and ultimately responsible for the
determination, in good faith, of the fair value of each investment.
Below is a description of factors that the Company's board of managers may consider when valuing its investments.
Any potential valuation adjustments are subject to a materiality threshold as determined by the Advisor. Due to the fact that all non-Watch List investments are performing loans, with no macroeconomic indicator or other event observed that would reasonably be expected to have a material impact on the underlying performance or collateral value of the investment, most of these investments generally do not deviate materially from the amortized cost. If, pursuant to the Company's quarterly review, the Company determines that one or more material valuation adjustments are appropriate, then the Company adjusts the fair value. Historically, in most cases these adjustments that have resulted in a fair value that is materially different from amortized cost have resulted in the Company's determination to place the investment on the Watch List. Fixed income investments are typically valued utilizing a market approach, income approach, collateral based approach, or a combination of these approaches (and any others, as appropriate). The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including the sale of a business) and is used less frequently due to the private nature of our investments. The income approach uses valuation techniques to convert future amounts (for example, interest and principal payments) to a single present value amount (Discounted Cash Flow or "DCF") calculated based on an appropriate discount rate. The measurement is based on the net present value indicated by current market expectations about those future amounts. ForWatch List investments, we may use a collateral based approach (also known as a liquidation or net recovery approach). The collateral based approach uses estimates of the collateral value of the borrower's assets using an expected recovery model. When using the collateral based approach, the Company determines the fair value of the remaining assets, discounted to reflect the anticipated amount of time to recovery and the uncertainty of recovery. The Company also may make further adjustments to account for anticipated costs of recovery, including legal fees and expenses. In following a given approach, the types of factors that it may take into account in valuing our investments include, as applicable:
• Macro-economic factors that are relevant to the investment or the underlying
borrower
• Industry factors that are relevant to the investment or the underlying
borrower
• Historical and projected financial performance of the borrower based on most
recent financial statements • Borrower draw requests and payment track record • Loan covenants, duration and drivers
• Performance and condition of the collateral (nature, type and value) that
supports the investment
• Sub-Advisor recommendation as to possible impairment or reserve, including
updates and feedback • For participations, our ownership percentage of the overall facility
• Key inputs and assumptions that are believed to be most appropriate for the
investment and the approach utilized • Applicable global interest rates • Impact of investments placed on non-accrual status With respect to warrants and other equity investments, as well as certain fixed income investments, the Company may also look to private merger and acquisition statistics, public trading multiples discounted for illiquidity and other factors, valuations implied by third-party investments in the portfolio companies, option pricing models or industry practices in determining fair value. the Company may also consider the size and scope of a portfolio company and its specific strengths and weaknesses, as well as any other factors we deem relevant in measuring the fair values of its investments. 45
--------------------------------------------------------------------------------
Recent Accounting Pronouncements
See Note 2 to the Company's accompanying Consolidated Financial Statements for a description of recent accounting pronouncements and its expectation of their impact on the Company's results of operations and financial condition.
Subsequent Events
Please see "Notes to Consolidated Financial Statements-Note 11. Subsequent Events."
46
--------------------------------------------------------------------------------
© Edgar Online, source