Notes to Unaudited Consolidated Financial Statements
Note 1. Organization
Harvest Capital Credit Corporation ("HCAP" or the "Company") was incorporated as a Delaware corporation on November 14, 2012, for the purpose of, among other things, acquiring Harvest Capital Credit LLC (“HCC LLC”). HCAP acquired HCC LLC in May 2013, in connection with HCAP's initial public offering. HCAP is an externally managed, closed-end, non-diversified management investment company that has filed an election to be regulated as a business development company (“BDC”) under the 1940 Act. In addition, for tax purposes, HCAP has elected to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). As an investment company, the Company follows accounting and reporting guidance as set forth in Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 946, Financial Services- Investment Companies.
On July 1, 2016, the Company formed HCAP Equity Holdings, LLC, a Delaware limited liability company, as a wholly-owned subsidiary of the Company to hold certain equity investments made by the Company in limited liability companies or other forms of pass-through entities. By investing through HCAP Equity Holdings, LLC, the Company is able to benefit from the tax treatment of this entity and create a tax structure that is advantageous with respect to the Company's status as a RIC. The Company also formed a wholly-owned subsidiary, HCAP ICC, LLC, a Delaware limited liability company, to exercise certain rights in connection with its investment in Infinite Care, LLC.
HCAP Equity Holdings, LLC and HCAP ICC, LLC are consolidated for financial reporting purposes, and the portfolio investments held by HCAP Equity Holdings, LLC are included in the Company's consolidated financial statements and recorded at fair value in conjunction with the Company's valuation policy. However, HCAP Equity Holdings, LLC and HCAP ICC, LLC are not consolidated for income tax purposes and may generate tax expense as a result of any ownership of portfolio companies.
The Proposed Merger With Portman Ridge Finance Corporation
On December 23, 2020, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Portman Ridge Finance Corporation, a Delaware corporation (“PTMN”), Rye Acquisition Sub Inc., a Delaware corporation and a direct wholly-owned subsidiary of PTMN (“Acquisition Sub”), and Sierra Crest Investment Management LLC, a Delaware limited liability company and the external investment adviser to PTMN (“Sierra Crest”). The Merger Agreement provides that (i) Acquisition Sub will merge with and into the Company (the “First Merger”), with the Company continuing as the surviving corporation and as a wholly-owned subsidiary of PTMN, and (ii) immediately after the effectiveness of the First Merger, the Company will merge with and into PTMN (the “Second Merger” and, together with the First Merger, the “Mergers”), with PTMN continuing as the surviving corporation. Sierra Crest is expected to manage the combined company following the Mergers.
The transaction is the result of a review of strategic alternatives by the Company's board of directors and a special committee thereof (the “HCAP Special Committee”) comprised solely of the independent directors of the Company's board of directors. The Company's board of directors (other than directors affiliated with HCAP Advisors LLC, or “HCAP Advisors,” the Company’s investment adviser and administrator, who abstained from voting), on the unanimous recommendation of the HCAP Special Committee, has approved the Merger Agreement and the transactions contemplated thereby. The boards of directors of each of PTMN and Acquisition Sub, and the managing member of Sierra Crest, have also each unanimously approved the Merger Agreement and the transactions contemplated thereby.
Under the terms of the proposed transaction, at the closing of the First Merger (the “Closing”), PTMN will issue, in respect of all of the issued and outstanding shares of the Company's common stock (excluding shares held by the Company's subsidiaries or held, directly or indirectly, by PTMN or Acquisition Sub and all treasury shares (“Canceled Shares”)), in the aggregate, a number of shares of common stock, par value $0.01 per share, of PTMN (“PTMN Common Stock”) equal to 19.9% of the number of shares of PTMN Common Stock issued and outstanding immediately prior to the Closing (the “Total Stock Consideration”). In addition, subject to the terms and conditions of the Merger Agreement, at the Closing, PTMN will pay, in respect of all the issued and outstanding shares of the Company's common stock (excluding Canceled Shares) in the aggregate, an amount of cash equal to the amount by which (i) the Company's net asset value at Closing exceeds (ii) the product of (A) the Total Stock Consideration multiplied by (B) the quotient of (i) PTMN’s net asset value at closing divided by (ii) the
number of shares of PTMN Common Stock issued and outstanding as of the determination date (the “Determination Date”) which is two days prior to the Closing (the “Aggregate Cash Consideration”). In addition, as additional consideration to the holders of shares of the Company's common stock that are issued and outstanding immediately prior to the Closing (excluding any Canceled Shares), Sierra Crest will pay or cause to be paid to such holders an aggregate amount in cash equal to $2.15 million.
Each person who as of the effective time of the First Merger is a record holder of shares of the Company's common stock will be entitled, with respect to all or any portion of such shares, to make an election (an “Election”) to receive payment for their shares of the Company's common stock in cash, subject to the conditions and limitations set forth in the Merger Agreement. Any record holder of shares of the Company's common stock at the record date who does not make an Election will be deemed to have elected to receive payment for their shares of the Company's common stock in the form of PTMN Common Stock. Each share of the Company's common stock (other than a Canceled Share) with respect to which an Election has been made will be converted into the right to receive an amount in cash equal to the Per Share Cash Price (as defined below), subject to adjustment under the terms of the Merger Agreement.
The “Per Share Cash Price” means the quotient of (i) the sum of (A) the product of Total Stock Consideration multiplied by the PTMN Per Share Price (as defined below) plus (B) the Aggregate Cash Consideration, divided by (ii) the number of shares of the Company's common stock issued and outstanding immediately prior to the Closing. The “PTMN Per Share Price” is defined as the average of the volume weighted average price per share of PTMN Common Stock on Nasdaq on each of the ten consecutive trading days ending with the Determination Date.
Each share of the Company's common stock (other than a Canceled Share) with respect to which an Election has not been made will be converted into the right to receive a number of validly issued, fully paid and non-assessable shares of PTMN Common Stock, equal to the number of shares of PTMN Common Stock with a value equal to the Per Share Cash Price based on the PTMN Per Share Price, subject to adjustment under the terms of the Merger Agreement.
While each holder of the Company’s common stock will be entitled to make an Election, the maximum aggregate number of shares of PTMN Common Stock available for all of the Company’s stockholders will be fixed to equal the Total Stock Consideration and, accordingly, the aggregate amount of cash available to the Company’s stockholders will be fixed. As a result, depending on the Elections made by other stockholders, if a holder of the Company’s common stock elects to receive cash in connection with the Mergers, such holder will likely receive a portion of its merger consideration in PTMN Common Stock, and if a holder of the Company’s common stock elects to receive PTMN Common Stock in connection with the Mergers, such holder will likely receive a portion of the merger consideration in cash.
The Merger Agreement contains customary representations, warranties and covenants, including, among others, covenants relating to the operation of each of PTMN’s and the Company's businesses during the period prior to the Closing. The Company has agreed to convene and hold a stockholder meeting for the purpose of seeking the adoption of the Merger Agreement by the holders of at least a majority of the outstanding shares of the Company's common stock entitled to vote thereon.
The Merger Agreement contains “no-shop” provisions that restrict the Company's ability to solicit or initiate discussions or negotiations with third parties regarding other proposals to acquire the Company, and the Company is restricted in its ability to respond to such proposals. The Merger Agreement also contains customary termination rights. In particular, at any time prior to receipt of the requisite Company stockholder approval, the Company may terminate the Merger Agreement in order to substantially concurrently enter into a binding definitive agreement providing for the consummation of a Superior Proposal (as defined in the Merger Agreement), subject to the Company's compliance with notice and other specified conditions contained in the non-solicitation covenants, including giving PTMN the opportunity to propose revisions to the terms of the transactions contemplated by the Merger Agreement during a period following notice, and provided that the Company has not otherwise materially breached any provision of the non-solicitation covenants. If the Company terminates the Merger Agreement as provided in the foregoing sentence or the Merger Agreement is terminated under certain other circumstances, upon notice by PTMN, the Company must pay PTMN a termination fee equal to approximately $2.1 million, minus any amounts that the Company previously paid to PTMN in the form of expense reimbursement. Similarly, if the Merger Agreement is terminated under certain other circumstances by PTMN, upon notice by the Company, PTMN must pay the Company a termination fee equal to approximately $2.1 million.
The consummation of the Mergers is subject to the satisfaction or (to the extent permitted by law) waiver of certain customary closing conditions, including obtaining the requisite Company stockholder approval. The obligation of each party to
consummate the Mergers is also conditioned upon the other party’s representations and warranties being true and correct (subject to certain materiality exceptions) and the other party having performed in all material respects its obligations under the Merger Agreement.
Concurrently with the Company’s and PTMN’s entry into the Merger Agreement, the Company also entered into a letter agreement (the “Jolson Letter Agreement”) with Joseph Jolson, its Chairman and Chief Executive Officer. Pursuant to the Jolson Letter Agreement, Mr. Jolson has agreed (i) to elect to receive shares of PTMN Common Stock as consideration in connection with the Mergers for all of the 894,273 shares of the Company’s common stock then beneficially owned directly by Mr. Jolson and indirectly by Mr. Jolson through the Joseph A. Jolson 1991 Trust (the “Jolson Shares”), (ii) to not, directly or indirectly, transfer, sell, offer, exchange, assign, pledge, convey any legal or beneficial ownership interest in or otherwise dispose of, or encumber any of the Jolson Shares or enter into any contract, option, or other agreement with respect to, or consent to, a transfer of, any of the Jolson Shares or his voting or economic interest therein other than pursuant to the Merger Agreement and in connection with the Mergers during the period commencing on the date of the Jolson Letter Agreement and ending on the closing date of the Mergers and (iii) to not transfer any shares of PTMN Common Stock received in exchange for the Jolson Shares in the First Merger (the “Locked Up Securities”) or enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the Locked Up Securities for 90 days following the Closing.
In connection with the Mergers, Sierra Crest and HCAP Advisors have agreed to a transition services agreement pursuant to which HCAP Advisors will provide certain consulting services to Sierra Crest relating to the Company's existing investment portfolio subsequent to, and contingent upon, the Closing.
Note 2. Summary of Significant Accounting Policies
Basis of Financial Statement Presentation
The accompanying unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in accordance with the requirements for reporting on Form 10-Q and Articles 6, 10 and 12 of Regulation S-X. In the opinion of management, all adjustments of a normal recurring nature considered necessary for the fair statement of the Company's consolidated interim financial statements have been made.
In preparing the consolidated interim financial statements in accordance with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, as of the date of the Consolidated Statements of Assets and Liabilities and the Consolidated Statements of Operations for the relevant period. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of Harvest Capital Credit Corporation and its wholly-owned subsidiaries, HCAP Equity Holdings, LLC and HCAP ICC, LLC. The effects of all intercompany transactions between the Company and its subsidiaries have been eliminated in consolidation. Under ASC 946, Financial Services - Investment Companies, the Company is precluded from consolidating any entity other than another investment company, except that ASC 946 provides for the consolidation of a controlled operating company that provides substantially all of its services to the investment company or its consolidated subsidiaries.
Recent Accounting Pronouncements
In June 2016, FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. In addition, ASU 2016-13 requires credit losses relating to available-for-sale debt securities to be recorded through an allowance for credit losses. The amendments in ASU 2016-13 broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The new standard is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019. The Company has adopted these amendments as currently required and the adoption did not have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements in Topic 820, Fair Value Measurement, by removing certain disclosure requirements related to the fair value hierarchy, modifying existing disclosure requirements related to measurement uncertainty and adding new disclosure requirements. ASU 2018-13 is effective for public companies for annual reporting periods and interim periods within those annual periods beginning after December 15, 2019. The Company has adopted these amendments as currently required and the adoption did not have a material impact on its consolidated financial statements.
Use of Estimates
In preparing the consolidated financial statements in accordance with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, as of the date of the Consolidated Statement of Assets and Liabilities and the Consolidated Statements of Operations for the period. Actual results could differ from those estimates.
Cash
Cash as presented in the Consolidated Statements of Assets and Liabilities and the Consolidated Statements of Cash Flows includes bank clearing accounts with financial institutions and cash held in these accounts may exceed the Federal Deposit Insurance Corporation insured limit.
Restricted Cash
Restricted cash of $11.3 million and $31.5 million as of March 31, 2021 and December 31, 2020, respectively, was held at financial institutions in conjunction with the Company's senior secured revolving credit facility (as modified, amended and restated from time to time, the "Credit Facility") (see Note 3. Borrowings). The Company is restricted from accessing this cash until the monthly settlement date when, after delivering a covenant compliance certificate, the net restricted cash is released to the Company after paying interest, fees, expenses, and borrowings outstanding owed under the Credit Facility.
Investments and Related Investment Revenue and Expense
All investment related revenue and expenses are reflected on the Consolidated Statement of Operations, generally commencing on the trade date unless otherwise specified by the transaction documents.
The Company accrues interest income if it expects that ultimately it will be able to collect it. Generally, when an interest payment default occurs on a loan in the portfolio, when interest has not been paid for greater than 90 days, or when management otherwise believes that the issuer of the loan will not be able to service the loan and other obligations, the Company will place the loan on non-accrual status and will cease accruing interest income on that loan until all principal and interest is current through payment or until a restructuring occurs, such that the interest income is deemed collectible. However, the Company remains contractually entitled to this interest, and any collections actually received on these non-accrual loans may be recognized as interest income on a cash basis or applied to the principal depending upon management's judgment regarding collectability. The Company may make exceptions to this policy if the loan has sufficient collateral value and is in the process of collection and the amount of collectible interest can be reasonably estimated. As of March 31, 2021, the Company had debt investments in two portfolio companies, with a combined fair value of $6.2 million, on non-accrual status. As of December 31, 2020, the Company had debt investments in two portfolio companies, with a combined fair value of $5.6 million, on non-accrual status.
For loans with contractual PIK (payment-in-kind) interest income, which represents contractual interest accrued and added to the loan balance that generally becomes due at maturity, the Company will not accrue PIK interest if the Company believes that the PIK interest is no longer collectible, including if the portfolio company valuation indicates that such PIK interest is not collectible. Loan origination fees - net of direct loan origination costs, original issue discounts that initially represent the value of detachable equity warrants obtained in conjunction with the acquisition of debt securities and market discounts or premiums - are accreted or amortized using the effective interest method as interest income over the contractual life of the loan. Upon the prepayment of a loan or debt security, any unamortized net loan origination fee will be recorded as interest income. Loan exit fees that are contractually required to be paid at the termination or maturity of the loan will be accreted to interest income over the contractual term of the loan. The Company suspends the accretion of interest income for
any loans or debt securities placed on non-accrual status. The Company may also collect other prepayment premiums on loans. These prepayment premiums are recorded as other income as earned.
For equity investments with contractual dividends, the Company accrues dividend income based on the contractual obligation. The Company will not accrue dividend income if the Company believes that the dividend income is no longer collectible, including if the portfolio company valuation indicates that such dividend income is not collectible. For equity investments without contractual dividends, dividend income will be recognized on the ex-dividend date.
Income from certain of the Company's equity investments is recorded based upon an estimation of an effective yield to expected maturity utilizing projected cash flows in accordance with ASC 325-40, Beneficial Interests in Securitized Financial Assets. The Company monitors the expected cash flows from these equity investments and the effective yield is determined and updated at each reporting date.
Certain expenses related to legal and tax consultation, due diligence, valuation expenses and independent collateral appraisals may arise when the Company makes certain investments. To the extent that such costs are not classified as direct loan origination costs, these expenses are recognized in the Consolidated Statements of Operations as they are incurred.
Investment Date
The Company records investment purchases and sales based on the trade date. For instances when the trade date and funding date differ, the Company captures the open trades in the receivable for securities sold or payable for securities purchased on the Consolidated Statements of Assets and Liabilities.
Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation
Realized gains and losses on investments are calculated using the specific identification method. The Company measures realized gains or losses on equity investments as the difference between the net proceeds from the sale and the cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized. The Company measures realized gains or losses on debt investments as the difference between the net proceeds from the repayment or sale and the contractual amount owed to the Company on the investment, without regard to unrealized appreciation or depreciation previously recognized or unamortized deferred fees. The acceleration of unamortized deferred fees is recognized as interest income and the collection of prepayment and other fees is recognized as other income. The Company recognized $6.4 million in net realized gains on its investments and $0.1 million in net realized losses on its investments during the three months ended March 31, 2021 and March 31, 2020, respectively.
Net changes in unrealized appreciation or depreciation measure changes in the fair value of the Company's investments relative to changes in their amortized cost. The Company recognized $3.0 million and $4.6 million in net change in unrealized depreciation during the three months ended March 31, 2021 and March 31, 2020, respectively.
Classification of Portfolio Companies
The Company classifies its investments by level of control. As defined in the 1940 Act, control investments are those where there is the ability or power to exercise a controlling influence over the management or policies of a company. Control is generally deemed to exist when a company or individual owns beneficially more than 25% of the voting securities of another entity. Affiliated investments and affiliated companies are defined by a lesser degree of influence and are deemed to exist through beneficial ownership of at least 5% but not more than 25%, of the outstanding voting securities of another entity. See the table below for a breakdown of the Company's portfolio companies by classification at March 31, 2021 and December 31, 2020, respectively.
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Number of portfolio company investments by classification
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March 31, 2021
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December 31, 2020
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Non-Control/Non-Affiliated
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12
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12
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Affiliated
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6
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7
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Control
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2
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2
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Total
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20
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21
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Valuation of Investments
Valuation analyses of the Company’s investments are generally performed on a quarterly basis pursuant to ASC 820, Fair Value Measurement. ASC 820 defines fair value, establishes a framework for measuring fair value in accordance with applicable accounting guidance and expands disclosure of fair value measurements.
Pursuant to ASC 820, the valuation standard used to measure the value of each investment is fair value defined as, “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” Investments are recorded at their fair value at each quarter end (the measurement date).
Fair Value Investment Hierarchy
Accounting standards establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
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Level 1
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Quoted prices (unadjusted) for identical assets or liabilities in active public markets that the entity has the ability to access as of the measurement date.
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Level 2
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Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
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Level 3
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Significant unobservable inputs that reflect a reporting entity’s own assumptions about what market participants would use in pricing an asset or liability.
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Valuation Process
Investments are measured at fair value as determined in good faith by the Company's management team and investment professionals of HCAP Advisors, the Company's external investment adviser, reviewed by the audit committee (which consists entirely of directors who are not "interested persons," as such term is defined in Section 2(a)(19) of the 1940 Act, of the Company) of the board of directors, and ultimately approved by the Company's board of directors, based on, among other factors, consistently applied valuation procedures on each measurement date.
The board of directors undertakes a multi-step valuation process at each measurement date.
•The valuation process generally begins with each investment initially being valued by the Company's management and the investment professionals of HCAP Advisors and/or, if applicable, by an independent third-party valuation firm.
•Preliminary valuation conclusions are documented and discussed with the Company's senior management.
•The audit committee of the Company's board of directors reviews and discusses the preliminary valuations and recommends valuations to the board of directors for approval.
•The board of directors discusses valuations and determines the fair value of each investment in the Company's portfolio in good faith, based upon input of the Company's senior management, HCAP Advisors' investment professionals, and an independent third-party valuation firm (to the extent any such firm reviewed the investment during the applicable quarter), and the recommendation of the board of director's audit committee.
The nature of the materials and input that the Company’s board of directors receives in the valuation process varies depending on the nature of the investment and the other facts and circumstances. For example, in the case of investments that are Level 1 or 2 assets, a formal report by the Company’s management or HCAP Advisors' investment professionals, called a portfolio monitoring report, or “PMR,” is not generally prepared, and no independent third-party valuation firm is engaged due to the availability of quotes in markets for such investments or similar assets.
In the case of investments that are Level 3 assets, however, the Company’s board of directors generally receives a report on material Level 3 investments on a quarterly basis (i) from the Company’s management or HCAP Advisors' investment
professionals in the form of a PMR, (ii) from an independent third-party valuation firm, or (iii) in some cases, both. In the case of investments that are Level 3 assets and have an investment rating of 1 (performing above expectations), the Company generally engages an independent third-party valuation firm to review all such material investments at least annually. In quarters where an external valuation is not prepared for such investments, the Company’s management or HCAP Advisors' investment professionals generally prepare a PMR. In the case of investments that are Level 3 assets and have an investment rating of 2 through 5 (with performance ranging from within expectations to substantially below expectations), the Company generally engages an independent third-party valuation firm to review such material investments quarterly (and may receive a PMR in addition to the review of the independent external valuation firm where the Level 3 assets have an investment rating of 3 through 5). However, in certain cases for Level 3 assets, the Company may determine that it is more appropriate for HCAP Advisors' investment professionals to prepare a PMR instead of engaging an independent third-party valuation firm on a quarterly basis, because a third-party valuation is not cost effective or the nature of the investment does not warrant a quarterly third-party valuation. In addition, under certain unique circumstances, the Company may determine that a formal valuation report is not likely to be informative, and neither a third-party valuation report nor a report from the Company’s management or HCAP Advisor's investment professionals is prepared. Such circumstances might include, for example, an instance in which the investment has paid off after the period end date but before the board of directors meets to discuss the valuations.
Further, Level 3 debt investments that have closed within six months of the measurement date are valued at cost unless unique circumstances dictate otherwise.
Valuation Methodology
The following section describes the valuation methods and techniques used to measure the fair value of the investments.
Fair value for each investment may be derived using a combination of valuation methodologies that, in the judgment of the Company's management, are most relevant to such investment, including, without limitation, being based on one or more of the following: (i) market prices obtained from market makers for which management has deemed there to be enough breadth (number of quotes) and depth to be indicative of fair value, (ii) the price paid or realized in a completed transaction or binding offer received in an arms-length transaction, (iii) the market approach (enterprise value), (iv) the income approach (discounted cash flow analysis), or (v) the bond yield approach.
The valuation methods selected for a particular investment are based on the circumstances and on the level of sufficient data available to measure fair value. If more than one valuation method is used to measure fair value, the results are evaluated and weighted, as appropriate, considering the reasonableness of the range indicated by those results. A fair value measurement is the point within that range that is most representative of fair value given the circumstances.
The determination of fair value using the selected methodologies takes into consideration a range of factors including, but not limited to, the price at which the investment was acquired, the nature of the investment, local market conditions, trading values on public and private exchanges for comparable securities, current and projected operating performance and financing transactions subsequent to the acquisition of the investment, compliance with agreed upon terms and covenants, and assessment of credit ratings of an underlying borrower.
In most cases the Company uses the income approach or bond yield approach for valuing its Level 3 debt investments, as long as the Company deems this method appropriate. This approach entails analyzing the interest rate spreads for recently completed financing transactions which are similar in nature to the Company's, in order to assess what the range of effective market interest rates would be for the investment if it were being made on or near the valuation date. Then all of the remaining expected cash flows of the investment are discounted using this range of interest rates to determine a range of fair values for the debt investment. If, in the Company's judgment, the bond yield approach is not appropriate, the Company may use the market approach, or, in certain cases, an alternative methodology potentially including an asset liquidation or expected recovery model.
The fair value of equity securities, including warrants, in portfolio companies oftentimes considers the market approach, which applies market valuation multiples of publicly-traded firms or recently acquired private firms engaged in businesses similar to those of the portfolio companies. This approach to determining the fair value of a portfolio company’s equity security will typically involve: (1) applying to the portfolio company’s trailing-twelve-month EBITDA (earnings before interest, taxes, depreciation and amortization) a range of enterprise value to EBITDA multiples that are derived from an analysis of comparable companies, in order to arrive at a range of enterprise values for the portfolio company; then (2) subtracting from the range of enterprise values balances of any debt or equity securities that rank senior to the Company's equity securities; and (3)
multiplying the range of equity values by the Company’s ownership share of such equity to determine a range of fair values for the Company’s equity investment.
The Company also uses the income approach, which discounts a portfolio company’s expected future cash flows to determine its net present enterprise value. The discount rate used is based upon the company’s weighted average cost of capital, which is determined by blending the cost of the portfolio company’s various debt instruments and its estimated cost of equity capital. The cost of equity capital is estimated based upon the Company's market knowledge and discussions with private equity sponsors.
These valuation methodologies involve a significant degree of judgment, including in discerning whether the impact of the COVID-19 pandemic on the Company's portfolio companies and their earnings is temporary or permanent in nature and the resulting significance thereof on the valuation of the Company's portfolio investments. As it relates to investments that do not have an active public market, there is no single standard for determining the estimated fair value. Valuations of privately held investments are inherently uncertain, and they may fluctuate over short periods of time and are based on estimates and other information provided to the Company by its portfolio companies, including with respect to the evolving nature of the impact of the COVID-19 pandemic on their businesses and earnings. The determination of fair value may differ materially from the values that would have been used if a ready market for these investments existed. In some cases, fair value of such investments is best expressed as a range of values derived utilizing different methodologies from which a single fair value may then be determined.
Consequently, fair value for each investment may be derived using a combination of valuation methodologies that, in the judgment of the Company's management, are most relevant to such investment. The selected valuation methodologies for a particular investment are consistently applied on each measurement date. However, a change from one measurement date to another in a valuation methodology, its application or the related inputs, such as earnings and adjustments relating thereto to account for the estimated impact of the COVID-19 pandemic on a portfolio company, is possible if the change results in a measurement that is deemed to be equally or more representative of fair value in the circumstances.
Capital Gains Incentive Fee
Under GAAP, the Company calculates the capital gains incentive fee as if the Company had realized all investments at their fair values as of the reporting date. Accordingly, the Company accrues a provisional capital gains incentive fee taking into account any unrealized gains or losses. As the provisional incentive fee is subject to the performance of investments until there is a realization event, the amount of provisional capital gains incentive fee accrued at a reporting date may vary from the capital gains incentive fee that is ultimately paid and the differences could be material.
Deferred Financing Costs
Deferred financing costs consist of debt issuance costs associated with the Company's Credit Facility. The deferred financing costs consist of fees and other direct costs incurred by the Company in obtaining debt financing from its lenders and are recognized as assets and are amortized as interest expense over the term of the applicable credit facility. The balance of deferred financing costs as of March 31, 2021 and December 31, 2020 was $0.1 million and $0.2 million, respectively. Amortization expense relating to deferred debt financing costs during the three months ended March 31, 2021 and March 31, 2020 was $0.1 million and $0.1 million, respectively.
Deferred Offering Costs
Deferred offering costs consist of expenses related to the Company's $28.8 million in aggregate principal amount of its 2022 Notes (defined below in Note 3), including underwriting fees, legal fees, and other direct costs incurred. The deferred offering costs are recognized as a reduction to the 2022 Notes on the Company's consolidated statement of assets and liabilities and are amortized as interest expense through the maturity of the 2022 Notes. The balance of deferred offering costs as of March 31, 2021 and December 31, 2020 was $0.4 million and $0.4 million, respectively. Amortization expense of the deferred offering costs was $0.1 million and $0.1 million for the three months ended March 31, 2021 and March 31, 2020, respectively.
Dividends and Distributions
Dividends and distributions to common stockholders are recorded on the ex-dividend date. Distributions to stockholders which exceed tax distributable income (tax net investment income and realized gains, if any) are reported as distributions of
paid-in capital (i.e., return of capital). The determination of the tax attributes of the Company's distributions is made at the end of the year based upon the Company's taxable income for the full year and the distributions paid during the full year. Net realized capital gains, if any, are distributed at least annually, although the Company may decide to retain such capital gains for investment. The Company adopted a dividend reinvestment plan that provides for reinvestment of its dividends and other distributions on behalf of the Company's stockholders, unless a stockholder elects to receive cash. As a result, if the board of directors authorizes, and the Company declares, a cash dividend or other distribution, then stockholders who have not “opted out” of the dividend reinvestment plan will have their cash distribution automatically reinvested in additional shares of the Company's common stock, rather than receiving the cash distribution.
During the three months ended March 31, 2021, the Company did not pay any distributions. During the three months ended March 31, 2020, the Company paid distributions totaling $0.24 per share.
Income Taxes
The Company has elected to be treated, and intends to qualify annually, as a RIC under Subchapter M of the Code. To qualify for tax treatment as a RIC, the Company is required to meet certain income and asset diversification tests in addition to distributing at least 90% of ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, out of the assets legally available for distribution. As a RIC, the Company will be subject to a 4% nondeductible federal excise tax on certain undistributed income unless the Company distributes in a timely manner an amount at least equal to the sum of (1) 98% of its ordinary income for each calendar year, (2) 98.2% of its capital gain net income for the 1-year period ending October 31 in that calendar year and (3) any ordinary income and net capital gains for preceding years that were not distributed during such years and on which the Company paid no U.S. federal income tax. To the extent the Company receives taxable income information from portfolio companies subsequent to the filing of the Form 10-K which alters taxable income estimates and book/tax differences as reported in the filing, the Company’s tax return will be trued-up.
One of the Company's wholly-owned taxable subsidiaries, HCAP Equity Holdings LLC, holds certain portfolio investments that are listed on the Consolidated Schedule of Investments. HCAP Equity Holdings LLC is consolidated for financial reporting purposes, such that the company’s consolidated financial statements reflect the Company’s investments in the portfolio companies owned by it. The purpose of HCAP Equity Holdings LLC is to permit the Company to hold certain portfolio companies that are organized as limited liability companies (“LLCs”) (or other forms of pass-through entities) and still satisfy the RIC tax requirement that at least 90% of the RIC’s gross revenue for income tax purposes must consist of qualifying investment income. Absent such a taxable subsidiary, a proportionate amount of any gross income of an LLC (or other pass-through entity) portfolio investment would flow through directly to the RIC. To the extent that such income did not consist of qualifying investment income, it could jeopardize the Company’s ability to qualify as a RIC and therefore cause the Company to incur significant amounts of federal income taxes. When LLCs (or other pass-through entities) are owned by a taxable subsidiary, their income is taxed to the taxable subsidiary and does not flow through to the RIC, thereby helping the Company preserve its RIC status and resultant tax advantages. HCAP Equity Holdings LLC is not consolidated for income tax purposes and may generate income tax expense as a result of its ownership of interests in portfolio companies. This income tax expense is reflected in the Company’s Consolidated Statements of Operations.
HCAP Equity Holdings, LLC is subject to U.S. federal and state income taxes and may generate income tax liabilities or assets from permanent and temporary differences in the recognition of items for financial reporting and income tax purposes at HCAP Equity Holdings, LLC. During the three months ended March 31, 2021 the Company accrued a deferred tax benefit of $0.9 million for such temporary differences. During the three months ended March 31, 2020, the Company did not accrue any deferred tax expense for such temporary differences. The Company did not recognize a current income tax expense during either of the three months ended March 31, 2021 or 2020.
The Company’s tax returns are subject to examination by federal, state and local taxing authorities. Because many types of transactions are susceptible to varying interpretations under federal and state income tax laws and regulations, the amounts reported in the accompanying financial statements may be subject to change at a later date by the respective taxing authorities. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. Penalties or interest that may be assessed related to any income taxes would be classified as other operating expenses in the financial statements. Based on an analysis of the Company's tax position, there are no uncertain tax positions that met the recognition or measurement criteria and the Company has no amounts accrued for interest or penalties as of March 31, 2021. The Company is not currently undergoing any tax examinations. The Company does not anticipate any significant increase or decrease in unrecognized tax benefits for the next twelve months. The federal tax years 2017-2019 for the Company remain
subject to examination by the IRS. The state tax years 2015 - 2019 for the Company remain subject to examination by the state taxing authorities.
Excise Tax
The Company estimates excise tax based on timely information available. The Company estimates that it will not incur an excise tax for the fiscal year ending December 31, 2021. The Company did not incur an excise tax expense for the year ended December 31, 2020.
Note 3. Borrowings
The Company's principal balance of its debt obligations consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
March 31, 2021
|
|
December 31, 2020
|
|
Revolving line of credit
|
$
|
10,000,000
|
|
|
$
|
35,591,406
|
|
|
2022 Notes
|
28,750,000
|
|
|
28,750,000
|
|
|
Total debt obligations
|
$
|
38,750,000
|
|
|
$
|
64,341,406
|
|
The weighted average stated interest rate and weighted average maturity on all of the Company's debt obligations outstanding as of March 31, 2021 were 6.0% and 1.2 years, respectively. The weighted average stated interest rate and weighted average maturity on all of the Company's debt obligations outstanding as of December 31, 2020 were 5.8% and 1.2 years, respectively.
Revolving Line of Credit
On October 29, 2013, the Company entered into a Loan and Security Agreement (as amended, restated and modified from time to time, the "Loan and Security Agreement") with CapitalSource Bank (now Pacific Western Bank following a merger), as agent and a lender, and each of the lenders from time to time party thereto, including City National Bank, to provide the Company with its $45.0 million Credit Facility. The Credit Facility is secured by all of the Company’s assets, including the Company's equity interest in HCAP Equity Holdings, LLC and HCAP ICC, LLC.
As of March 31, 2021, advances under the Credit Facility bear interest at a rate per annum equal to the lesser of (i) the applicable LIBOR plus 4.50% (with a 1.00% LIBOR floor) and (ii) the maximum rate permitted under applicable law. During the revolving period, availability under the Credit Facility is determined by advance rates against eligible loans in the borrowing base up to a maximum aggregate availability of $44.3 million. Advance rates against individual investments range from 40% to 65% depending on the seniority of the investment in the borrowing base.
In addition, as of March 31, 2021, the Credit Facility included the following terms, among other things: (i) a revolving period scheduled to expire on June 30, 2021, until which date the Company may receive additional advances at the discretion of the lenders; (ii) provides for a senior leverage ratio (the ratio of total borrowed money other than subordinated debt and unsecured longer-term indebtedness to equity) of 1-to-1; (iii) provides for a total leverage ratio (the ratio of total debt to equity) of 1.4-to-1 and a limit on the Company’s debt service coverage ratio of 1.25-to-1.00 as of the end of any quarter in the period beginning as of August 1, 2020 (which ratio was 1.40-to-1.00 as of the end of any quarter prior to August 1, 2020); (iv) additional advances requested under the Credit Facility will be made only at the discretion of the lenders; (v) aggregate commitments under the Loan and Security Agreement are $45.0 million; (vi) a tangible net worth covenant for the Company that reflects a minimum amount equal to $58.0 million; (vii) an effective limitation on the aggregate value of eligible loans in the borrowing base to maximum of approximately $44.3 million; (viii) requires the Company to pay a monthly fee for unused amounts during the revolving period in an amount equal to 0.50% per annum multiplied by the difference between (a) the maximum loan amount under the Loan and Security Agreement and (b) the average daily principal balance of the obligations outstanding during the prior calendar month; (ix) prohibits the Company from repurchasing shares of its common stock and declaring and paying any distribution or dividend until the termination of the Loan and Security Agreement, except, in the case of distributions and dividends, to the extent necessary for the Company to maintain its eligibility to qualify as a RIC under Subchapter M of the Code; (x) includes a minimum liquidity covenant threshold for the Company of least $2.2 million through termination of the Loan and Security Agreement; and (xi) permits the use of an Alternative Rate (as defined in the Loan and Security Agreement) in place of LIBOR if certain conditions are satisfied.
Beginning as of August 1, 2020, during the amortization period, the Company is required to pay down the principal amount outstanding under the Credit Facility on a monthly basis in equal installments during the relevant calendar quarter so that such outstanding amounts will be reduced by an amount equal to or greater than (i) $2.2 million for each of the first two full calendar quarters following July 31, 2020, (ii) $3.3 million for each of the succeeding two full calendar quarters and (iii) $4.3 million for each succeeding calendar quarter until termination of the Credit Facility, which is scheduled to mature on October 30, 2021. During the amortization period, 90% of all principal collections the Company receives from its portfolio companies must generally be paid to the lenders to pay down the Company's obligations and other amounts outstanding under the Credit Facility. In addition, any proceeds the Company receives from the sale or issuance of its equity or debt securities during the amortization period must generally be applied to the prepayment of the Company's obligations under the Credit Facility.
The Credit Facility contains additional customary terms and conditions, including, without limitation, affirmative and negative covenants, including, without limitation, information reporting requirements, a minimum debt-service coverage ratio and maintenance of RIC and BDC status. The Credit Facility also contains customary events of default, including, without limitation, nonpayment, misrepresentation of representations and warranties in a material respect, breach of covenant, cross-default to other indebtedness, bankruptcy, change of control, and the occurrence of a material adverse effect. In addition, the Credit Facility provides that, upon the occurrence and during the continuation of any event of default, the Company’s administration agreement could be terminated and a backup administrator could be substituted by the agent.
The maturity date under the Credit Facility is the earlier of (x) October 30, 2021, or (y) the date that is six months prior to the maturity of any of the Company's outstanding unsecured long-term indebtedness. Based on the Company's outstanding 2022 Notes (defined below) that mature on September 15, 2022, the maturity date under the Credit Facility is October 30, 2021. HCAP Equity Holdings, LLC became a co-borrower under the Credit Facility in August 2016, and HCAP ICC, LLC, became a borrower under the Credit Facility in November 2017.
As of March 31, 2021 and December 31, 2020 the outstanding balance on the Credit Facility was $10.0 million and $35.6 million, respectively. As of March 31, 2021 and December 31, 2020, the Company was in compliance with the covenants under the Credit Facility.
2022 Notes
On August 24, 2017, the Company closed the public offering of $25.0 million in aggregate principal amount of its 6.125% Notes due 2022 (the "2022 Notes"). On September 1, 2017, the Company closed on an additional $3.75 million in aggregate principal amount of 2022 Notes to cover the over-allotment option exercised by the underwriters. In total, the Company issued 1,150,000 of the 2022 Notes at a price of $25.00 per Note. The total net proceeds to the Company from the 2022 Notes, after deducting underwriting discounts of $0.9 million and offering costs of $0.2 million, were $27.7 million. As of March 31, 2021, the outstanding principal balance of the 2022 Notes was $28.8 million and the debt issuance costs balance was $0.4 million. As of December 31, 2020, the outstanding principal balance of the 2022 Notes was $28.8 million and the debt issuance costs balance was $0.4 million.
The 2022 Notes mature on September 15, 2022 and bear interest at a rate of 6.125%. They are redeemable in whole or in part at any time at the Company's option at a price equal to 100% of the outstanding principal amount of the 2022 Notes plus accrued and unpaid interest. The 2022 Notes are unsecured obligations of the Company and rank pari passu with any existing and future unsecured unsubordinated indebtedness; senior to any of the Company’s future indebtedness that expressly provides it is subordinated to the 2022 Notes; effectively subordinated to all of the existing and future secured indebtedness of the Company, to the extent of the value of the assets securing such indebtedness, including borrowings under the Credit Facility; and structurally subordinated to all existing and future indebtedness and other obligations of any subsidiaries, financing vehicles, or similar facilities the Company may form in the future, with respect to claims on the assets of any such subsidiaries, financing vehicles, or similar facilities. Interest on the 2022 Notes is payable quarterly on March 15, June 15, September 15, and December 15 of each year. The 2022 Notes are listed on the Nasdaq Global Market under the trading symbol “HCAPZ.” The Company may from time to time repurchase 2022 Notes in accordance with the 1940 Act and the rules promulgated thereunder.
The indenture governing the 2022 Notes (the “2022 Notes Indenture”) contains certain covenants, including covenants (i) prohibiting the Company’s issuance of any senior securities unless, immediately after such issuance, the Company is in compliance with the 1940 Act asset coverage requirements (after giving effect to any exemptive relief granted to the Company
by the Securities and Exchange Commission (the “SEC”)); (ii) if the Company’s asset coverage has been below the 1940 Act minimum asset coverage requirements (after giving effect to any exemptive relief granted to the Company by the SEC) for more than six consecutive months, prohibiting the declaration of any cash dividend or distribution on the Company’s common stock (except to the extent necessary for the Company to maintain its treatment as a RIC under Subchapter M of the Code), or purchasing any of its common stock, unless, at the time of the declaration of the dividend or distribution or the purchase, and after deducting the amount of such dividend, distribution, or purchase, the Company is in compliance with the 1940 Act asset coverage requirements (after giving effect to any exemptive relief granted to the Company by the SEC); and (iii) requiring the Company to provide financial information to the holders of the 2022 Notes and the Trustee if the Company ceases to be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These covenants are subject to limitations and exceptions that are described in the 2022 Notes Indenture. As of March 31, 2021 and December 31, 2020, the Company was in compliance with the covenants under the 2022 Notes Indenture.
Regulatory Requirements
As a BDC, the Company is generally required, upon issuing any senior securities, to meet a coverage ratio of total assets, less liabilities and indebtedness not represented by senior securities, to total senior securities, which include all of the Company's borrowings, of at least 200%. However, the Small Business Credit Availability Act (the "SBCAA"), which was signed into law in March 2018, modified this requirement to permit a BDC to reduce the required minimum asset coverage ratio to 150% from 200%, if certain requirements are met. On May 4, 2018, the Company's board of directors unanimously approved the application of the modified asset coverage requirements set forth in Section 61(a) of the 1940 Act. As a result, the asset coverage ratio applicable to the Company under the 1940 Act changed to 150% from 200%, effective May 4, 2019.
As of March 31, 2021 and December 31, 2020, the Company's aggregate indebtedness, including outstanding borrowings under the Credit Facility and the aggregate principal amount outstanding on the 2022 Notes, was $38.8 million and $64.3 million, respectively, and as of March 31, 2021, and December 31, 2020, the Company's asset coverage, as defined in the 1940 Act, was 272% and 197%, respectively.
Note 4. Concentrations of Credit Risk
The Company’s investment portfolio consists primarily of loans to privately-held small to mid-size companies. Many of these companies may experience variation in operating results. Many of these companies do business in regulated industries and could be affected by changes in government regulations.
The largest debt investments may vary from year to year as new debt investments are recorded and repaid. The Company’s five largest debt investments represented approximately 59.6% and 54.7% of total principal balance of debt investments outstanding as of March 31, 2021 and December 31, 2020, respectively. Investment income, consisting of interest and fees, can fluctuate significantly upon repayment of large loans. Investment income from the five largest debt investments accounted for approximately 48.1% and 37.8% of total investment income for the three months ended March 31, 2021 and March 31, 2020, respectively.
Note 5. Stockholders' Equity
The following table summarizes the Company's common stock activity for each of the three months ended March 31, 2021 and March 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2021
|
|
2020
|
|
|
Shares
|
Amount
|
|
Shares
|
Amount
|
|
Dividends reinvested
|
—
|
|
$
|
—
|
|
|
12,625
|
|
$
|
85,538
|
|
|
Total
|
—
|
|
$
|
—
|
|
|
12,625
|
|
$
|
85,538
|
|
As of March 31, 2021 and 2020, the Company had no dilutive securities outstanding.
The Company has adopted an “opt out” dividend reinvestment plan, or “DRIP,” for its common stockholders. As a result, if the Company makes cash distributions, then stockholders’ cash distributions will be automatically reinvested in
additional shares of the Company's common stock, unless they specifically “opt out” of the dividend reinvestment plan so as to receive cash distributions.
Note 6. Fair Value Measurements
As described in Note 2, the Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. A description of the valuation methodologies used for assets and liabilities recorded at fair value, and for estimating fair value for financial and non-financial instruments not recorded at fair value, is set forth below. The information presented should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only required for a portion of the Company’s assets and liabilities.
2022 Notes: The 2022 Notes are a Level 2 financial instrument with readily observable market inputs from other comparable unsecured notes in the marketplace. The 2022 Notes trade under the ticker "HCAPZ". As of March 31, 2021 and December 31, 2020, the fair value of the 2022 Notes was $29.2 million and $28.8 million, respectively, which was based on the closing price of the 2022 Notes on the respective dates.
Revolving line of credit: Borrowings under the Credit Facility are carried at cost. The fair value of the Credit Facility as of March 31, 2021 and December 31, 2020 was $10.0 million and $35.6 million, respectively, which approximates cost due to its short-term maturity and floating rate coupon.
Off-balance sheet financial instruments: The fair value of unfunded commitments is estimated based on the fair value of the funded portion of the corresponding debt investment.
As of March 31, 2021 and December 31, 2020, unfunded commitments totaled $1.3 million and $1.8 million, respectively, and if funded, their estimated fair values on such dates were $1.3 million and $1.8 million, respectively.
There were no assets or liabilities measured at fair value on a nonrecurring basis as of March 31, 2021 or December 31, 2020.
The following table details the financial instruments that are carried at fair value and measured at fair value on a recurring basis as of March 31, 2021 and December 31, 2020, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Values as of March 31, 2021
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
Senior Secured (1)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
58,891,399
|
|
|
$
|
58,891,399
|
|
|
Junior Secured
|
—
|
|
|
—
|
|
|
10,052,161
|
|
|
10,052,161
|
|
|
Equity and Equity Related Securities
|
—
|
|
|
—
|
|
|
8,193,990
|
|
|
8,193,990
|
|
|
Total
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
77,137,550
|
|
|
$
|
77,137,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Values as of December 31, 2020
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
Senior Secured (1)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
64,629,875
|
|
|
$
|
64,629,875
|
|
|
Junior Secured
|
—
|
|
|
—
|
|
|
9,417,801
|
|
|
9,417,801
|
|
|
Equity and Equity Related Securities
|
—
|
|
|
—
|
|
|
15,506,897
|
|
|
15,506,897
|
|
|
Total
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
89,554,573
|
|
|
$
|
89,554,573
|
|
|
|
|
|
|
|
|
|
(1)
|
Senior secured category includes both first out and last out term loans. The Company's last out senior secured loans are identified on the Consolidated Schedule of Investments.
|
The following table provides quantitative information related to the significant unobservable inputs used to fair value the Company's Level 3 investments as of March 31, 2021 and December 31, 2020, respectively, and indicates the valuation techniques utilized by the Company to determine the fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of Investment
|
|
Fair Value at March 31, 2021
|
|
Valuation Technique (1)
|
|
Significant Unobservable Input
|
|
Range
|
|
Weighted Average (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured (3)
|
|
$
|
58,891,399
|
|
|
Bond Yield
|
|
Risk adjusted discount factor
|
|
8.0% - 18.2%
|
|
15.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
|
|
EBITDA multiple
|
|
4.3x -8.6x
|
|
6.0x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
Weighted average cost of capital
|
|
8.3% - 22.3%
|
|
12.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior Secured
|
|
$
|
10,052,161
|
|
|
Market
|
|
Risk adjusted discount factor
|
|
13.8% - 13.8%
|
|
13.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
|
|
EBITDA multiple
|
|
5.0x - 8.5x
|
|
6.8x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
Weighted average cost of capital
|
|
12.1% - 44.0%
|
|
32.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity and Equity Related Securities
|
|
$
|
8,193,990
|
|
|
Market
|
|
EBITDA multiple
|
|
4.9x - 11.5x
|
|
9.4x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
|
|
Book value multiple
|
|
1.0x - 1.0x
|
|
1.0x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of Investment
|
|
Fair Value at December 31, 2020
|
|
Valuation Technique (1)
|
|
Significant Unobservable Input
|
|
Range
|
|
Weighted Average (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured (3)
|
|
$
|
64,629,875
|
|
|
Bond Yield
|
|
Risk adjusted discount factor
|
|
8.0% - 18.4%
|
|
14.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
|
|
EBITDA multiple
|
|
3.5x - 12.4x
|
|
6.2x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
Weighted average cost of capital
|
|
8.0% - 22.8%
|
|
12.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Junior Secured
|
|
$
|
9,417,801
|
|
|
Bond Yield
|
|
Risk adjusted discount factor
|
|
13.8% - 13.8%
|
|
13.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
|
|
EBITDA multiple
|
|
4.8x - 8.9x
|
|
6.8x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
Weighted average cost of capital
|
|
14.3% - 42.0%
|
|
31.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity and Equity Related Securities
|
|
$
|
15,506,897
|
|
|
Market
|
|
EBITDA multiple
|
|
3.5x - 12.4x
|
|
10.8x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
|
|
Book value multiple
|
|
1.0x - 1.0x
|
|
1.0x
|
|
|
|
|
|
|
|
|
(1)
|
When estimating the fair value of its debt investments, the Company typically utilizes the bond yield technique. The significant unobservable inputs used in the fair value measurement under this technique are risk adjusted discount factors. However, the Company also takes into consideration the market technique and income technique in order to determine whether the fair value of the debt investment is within the estimated enterprise value of the portfolio company. The significant unobservable inputs used under these techniques are EBITDA multiples and weighted average cost of capital. Under the bond yield technique, significant increases (decreases) in the risk adjusted discount factors would result in a significantly lower (higher) fair value measurement.
When estimating the fair value of its equity investments, the Company utilizes the (i) market technique and (ii) income technique. The significant unobservable inputs used in the fair value measurement of the Company’s equity investments are EBITDA multiples and weighted average cost of capital (“WACC”). Significant increases (decreases) in EBITDA multiple inputs in isolation would result in a significantly higher (lower) fair value measurement. Significant increases (decreases) in WACC inputs in isolation would result in a significantly lower (higher) fair value measurement.
|
|
(2)
|
The weighted average is calculated in two parts. First, the Company calculates each portfolio company's unobservable input weight by multiplying an individual portfolio company's unobservable input by its fair value and dividing by the total fair value of each portfolio company that utilizes that unobservable input. Then, the Company totals each portfolio company's weight that utilizes that specific unobservable input to calculate the weighted average.
|
|
(3)
|
Senior secured category includes both first out and last out term loans. The Company's last out senior secured loans are identified on the Consolidated Schedule of Investments.
|
The following tables show a reconciliation of the beginning and ending balances for Level 3 assets for the three months ended March 31, 2021 and March 31, 2020. Transfers between investment type and level, if any, are recognized at fair value at the beginning of the period in which the transfers occur:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2021
|
|
|
Senior Secured (1)
|
|
Junior Secured
|
|
Equity and Equity Related Securities
|
|
Total Investments as of March 31, 2021
|
|
|
|
|
|
|
|
|
|
|
Fair value of portfolio, beginning of period
|
$
|
64,629,875
|
|
|
$
|
9,417,801
|
|
|
$
|
15,506,897
|
|
|
$
|
89,554,573
|
|
|
New/Add-on investments/principal increases
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Principal payments received/principal reductions
|
(7,085,681)
|
|
|
—
|
|
|
—
|
|
|
(7,085,681)
|
|
|
Sales of investments
|
—
|
|
|
—
|
|
|
(9,236,765)
|
|
|
(9,236,765)
|
|
|
Loan origination and other fees received
|
(13,750)
|
|
|
—
|
|
|
—
|
|
|
(13,750)
|
|
|
Payment-in-kind interest earned
|
339,122
|
|
|
28,131
|
|
|
—
|
|
|
367,253
|
|
|
Accretion of deferred loan origination fees/discounts
|
150,760
|
|
|
2,585
|
|
|
—
|
|
|
153,345
|
|
|
Transfers to (from) level 3
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Transfer (to) from investment type
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net realized gains on investments
|
—
|
|
|
—
|
|
|
6,445,524
|
|
|
6,445,524
|
|
|
Change in unrealized appreciation (depreciation) on investments
|
871,073
|
|
|
603,644
|
|
|
(4,521,666)
|
|
|
(3,046,949)
|
|
|
Fair value of portfolio, end of period
|
$
|
58,891,399
|
|
|
$
|
10,052,161
|
|
|
$
|
8,193,990
|
|
|
$
|
77,137,550
|
|
|
Net change in unrealized appreciation relating to Level 3 assets still held at March 31, 2021
|
$
|
1,039,813
|
|
|
$
|
603,644
|
|
|
$
|
1,923,857
|
|
|
$
|
3,567,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
|
|
Senior Secured (1)
|
|
Junior Secured
|
|
Equity and Equity Related Securities
|
|
Total Investments as of March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
Fair value of portfolio, beginning of period
|
$
|
85,954,384
|
|
|
$
|
18,757,348
|
|
|
$
|
12,097,658
|
|
|
$
|
116,809,390
|
|
|
New/Add-on investments/principal increases
|
1,405,000
|
|
|
—
|
|
|
200,000
|
|
|
1,605,000
|
|
|
Principal payments received/principal reductions
|
(3,042,841)
|
|
|
—
|
|
|
—
|
|
|
(3,042,841)
|
|
|
Sales of investments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Loan origination and other fees received
|
(34,600)
|
|
|
—
|
|
|
—
|
|
|
(34,600)
|
|
|
Payment-in-kind interest earned
|
261,719
|
|
|
3,243
|
|
|
—
|
|
|
264,962
|
|
|
Accretion of deferred loan origination fees/discounts
|
137,414
|
|
|
12,328
|
|
|
—
|
|
|
149,742
|
|
|
Transfers to (from) level 3
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Transfer (to) from investment type
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net realized losses on investments
|
—
|
|
|
—
|
|
|
(102,420)
|
|
|
(102,420)
|
|
|
Change in unrealized depreciation on investments
|
(2,481,635)
|
|
|
(989,767)
|
|
|
(1,108,135)
|
|
|
(4,579,537)
|
|
|
Fair value of portfolio, end of period
|
$
|
82,199,441
|
|
|
$
|
17,783,152
|
|
|
$
|
11,087,103
|
|
|
$
|
111,069,696
|
|
|
Net change in unrealized depreciation relating to Level 3 assets still held at March 31, 2020
|
$
|
(2,475,431)
|
|
|
$
|
(989,767)
|
|
|
$
|
(1,210,556)
|
|
|
$
|
(4,675,754)
|
|
|
|
|
|
|
|
|
|
(1)
|
Senior secured category includes both first out and last out term loans. The Company's last out senior secured loans are identified on the Consolidated Schedule of Investments.
|
There were no transfers between levels of the fair value hierarchy during the three months ended March 31, 2021 and March 31, 2020.
Note 7. Related Party Transactions
The Company's predecessor, Harvest Capital Credit LLC, was founded in 2011 by certain members of HCAP Advisors and JMP Group Inc. (now JMP Group LLC) ("JMP Group"), a full-service investment banking and asset management firm and affiliate of the Company. JMP Group currently holds an equity interest in us and a majority equity interest in HCAP Advisors. JMP Group conducts its primary business activities through two wholly-owned subsidiaries: (i) Harvest Capital Strategies, LLC ("HCS"), an SEC-registered investment adviser that focuses on long-short equity hedge funds, middle-market lending and private equity, and (ii) JMP Securities LLC, a full-service investment bank that provides equity research, institutional brokerage and investment banking services to growth companies and their investors.
Management Fees and Incentive Fees
In conjunction with the Company's initial public offering in May 2013, HCAP entered into an investment advisory and management agreement with HCAP Advisors. Under the investment advisory and management agreement, the base management fee is calculated based on the Company's gross assets (which includes assets acquired with the use of leverage and excludes cash and cash equivalents) at an annual rate of (i) 2.0% of gross assets up to and including $350 million, (ii) 1.75% of gross assets above $350 million and up to and including $1 billion, and (iii) 1.5% of gross assets above $1 billion.
Management fee expense for the three months ended March 31, 2021 and March 31, 2020 totaled $0.4 million and $0.6 million, respectively.
The incentive fee consists of two parts. The first part is calculated and payable quarterly in arrears based on the pre-incentive fee net investment income for the immediately preceding calendar quarter and is 20% of the amount, if any, by which
the pre-incentive fee net investment income for the immediately preceding calendar quarter exceeds a 2.0% (which is 8.0% annualized) hurdle rate and a “catch-up” provision, pursuant to which HCAP Advisors receives 100% of the pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.5% (10.0% annualized). The effect of this "catch-up" provision is that, if pre-incentive fee net investment income exceeds 2.5% in any calendar quarter, HCAP Advisors will receive 20% of the pre-incentive fee net investment income as if a hurdle rate did not apply. The income-based incentive fee is subject to a total return requirement, which provides that no incentive fee in respect of the pre-incentive fee net investment income is payable except to the extent 20% of the cumulative net increase in net assets resulting from operations over the then current and 11 preceding calendar quarters exceeds the cumulative income and capital gains incentive fees accrued and/or paid for the 11 preceding quarters. As a result, even in the event that the pre-incentive fee net investment income exceeds the hurdle rate, no incentive fee will be payable to the extent that the Company has generated cumulative net decreases in assets resulting from operations over the trailing 12 quarters due to unrealized or realized net losses on its investments.
The Company did not incur an income-based incentive fee for either of the three months ended March 31, 2021 or March 31, 2020.
The second part of the incentive fee is calculated and payable in arrears as of the end of each calendar year (or upon termination of the investment advisory and management agreement, as of the termination date) and equals 20% of the aggregate realized capital gains on a cumulative basis from inception through the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gains incentive fees.
The capital gains incentive fee is determined and paid annually with respect to cumulative realized capital gains (but not unrealized capital gains) to the extent such cumulative realized capital gains exceed cumulative realized and unrealized capital losses through the end of such fiscal year (less the aggregate amount of any previously paid capital gains incentive fee). The Company also records an expense accrual relating to the capital gains incentive fee payable by the Company to HCAP Advisors when (i) the cumulative realized and unrealized gains on its investments exceed all cumulative realized and unrealized capital losses on its investments and (ii) the capital gains incentive fee that would be payable exceeds the aggregate amount of any previously paid capital gains incentive fee given the fact that a capital gains incentive fee would be owed to HCAP Advisors if the Company were to liquidate its investment portfolio at such time. Any decrease in unrealized appreciation in subsequent periods will result in the reversal of some or all of such previously recorded expense accrual. The Company recorded a net change in unrealized depreciation of $3.0 million and $4.6 million for the three months ended March 31, 2021 and March 31, 2020, respectively. The Company recorded net realized gains of $6.4 million for the three months ended March 31, 2021 and net realized losses of $0.1 million for the three months ended March 31, 2020. The Company did not incur a capital gains incentive fee for either of the three months ended March 31, 2021 or March 31, 2020.
Total base management fees and incentive fees expense was $0.4 million and $0.6 million for the three months ended March 31, 2021 and March 31, 2020, respectively. Total accrued base management fees and incentive fees payable were $0.4 million and $0.5 million as of March 31, 2021 and December 31, 2020, respectively.
Administrative Services Expense
HCAP Advisors also serves as the Company's administrator pursuant to an administration agreement. Under the administration agreement, HCAP Advisors provides administrative services to the Company and furnishes the Company with office facilities, equipment, and clerical, bookkeeping, and recordkeeping services. In full consideration of the provision of the services of HCAP Advisors, the Company reimburses HCAP Advisors for the costs and expenses incurred by HCAP Advisors in performing its obligations and providing personnel and facilities under the administration agreement. Payments under the administration agreement are equal to an amount based upon the Company's allocable portion of the administrator's overhead in performing its obligations under the administration agreement, including rent and the Company's allocable portion of the cost of its executive officers and their respective staffs and administrative services provided to the Company by its executive officers. HCAP Advisors agreed to cap the amounts payable by the Company under the administration agreement to $350,000 per quarter for each quarter in the 2021 fiscal year and $1.4 million during the 2020 fiscal year.
Total administrative services expense was $0.4 million and $0.4 million for the three months ended March 31, 2021 and March 31, 2020, respectively. Accrued administrative services fees payable were $0.4 million and $0.4 million as of March 31, 2021 and December 31, 2020, respectively.
Co-investment Transactions with Affiliates
On December 10, 2015, the Company received co-investment exemptive relief under the 1940 Act from the SEC (the "Exemptive Relief") permitting the Company greater flexibility to negotiate the terms of co-investments with certain accounts managed or held by JMP Group and certain of its subsidiaries, in each case in a manner consistent with the Company's investment objectives and strategies as well as regulatory requirements and other pertinent factors (including the terms and conditions of the Exemptive Relief). Under the terms of the relief, a “required majority” (as defined in Section 57(o) of the 1940 Act) of the Company's independent directors must make certain conclusions in connection with a co-investment transaction, including (1) the terms of the proposed transaction, including the consideration to be paid, are reasonable and fair to the Company and its stockholders and do not involve overreaching in respect of the Company or its stockholders on the part of any person concerned and (2) the proposed transaction is consistent with the interests of the Company's stockholders and is consistent with the Company's investment objectives and strategies.
Managerial Assistance Fees
The Company may be requested by its portfolio companies to provide significant managerial assistance and may receive fees from the applicable portfolio company in exchange for such services. The Company may then reimburse HCAP Advisors at cost for its expenses related to providing such services on the Company’s behalf, which amount will not exceed the amount the Company receives from such companies for providing this assistance. In addition, the amounts reimbursed to HCAP Advisors will not count against the $1.4 million cap on amounts payable by the Company under the administration agreement.
The Company incurred $0.1 million in managerial assistance costs associated with work performed by HCAP Advisors for managing Infinite Care, LLC during the three months ended March 31, 2021. For the three months ended March 31, 2021, the Company billed Infinite Care, LLC $0.1 million in managerial assistance fees. Managerial assistance fees earned during the three months ended March 31, 2021 of $0.1 million are presented net against the aforementioned managerial assistance costs incurred in the consolidated statement of operations. The Company received $0.1 million from Infinite Care, LLC during the three months ended March 31, 2021, and paid $0.5 million (which the Company had previously received from Infinite Care, LLC during the year ended December 31, 2020) to HCAP Advisors during the three months ended March 31, 2021 and $0.1 million was payable to HCAP Advisors as of March 31, 2021. The $0.1 million payable to HCAP Advisors is included in accounts payable and accrued expenses in the consolidated statement of assets and liabilities as of March 31, 2021.
Strategic Alternatives
In October 2020, the HCAP Special Committee, on behalf of the Company, entered into an agreement with JMP Securities LLC at the direction of HCAP Advisors in connection with the Company's strategic alternatives review process, which had benefited the Company (the "JMP Securities Agreement"). In consideration for the services covered by the JMP Securities Agreement, the Company paid JMP Securities LLC $100,000 under the terms of the JMP Securities Agreement and, upon the consummation of the Mergers, will be required under the JMP Securities Agreement to pay JMP Securities an additional $250,000 in fulfillment of the remainder of the fee payable under the terms of the JMP Securities Agreement.
Note 8. Commitments and Contingencies
At March 31, 2021, the Company had a total of $1.3 million in unfunded commitments comprised entirely of unfunded revolving lines of credit and delayed draw term loans for two of the Company’s debt investments. As of December 31, 2020, the Company had a total of $1.8 million in unfunded commitments comprised entirely of unfunded revolving lines of credit and delayed draw term loans for four of the Company’s debt investments. The following table summarizes the Company's unfunded commitments and extended fair value if the unfunded commitments were fully funded as of March 31, 2021 and December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2021
|
|
As of December 31, 2020
|
|
|
Unfunded commitment
|
|
Extended fair value of unfunded commitment if fully funded
|
|
Unfunded commitment
|
|
Extended fair value of unfunded commitment if fully funded
|
|
Coastal Screen and Rail, LLC
|
$
|
850,000
|
|
|
$
|
850,000
|
|
|
$
|
850,000
|
|
|
$
|
850,000
|
|
|
National Program Management & Project Controls, LLC
|
—
|
|
|
—
|
|
|
35,600
|
|
|
36,312
|
|
|
Surge Busy Bee Holdings, LLC
|
450,000
|
|
|
438,196
|
|
|
450,000
|
|
|
432,340
|
|
|
V-Tek, Inc.
|
—
|
|
|
—
|
|
|
463,903
|
|
|
460,551
|
|
|
Total
|
$
|
1,300,000
|
|
|
$
|
1,288,196
|
|
|
$
|
1,799,503
|
|
|
$
|
1,779,203
|
|
Legal Proceedings
The Company and its subsidiaries may from time to time be involved in litigation arising out of their operations in the normal course of business or otherwise, including the enforcement of rights under the contracts with the Company's portfolio companies. Third parties may also seek to impose liability on the Company in connection with the activities of its portfolio companies. Except as discussed below, neither the Company nor its subsidiaries are currently subject to any material pending legal proceedings, other than ordinary routine litigation incidental to their respective businesses, and no such material proceedings are known to be contemplated.
The Company and certain of its officer and directors as well as JMP Group have been named as defendants in two putative stockholder class action lawsuits, both filed in the Court of Chancery in the State of Delaware, captioned Stewart Thompson v. Joseph Jolson, et al., Case No. 2021-0164 and Ronald Tornese v. Joseph Jolson, et al., Case No. 2021-0167 (the “Delaware Actions”). In addition, the Company and certain of its officer and directors, among others, have been named as defendants in stockholder actions, filed in the Supreme Court of the State of New York, captioned Greg Ramanauskas v. Harvest Capital Credit Corp, et al., Case No. 651524/2021 (the “New York State Action”) and in the Eastern District of New York, captioned Kyle Kruchok v. Harvest Capital Credit Corp., et al., Case No. 1:21-cv-01573 (the “New York Federal Action”) (collectively with the Delaware Actions, the “Litigations”).
On February 25, 2021, two putative stockholders, each purporting to act on behalf of himself and the Company’s common stockholders, filed substantially identical verified class action complaints in the Court of Chancery in the State of Delaware. The complaints in the Delaware Actions allege certain breaches of fiduciary duties against the defendants as well as aiding and abetting claims against JMP Group and the Company’s Chief Executive Officer concerning the Company’s proposed merger with PTMN and Acquisition Sub. On March 5, 2021, a putative stockholder filed a similar complaint in the Supreme Court of the State of New York, alleging certain breaches of fiduciary duties against individual defendants and aiding and abetting claims against the Company, PTMN, Acquisition Sub, and Sierra Crest. Later, on March 24, 2021, a putative stockholder filed another similar complaint in the Eastern District of New York, alleging violations of Section 14(a) of the Exchange Act against the Company and certain officers and directors, and Section 20(a) of the Exchange Act against individual defendants.
The complaints in the Delaware Actions and the New York State Action generally allege that the defendants breached their fiduciary duties in connection with the proposed merger and caused to be filed with the SEC an allegedly materially incomplete and misleading registration statement on Form N-14 relating to the proposed merger. The complaint in the New York Federal Action generally alleges that the defendants made material false and misleading statements and/or omissions in the registration statement on Form N-14 relating to the proposed merger. The plaintiffs in the Litigations ask the court to enjoin the proposed merger, and award attorneys’ fees and costs, among other relief. Further, the plaintiffs in the Delaware Actions ask the court to direct the defendants to account to plaintiffs and the putative class for all damages suffered as a result of the alleged wrongdoing. The plaintiffs in the New York Federal Action also ask for rescissory damages. The Litigations remain at an early stage.
The Company intends to defend itself vigorously against the allegations in the aforementioned actions. Neither the outcome of the lawsuits nor an estimate of any reasonably possible losses is determinable at this time. An adverse judgment for monetary damages could have a material adverse effect on the Company’s operations and liquidity or that of any combined company. There can be no assurances that additional complaints or demands will not be filed or made with respect to the
proposed Mergers. If additional similar complaints or demands are filed or made, absent new or different allegations that are material, the Company may not necessarily announce them.
Note 9. Net Increase (Decrease) in Net Assets Resulting from Operations per Common Share
In accordance with the provision of ASC 260, “Earnings per Share,” basic earnings per share is computed by dividing earnings available to common stockholders by the weighted average number of shares outstanding during the period. Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis. There were no potentially dilutive common shares outstanding as of March 31, 2021 or March 31, 2020.
The following information sets forth the computation of the weighted average basic and diluted net increase in net assets per share from operations for each period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2021
|
|
2020
|
|
Net increase (decrease) in net assets resulting from operations
|
$
|
4,452,883
|
|
|
$
|
(3,677,294)
|
|
|
Weighted average shares outstanding (basic and diluted)
|
5,968,296
|
|
|
5,949,548
|
|
|
Net increase (decrease) in net assets resulting from operations per share
|
$
|
0.75
|
|
|
$
|
(0.62)
|
|
Note 10. Income Tax
To receive RIC tax treatment, the Company must, among other things, distribute annually at least 90% of its net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. Depending on the level of taxable income earned in a tax year, the Company may choose to carry forward taxable income in excess of current year distributions into the next tax year and pay a 4% excise tax on such income. Any such carryover taxable income must be distributed through a dividend declared prior to filing the final tax return related to the year which generated such taxable income. The Company may, in the future, make actual distributions to its stockholders of its net capital gains. The Company can offer no assurance that it will achieve results that will permit the payment of any cash distributions and, if the Company issues senior securities, the Company may be prohibited from making distributions if doing so causes the Company to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the terms of any of the Company's borrowings. The Company did not incur an excise tax for calendar year 2020.
The Company's wholly-owned subsidiaries, HCAP Equity Holdings, LLC and HCAP ICC, LLC, have each elected to be taxed as a C-Corporation. As such, income taxes are accrued for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis of certain assets and liabilities for financial and tax reporting. The deferred taxes represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax assets are limited to amounts considered to be realizable in future periods. The Company accounts for any interest and penalties related to unrecognized tax benefits as part of the income tax provision.
During the three months ended March 31, 2021, the Company recognized a $0.9 million benefit for deferred taxes on unrealized losses on investments. As of March 31, 2021, the Company has a deferred tax liability of $0.3 million. As of December 31, 2020, the Company had a deferred tax liability of $1.2 million.
Note 11. Financial Highlights
The following is a schedule of financial highlights for the three months ended March 31, 2021 and March 31, 2020, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2021
|
|
2020
|
|
Per share data:
|
|
|
|
|
Net asset value at beginning of period
|
$
|
10.42
|
|
|
$
|
11.23
|
|
|
Net investment income (1)
|
0.02
|
|
|
0.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2021
|
|
2020
|
|
Net realized gains (losses) on investments (1)
|
1.08
|
|
|
(0.01)
|
|
|
Net change in unrealized depreciation on investments, net of deferred income taxes (1)
|
(0.35)
|
|
|
(0.78)
|
|
|
Net decrease in net assets from operations (1)
|
0.75
|
|
|
(0.62)
|
|
|
Distributions (2)
|
—
|
|
|
(0.24)
|
|
|
Total distributions
|
—
|
|
|
(0.24)
|
|
|
Net asset value at end of period
|
$
|
11.17
|
|
|
$
|
10.37
|
|
|
Net assets at end of period
|
66,669,404
|
|
|
61,761,890
|
|
|
Shares outstanding at end of period
|
5,968,296
|
|
|
5,958,479
|
|
|
Weighted average shares outstanding (basic and diluted)
|
5,968,296
|
|
|
5,949,548
|
|
|
Per share closing price at end of period
|
$
|
8.65
|
|
|
$
|
4.97
|
|
|
Ratios and Supplemental data:
|
|
|
|
|
Total return based on change in NAV (not annualized) (3)
|
7.20
|
%
|
|
(4.35)
|
%
|
|
Total investment return (not annualized) (4)
|
14.42
|
%
|
|
(41.3)
|
%
|
|
Average Net Assets
|
$
|
64,442,963
|
|
|
$
|
64,271,686
|
|
|
Ratio of expenses to average net assets (annualized)
|
12.89
|
%
|
|
14.30
|
%
|
|
Ratio of net investment income to average net assets (annualized)
|
0.75
|
%
|
|
6.15
|
%
|
|
Portfolio Turnover Ratio
|
—
|
%
|
|
1.35
|
%
|
|
Asset Coverage Ratio
|
272
|
%
|
|
185
|
%
|
|
|
|
|
|
|
|
|
(1)
|
Based on weighted average number of common shares outstanding for the period.
|
|
(2)
|
The Company did not make any distributions during the three months ended March 31, 2021. Distributions for the three months ended March 31, 2020 exceeded net investment income in the amount of $439,166. See "Dividends and Distributions" in Note 2.
|
|
(3)
|
This measure of total investment return measures the changes in net asset value over the period indicated, taking into account dividends as reinvested. The return is calculated by taking the difference between the net asset value per share at the end of the period (plus assumed reinvestment of dividends and distributions at prices obtained under the Company's dividend reinvestment plan) and the net asset value per share at the beginning of the period, and dividing that difference by the net asset value per share at the beginning of the period. This return primarily differs from the total investment return in that it does not take into account changes in the market price of the Company's stock.
|
|
(4)
|
This measure of total investment return measures the changes in market value over the period indicated, taking into account dividends as reinvested. The return is calculated based on an assumed purchase of stock at the market price on the first day of the period (plus assumed reinvestment of dividends and distributions at prices obtained under the Company’s dividend reinvestment plan) and an assumed sale at the market price on the last day of the period. The difference between the sale and purchases is then divided by the purchase prices. The total investment return does not reflect any sales load that may be paid by investors.
|
Note 12. Significant Subsidiary
The Company has determined that Infinite Care, LLC, an unconsolidated portfolio company of the Company, has met the conditions of a significant subsidiary under Regulation S-X Rule 10-01(b)(1) for the three months ended March 31, 2021. The financial information presented below includes a summarized income statement for Infinite Care, LLC, for each of the three months ended March 31, 2021 and March 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Statement - Infinite Care, LLC
|
|
For the Three Months Ended March 31, 2021
|
|
For the Three Months Ended March 31, 2020
|
|
Net sales
|
|
$
|
3,815,317
|
|
|
$
|
4,284,953
|
|
|
Cost of services
|
|
2,813,272
|
|
|
3,358,572
|
|
|
Gross profit
|
|
1,002,045
|
|
|
926,381
|
|
|
Operating expenses
|
|
1,324,029
|
|
|
998,939
|
|
|
Loss from operations
|
|
(321,984)
|
|
|
(72,558)
|
|
|
Other income (expenses), net
|
|
1,339,413
|
|
|
(247,345)
|
|
|
Net income (loss)
|
|
$
|
1,017,429
|
|
|
$
|
(319,903)
|
|
Note 13. Subsequent Events
The Company's management has evaluated subsequent events through the date of issuance of the consolidated interim financial statements included herein. There have been no subsequent events that occurred during such period that would require disclosure in this Form 10-Q or would be required to be recognized in the consolidated financial statements as of and for the three months ended March 31, 2021, except as discussed below.
As of May 7, 2021, the Company had no indebtedness outstanding under its Credit Facility.
On April 5, 2021, the Company sold its membership interests in Infinite Care, LLC and received a final payment to satisfy the amounts outstanding under its senior secured term loan and revolving line of credit provided to Infinite Care, LLC. The Company received $7.6 million in gross proceeds at the closing of the transaction. An additional $2.2 million of proceeds is scheduled to be released to the Company at various dates during the two-year period following the closing date of the transaction once certain conditions are met.
On April 30, 2021, the Company received $2.5 million from Water-Land Manufacturing & Supply, LLC, representing a full payoff at par of the Company's junior secured term loan. The Company also received a $25,000 prepayment fee upon the payoff.
On May 3, 2021, the Company received $4.4 million from Safety Services Acquisition Corp., representing a full payoff at par of the Company's senior secured term loan. The Company retained its Series A preferred stock investment in Safety Services Acquisition Corp.
Schedule 12-14
Harvest Capital Credit Corporation
Consolidated Schedule of Investments in and Advances to Affiliates (Unaudited)
Three Months Ended March 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company
|
Type of Investment (4) (5) (10) (17) (18)
|
|
Net Realized Gain (Loss)
|
Net Change in Unrealized Appreciation (Depreciation)
|
Amount of Dividends or Interest Credited to Income (1)
|
December 31, 2020 Value
|
Gross Additions (2)
|
Gross Reductions (3)
|
March 31, 2021 Value
|
|
More than 25% Owned
|
|
|
|
|
|
|
|
|
|
|
Flight Lease VII, LLC
|
Common Equity Interest (46.14% fully diluted common equity)
|
(9) (11)
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
300,000
|
|
$
|
—
|
|
$
|
—
|
|
$
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Infinite Care, LLC
|
Senior Secured Term Loan, due 01/2022 (8.00%; 4.00% cash + 4.00% PIK)
|
(8) (13)
|
—
|
|
(248,867)
|
|
101,203
|
|
5,043,356
|
|
50,602
|
|
(248,867)
|
|
4,845,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Revolving Line of Credit, due 01/2022 (8.00%; 4.00% cash + 4.00% PIK)
|
(8)
|
—
|
|
—
|
|
95,867
|
|
4,777,403
|
|
47,933
|
|
—
|
|
4,825,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership Interest (100% membership interests)
|
(7) (8)
|
—
|
|
(794,584)
|
|
—
|
|
794,584
|
|
—
|
|
(794,584)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total More Than 25% Owned Portfolio Companies
|
|
|
$
|
—
|
|
$
|
(1,043,451)
|
|
$
|
197,070
|
|
$
|
10,915,343
|
|
$
|
98,535
|
|
$
|
(1,043,451)
|
|
$
|
9,970,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5% and Greater Owned, But Not Greater Than 25%
|
|
|
|
|
|
|
|
|
|
|
Flight Lease XII, LLC
|
Common Equity Interest (19.23% fully diluted common equity)
|
(7) (11)
|
$
|
—
|
|
$
|
370,479
|
|
$
|
—
|
|
$
|
158,346
|
|
$
|
370,479
|
|
$
|
—
|
|
$
|
528,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kleen-Tech Acquisition, LLC
|
Common Equity Units (6.89% fully diluted common equity)
|
(7) (15)
|
—
|
|
1,009,913
|
|
—
|
|
325,000
|
|
1,009,913
|
|
—
|
|
1,334,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National Program Management & Project Controls, LLC
|
Senior Secured Term Loan, due 06/2023
|
(15) (19)
|
—
|
|
(167,216)
|
|
255,674
|
|
5,536,147
|
|
—
|
|
(5,536,147)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Delayed Draw Term Loan, due 06/2023
|
(6) (19)
|
—
|
|
(1,524)
|
|
2,291
|
|
64,456
|
|
—
|
|
(64,456)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Membership Interest (5.10% fully diluted common equity)
|
(19)
|
6,445,524
|
|
(6,445,524)
|
|
—
|
|
9,236,766
|
|
6,445,524
|
|
(15,682,290)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company
|
Type of Investment (4) (5) (10) (17) (18)
|
|
Net Realized Gain (Loss)
|
Net Change in Unrealized Appreciation (Depreciation)
|
Amount of Dividends or Interest Credited to Income (1)
|
December 31, 2020 Value
|
Gross Additions (2)
|
Gross Reductions (3)
|
March 31, 2021 Value
|
|
Northeast Metal Works LLC
|
Senior Secured Term Loan, due 12/2021 (10.00%; 6.00% Cash + 4.00% PIK)
|
(14)
|
—
|
|
712,180
|
|
344,612
|
|
10,813,299
|
|
850,649
|
|
—
|
|
11,663,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Equity Interest (22.79% fully diluted common equity; 12.0% cumulative preferred return)
|
(7)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Slappey Communications, LLC
|
Common Equity Units (11.33% preferred equity / 7.14% fully diluted common equity)
|
(7) (16)
|
—
|
|
138,866
|
|
—
|
|
281,648
|
|
138,866
|
|
—
|
|
420,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Surge Hippodrome Holdings LLC
|
Senior Secured Term Loan (Last Out), due 08/2024 (13.50%; 3M LIBOR + 11.50% with a 2.00% LIBOR floor)
|
(15)
|
—
|
|
457,573
|
|
198,929
|
|
4,746,273
|
|
472,227
|
|
—
|
|
5,218,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Interest (10.69% fully diluted common equity)
|
(7)
|
—
|
|
439,242
|
|
—
|
|
6,205
|
|
439,242
|
|
—
|
|
445,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Warrants (6.38% fully diluted common equity)
|
(7)
|
—
|
|
194,785
|
|
—
|
|
3,993
|
|
194,785
|
|
—
|
|
198,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
V-Tek, Inc.
|
Senior Secured Term Loan, due 03/2022 (8.25%; 3M LIBOR + 8.00%)
|
(12)
|
—
|
|
71,055
|
|
88,235
|
|
2,866,296
|
|
71,055
|
|
(326,351)
|
|
2,611,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Revolving Line of Credit, due 12/2021 (6.75%; 3M LIBOR + 6.50%)
|
(6)
|
—
|
|
(9,500)
|
|
25,922
|
|
1,525,000
|
|
—
|
|
(9,500)
|
|
1,515,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock (8.98% fully diluted common equity)
|
(7)
|
—
|
|
153,500
|
|
—
|
|
—
|
|
153,500
|
|
—
|
|
153,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 5% And Greater Owned, But Not Greater Than 25% Owned Portfolio Companies
|
|
|
$
|
6,445,524
|
|
$
|
(3,076,171)
|
|
$
|
915,663
|
|
$
|
35,563,429
|
|
$
|
10,146,240
|
|
$
|
(21,618,744)
|
|
$
|
24,090,925
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents the total amount of interest and fees credited to income for the portion of the year an investment was included in Affiliate categories.
|
|
(2)
|
Gross additions include increases in the total cost basis of investments resulting from a new portfolio investment and accrued PIK interest.
|
|
(3)
|
Gross reductions include decreases in the total cost basis of investments resulting from principal or PIK repayments or sales.
|
|
(4)
|
Debt investments are income-producing investments unless an investment is on non-accrual. Common equity, preferred equity, residual values and warrants are non-income-producing.
|
|
(5)
|
For each loan, the Company has provided the interest rate in effect on the date presented, as well as the contractual components of that interest rate. In the case of the Company's variable or floating rate loans, the interest rate in effect takes into account the applicable LIBOR in effect on the date presented or, if higher, the applicable LIBOR floor.
|
|
(6)
|
Line of credit has an unfunded commitment in addition to the amounts shown in the Consolidated Schedule of Investments. See Note 8 in the Notes to Consolidated Financial Statements for further discussion on portion of commitment unfunded as of March 31, 2021.
|
|
(7)
|
This investment is owned by HCAP Equity Holdings, LLC, one of the Company's taxable blocker subsidiaries.
|
|
(8)
|
ICC was previously in default under the terms of its credit agreement and was on non-accrual status through September 30, 2020. During the fourth quarter of 2020, due to operational improvements, ICC began to service its current debt obligations to the Company. In October 2017, the Company exercised its rights under a stock pledge of ICC. The Company formed a wholly owned subsidiary, HCAP ICC, LLC, to exercise its proxy right under the pledge agreement and take control of ICC’s board of directors. In January 2018, the Company took control of ICC's equity after accelerating the debt and auctioning ICC’s equity in a public sale. The Company bid a portion of its outstanding debt to gain control of ICC in connection with the public sale process. Upon the completion of the sale process in January 2018, the Company converted $2.0 million of its debt investment in ICC into shares of ICC’s membership interests.
During the three months ended March 31, 2021, the Company received $0.1 million from Infinite Care, LLC, representing payment for managerial assistance fees and reimbursed $0.5 million to HCAP Advisors during the three months ended March 31, 2021 to reimburse them for the cost of providing such services. Since the Company was determined to be the agent of the transaction under ASC 606 Revenue From Contracts With Customers, the Company has presented the revenue and corresponding expense on a net basis on its Statement of Operations.
|
|
(9)
|
This is an equity investment that receives a cash flow stream based on lease payments received by Flight Lease VII, LLC. Flight Lease VII, LLC owns an aircraft that was leased to one lessee. The lessee had been in arrears on its lease payments and in June of 2018, Flight Lease VII, LLC terminated the lease. As a result of the cessation of cash flows, future payments on this equity investment will resume only if Flight Lease VII, LLC is successful in obtaining a new lessee or sells the aircraft.
|
|
(10)
|
The Company's non-qualifying assets, on a fair value basis, total approximately 1.0% of the Company's total assets as of March 31, 2021.
|
|
(11)
|
Industry: Aerospace & Defense
|
|
(12)
|
Industry: Capital Equipment
|
|
(13)
|
Industry: Healthcare & Pharmaceuticals
|
|
(14)
|
Industry: Metals & Mining
|
|
(15)
|
Industry: Services: Business
|
|
(16)
|
Industry: Telecommunications
|
|
(17)
|
All of the Company's portfolio investments are generally subject to restrictions on resale as "restricted securities," unless otherwise noted.
|
|
(18)
|
The Company's Credit Facility is secured by all of the Company's assets. Refer to Note 3 in the accompanying Notes to the Consolidated Financial Statements for more information.
|
|
(19)
|
The Company exited this investment in 2021.
|
As of March 31, 2021, affiliate investments consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type
|
Amortized Cost
|
|
Fair Value
|
|
% of Fair Value
|
|
% of Net Assets
|
|
Senior Secured Debt
|
$
|
31,340,926
|
|
|
$
|
30,679,375
|
|
|
39.8
|
%
|
|
46.0
|
%
|
|
Equity
|
9,313,812
|
|
|
3,381,977
|
|
|
4.4
|
%
|
|
5.1
|
%
|
|
Total
|
$
|
40,654,738
|
|
|
$
|
34,061,352
|
|
|
44.2
|
%
|
|
51.1
|
%
|
The rate types of affiliate debt investments at fair value as of March 31, 2021 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type
|
Amortized Cost
|
|
Fair Value
|
|
% of Fair Value
|
|
% of Net Assets
|
|
Fixed Rate
|
$
|
21,688,838
|
|
|
$
|
21,334,375
|
|
|
27.7
|
%
|
|
32.0
|
%
|
|
Floating Rate
|
9,652,088
|
|
|
9,345,000
|
|
|
12.1
|
%
|
|
14.0
|
%
|
|
Total
|
$
|
31,340,926
|
|
|
$
|
30,679,375
|
|
|
39.8
|
%
|
|
46.0
|
%
|
The industry composition of affiliate investments at fair value as of March 31, 2021 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industry
|
Amortized Cost
|
|
Fair Value
|
|
% of Fair Value
|
|
% of Net Assets
|
|
Aerospace & Defense
|
$
|
458,346
|
|
|
$
|
828,825
|
|
|
1.1
|
%
|
|
1.3
|
%
|
|
Capital Equipment
|
4,602,884
|
|
|
4,280,000
|
|
|
5.6
|
%
|
|
6.4
|
%
|
|
Healthcare & Pharmaceuticals
|
13,778,735
|
|
|
9,670,427
|
|
|
12.5
|
%
|
|
14.5
|
%
|
|
Metals & Mining
|
15,374,623
|
|
|
11,663,948
|
|
|
15.1
|
%
|
|
17.5
|
%
|
|
Services: Business
|
6,151,204
|
|
|
7,197,638
|
|
|
9.3
|
%
|
|
10.8
|
%
|
|
Telecommunications
|
288,946
|
|
|
420,514
|
|
|
0.6
|
%
|
|
0.6
|
%
|
|
Total
|
$
|
40,654,738
|
|
|
$
|
34,061,352
|
|
|
44.2
|
%
|
|
51.1
|
%
|
The geographic concentrations of affiliate investments at fair value as of March 31, 2021 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Region
|
Amortized Cost
|
|
Fair Value
|
|
% of Fair Value
|
|
% of Net Assets
|
|
Northeast
|
$
|
21,275,827
|
|
|
$
|
17,526,673
|
|
|
22.7
|
%
|
|
26.3
|
%
|
|
West
|
18,631,619
|
|
|
15,285,340
|
|
|
19.8
|
%
|
|
22.9
|
%
|
|
South
|
747,292
|
|
|
1,249,339
|
|
|
1.7
|
%
|
|
1.9
|
%
|
|
Total
|
$
|
40,654,738
|
|
|
$
|
34,061,352
|
|
|
44.2
|
%
|
|
51.1
|
%
|
See accompanying notes to unaudited consolidated financial statements.
Harvest Capital Credit Corporation
Consolidated Schedule of Investments in and Advances to Affiliates
Year Ended December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company
|
Type of Investment (4) (5) (11) (19) (20)
|
|
Net Realized Loss
|
Net Change in Unrealized Appreciation (Depreciation)
|
Amount of Dividends or Interest Credited to Income (1)
|
December 31, 2019 Value
|
Gross Additions (2)
|
Gross Reductions (3)
|
December 31, 2020 Value
|
|
More than 25% Owned
|
|
|
|
|
|
|
|
|
|
|
Flight Lease VII, LLC
|
Common Equity Interest (46.14% fully diluted common equity)
|
(9) (11)
|
$
|
(112,500)
|
|
$
|
—
|
|
$
|
—
|
|
$
|
412,500
|
|
$
|
—
|
|
$
|
(112,500)
|
|
$
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Infinite Care, LLC
|
Senior Secured Term Loan, due 01/2022 (8.0% with a borrower PIK Option)
|
(8) (13)
|
—
|
|
1,323,239
|
|
101,304
|
|
3,783,600
|
|
1,373,891
|
|
(114,135)
|
|
5,043,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Revolving Line of Credit, due 01/2022 (8.0% with a borrower PIK option)
|
(8)
|
—
|
|
370,921
|
|
95,962
|
|
4,208,500
|
|
568,903
|
|
—
|
|
4,777,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Membership Interest (100% membership interests)
|
(7) (8)
|
—
|
|
794,584
|
|
—
|
|
—
|
|
794,584
|
|
—
|
|
794,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total More Than 25% Owned Portfolio Companies
|
|
|
$
|
(112,500)
|
|
$
|
2,488,744
|
|
$
|
197,266
|
|
$
|
8,404,600
|
|
$
|
2,737,378
|
|
$
|
(226,635)
|
|
$
|
10,915,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5% and Greater Owned, But Not Greater Than 25%
|
|
|
|
|
|
|
|
|
|
|
Flight Lease XII, LLC
|
Common Equity Interest (19.23% fully diluted common equity)
|
(7) (11)
|
$
|
(231,411)
|
|
$
|
43,776
|
|
$
|
—
|
|
$
|
345,980
|
|
$
|
43,777
|
|
$
|
(231,411)
|
|
$
|
158,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kleen-Tech Acquisition, LLC
|
Senior Secured Term Loan, due 05/2024
|
(16) (20)
|
—
|
|
31,290
|
|
1,147,961
|
|
6,819,708
|
|
524,499
|
|
(7,344,207)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Revolving Line of Credit, due 05/2022
|
(20)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Units (6.89% fully diluted common equity)
|
(7)
|
—
|
|
50,864
|
|
—
|
|
274,136
|
|
50,864
|
|
—
|
|
325,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Warrants
|
(20)
|
440,117
|
|
(88,135)
|
|
—
|
|
275,104
|
|
440,118
|
|
(715,222)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
National Program Management & Project Controls, LLC
|
Senior Secured Term Loan, due 06/2023 (9.75%; 1M LIBOR + 8.25% with a 1.50% LIBOR floor)
|
(16)
|
—
|
|
87,965
|
|
569,833
|
|
5,566,763
|
|
20,588
|
|
(51,204)
|
|
5,536,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company
|
Type of Investment (4) (5) (11) (19) (20)
|
|
Net Realized Loss
|
Net Change in Unrealized Appreciation (Depreciation)
|
Amount of Dividends or Interest Credited to Income (1)
|
December 31, 2019 Value
|
Gross Additions (2)
|
Gross Reductions (3)
|
December 31, 2020 Value
|
|
|
Senior Secured Delayed Draw Term Loan, due 06/2023 (9.75%; 1M LIBOR + 8.25% with a 1.50% LIBOR floor)
|
(6)
|
—
|
|
1,537
|
|
4,288
|
|
—
|
|
65,664
|
|
(1,208)
|
|
64,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Membership Interest (5.10% fully diluted common equity)
|
(7)
|
—
|
|
4,437,435
|
|
—
|
|
4,799,331
|
|
4,437,435
|
|
—
|
|
9,236,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northeast Metal Works, LLC
|
Senior Secured Term Loan, due 12/2021 (10.00%; 5.00% Cash + 5.00% PIK)
|
(14)
|
—
|
|
(1,388,855)
|
|
1,532,261
|
|
11,596,969
|
|
605,185
|
|
(1,388,855)
|
|
10,813,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Equity Interest (22.79% fully diluted common equity; 12.0% cumulative preferred return)
|
(7)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Slappey Communications, LLC
|
Senior Secured Term Loan, due 05/2024
|
(17) (20)
|
—
|
|
(110,182)
|
|
1,009,646
|
|
6,828,238
|
|
1,265,382
|
|
(8,093,620)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Revolving Line of Credit, due 05/2023
|
(20)
|
—
|
|
—
|
|
313
|
|
—
|
|
100,000
|
|
(100,000)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Units (11.33% preferred equity / 7.05% fully diluted common equity
|
(7)
|
—
|
|
(34,333)
|
|
—
|
|
227,035
|
|
88,946
|
|
(34,333)
|
|
281,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Surge Hippodrome Holdings LLC
|
Senior Secured Term Loan (Last Out), due 08/2024 (13.50%; 3M LIBOR + 11.50%)
|
(16)
|
—
|
|
(438,277)
|
|
802,641
|
|
5,131,294
|
|
53,256
|
|
(438,277)
|
|
4,746,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Interest (10.69% fully diluted common equity)
|
(7)
|
—
|
|
(458,216)
|
|
—
|
|
360,000
|
|
104,421
|
|
(458,216)
|
|
6,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Warrants (6.38% fully diluted common equity)
|
(7)
|
—
|
|
(233,586)
|
|
—
|
|
237,579
|
|
—
|
|
(233,586)
|
|
3,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
V-Tek, Inc.
|
Senior Secured Term Loan, due 03/2022 (6.0%)
|
(12)
|
—
|
|
(360,981)
|
|
339,375
|
|
3,175,500
|
|
51,777
|
|
(360,981)
|
|
2,866,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Revolving Line of Credit, due 03/2021 (6.75%; 3M LIBOR + 6.50%)
|
(6)
|
—
|
|
(11,097)
|
|
114,386
|
|
1,536,097
|
|
—
|
|
(11,097)
|
|
1,525,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock (8.98% fully diluted common equity)
|
(7)
|
—
|
|
(257,500)
|
|
—
|
|
257,500
|
|
—
|
|
(257,500)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company
|
Type of Investment (4) (5) (11) (19) (20)
|
|
Net Realized Loss
|
Net Change in Unrealized Appreciation (Depreciation)
|
Amount of Dividends or Interest Credited to Income (1)
|
December 31, 2019 Value
|
Gross Additions (2)
|
Gross Reductions (3)
|
December 31, 2020 Value
|
|
Total 5% and Greater Owned, But Not Greater Than 25% Owned Portfolio Companies
|
|
|
$
|
208,706
|
|
$
|
1,271,705
|
|
$
|
5,520,704
|
|
$
|
47,431,234
|
|
$
|
7,851,912
|
|
$
|
(19,719,717)
|
|
$
|
35,563,429
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents the total amount of interest and fees credited to income for the portion of the year an investment was included in Affiliate categories.
|
|
(2)
|
Gross additions include increase in the cost basis of investments resulting from new portfolio investment and accrued PIK interest.
|
|
(3)
|
Gross reductions include decreases in the total cost basis of investments resulting from principal or PIK repayments or sales.
|
|
(4)
|
Debt investments are income-producing investments unless an investment is on non-accrual. Common equity, preferred equity, residual values and warrants are non-income-producing.
|
|
(5)
|
For each loan, the Company has provided the interest rate in effect on the date presented, as well as the contractual components of that interest rate. In the case of the Company's variable or floating rate loans, the interest rate in effect takes into account the applicable LIBOR rate in effect on December 31, 2020 or, if higher, the applicable LIBOR floor.
|
|
(6)
|
Line of credit has an unfunded commitments in addition to the amounts shown in the Consolidated Schedule of Investments. See Note 8 in the Notes to Consolidated Financial Statements for further discussion on portion of commitment unfunded at December 31, 2020.
|
|
(7)
|
The investment is owned by HCAP Equity Holdings, LLC, one of the Company's taxable blocker subsidiaries.
|
|
(8)
|
ICC was previously in default under the terms of its credit agreement and was on non-accrual status through September 30, 2020. During the fourth quarter of 2020, due to operational improvements, ICC began to service its current debt obligations to the Company. In October 2017, the Company exercised its rights under a stock pledge of ICC. The Company formed a wholly owned subsidiary, HCAP ICC, LLC, to exercise its proxy right under the pledge agreement and take control of ICC’s board of directors. In January 2018, the Company took control of ICC's equity after accelerating the debt and auctioning ICC’s equity in a public sale. The Company bid a portion of its outstanding debt to gain control of ICC in connection with the public sale process. Upon the completion of the sale process in January 2018, the Company converted $2.0 million of its debt investment in ICC into shares of ICC’s membership interests.
During the year ended December 31, 2020, the Company received $0.5 million from Infinite Care representing payment for managerial assistance fees, of which $0.1 million was reimbursed to HCAP Advisors during the fiscal year ended December 31, 2020 to reimburse them for the cost of providing such services. Since the Company was determined to be the agent of the transaction under ASC 606 Revenue From Contracts With Customers, the Company has presented the revenue and corresponding expense on a net basis on its Statement of Operations.
|
|
(9)
|
This is an equity investment that receives a cash flow stream based on lease payments received by Flight Lease VII, LLC. Flight Lease VII, LLC owns an aircraft that was leased to one lessee. The lessee had been in arrears on its lease payments and in June of 2018, Flight Lease VII, LLC terminated the lease. As a result of the cessation of cash flows, future payments on this equity investment will resume only if Flight Lease VII, LLC is successful in obtaining a new lessee or sells the aircraft.
|
|
(10)
|
The Company's non-qualifying assets, on a fair value basis, total approximately 0.8% of the Company's total assets as of December 31, 2020.
|
|
(11)
|
Industry: Aerospace & Defense
|
|
(12)
|
Industry: Capital Equipment
|
|
(13)
|
Industry: Healthcare & Pharmaceuticals
|
|
(14)
|
Industry: Metals & Mining
|
|
(15)
|
Industry: Construction & Building
|
|
(16)
|
Industry: Services: Business
|
|
(17)
|
Industry: Telecommunications
|
|
(18)
|
All of the Company's portfolio investments are generally subject to restrictions on resale as "restricted securities," unless otherwise noted.
|
|
(19)
|
The Company's Credit Facility is secured by all of the Company's assets. Refer to Note 3 in the accompanying Notes to the Consolidated Financial Statements for more information.
|
|
(20)
|
The Company exited this investment in 2020.
|
As of December 31, 2020, affiliate investments consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type
|
Amortized Cost
|
|
Fair Value
|
|
% of Fair Value
|
|
% of Net Assets
|
|
Senior Secured Debt
|
$
|
36,847,482
|
|
|
$
|
35,372,230
|
|
|
39.5
|
%
|
|
56.9
|
%
|
|
Equity
|
12,105,053
|
|
|
11,106,541
|
|
|
12.4
|
%
|
|
17.8
|
%
|
|
Total
|
$
|
48,952,535
|
|
|
$
|
46,478,771
|
|
|
51.9
|
%
|
|
74.7
|
%
|
The rate type of affiliate debt investments at fair value as of December 31, 2020 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type
|
Amortized Cost
|
|
Fair Value
|
|
% of Fair Value
|
|
% of Net Assets
|
|
Fixed Rate
|
$
|
24,694,971
|
|
|
$
|
23,500,354
|
|
|
16.2
|
%
|
|
37.8
|
%
|
|
Floating Rate
|
12,152,511
|
|
|
11,871,876
|
|
|
13.3
|
%
|
|
19.1
|
%
|
|
Total
|
$
|
36,847,482
|
|
|
$
|
35,372,230
|
|
|
29.5
|
%
|
|
56.9
|
%
|
The industry composition of affiliate investments at fair value as of December 31, 2020 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industry
|
Amortized Cost
|
|
Fair Value
|
|
% of Fair Value
|
|
% of Net Assets
|
|
Aerospace & Defense
|
$
|
458,346
|
|
|
$
|
458,346
|
|
|
0.5
|
%
|
|
0.7
|
%
|
|
Capital Equipment
|
4,929,235
|
|
|
4,391,296
|
|
|
4.9
|
%
|
|
7.0
|
%
|
|
Construction & Building
|
8,223,105
|
|
|
14,837,368
|
|
|
16.6
|
%
|
|
23.8
|
%
|
|
Healthcare & Pharmaceuticals
|
13,680,200
|
|
|
10,615,343
|
|
|
11.8
|
%
|
|
17.1
|
%
|
|
Metals & Mining
|
15,236,153
|
|
|
10,813,299
|
|
|
12.1
|
%
|
|
17.4
|
%
|
|
Services: Business
|
6,136,550
|
|
|
5,081,471
|
|
|
5.7
|
%
|
|
8.2
|
%
|
|
Telecommunications
|
288,946
|
|
|
281,648
|
|
|
0.3
|
%
|
|
0.5
|
%
|
|
Total
|
$
|
48,952,535
|
|
|
$
|
46,478,771
|
|
|
51.9
|
%
|
|
74.7
|
%
|
The geographic concentrations of affiliate investments at fair value as of December 31, 2020 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Region
|
Amortized Cost
|
|
Fair Value
|
|
% of Fair Value
|
|
% of Net Assets
|
|
West
|
$
|
27,082,540
|
|
|
$
|
30,169,007
|
|
|
33.7
|
%
|
|
48.5
|
%
|
|
Northeast
|
21,122,703
|
|
|
15,569,770
|
|
|
17.4
|
%
|
|
25.0
|
%
|
|
South
|
747,292
|
|
|
739,994
|
|
|
0.8
|
%
|
|
1.2
|
%
|
|
Total
|
$
|
48,952,535
|
|
|
$
|
46,478,771
|
|
|
51.9
|
%
|
|
74.7
|
%
|
See accompanying notes to unaudited consolidated financial statements.