UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
(Mark One)
☑
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 814-00861
Fidus Investment Corporation
(Exact Name of Registrant as Specified in its Charter)
Maryland
27-5017321
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
1603 Orrington Avenue, Suite 1005
Evanston, Illinois
60201
(Address of Principal Executive Offices)
(Zip Code)
(847) 859-3940
(Registrant’s telephone number, including area code)
n/a
(Former name, former address and former fiscal year, if changed since last report)
_______________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, par value $0.001 per share
FDUS
The NASDAQ Global Select Market
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☐ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☐
Accelerated filer
Non-accelerated filer
Smaller reporting company ☐
Emerging growth company ☐
(Do not check if a smaller reporting company)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of November 1, 2021, the Registrant had outstanding 24,437,400 shares of common stock, $0.001 par value.
1
FIDUS INVESTMENT CORPORATION
TABLE OF CONTENTS
QUARTERLY REPORT ON FORM 10-Q
PART I — FINANCIAL INFORMATION
Item 1.
Financial Statements.
Consolidated Statements of Assets and Liabilities — September 30, 2021 (unaudited) and December 31, 2020
3
Consolidated Statements of Operations — three and nine months ended September 30, 2021 (unaudited) and 2020 (unaudited)
4
Consolidated Statements of Changes in Net Assets — three and nine months ended September 30, 2021 (unaudited) and 2020 (unaudited)
5
Consolidated Statements of Cash Flows — three and nine months ended September 30, 2021, (unaudited) and 2020 (unaudited)
6
Consolidated Schedules of Investments — September 30, 2021 (unaudited) and December 31, 2020
7
Notes to Consolidated Financial Statements (unaudited)
17
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
39
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
58
Item 4.
Controls and Procedures.
59
PART II — OTHER INFORMATION
Legal Proceedings.
60
Item 1A.
Risk Factors.
Unregistered Sales of Equity Securities and Use of Proceeds.
Defaults Upon Senior Securities.
Mine Safety Disclosures.
Item 5.
Other Information.
Item 6.
Exhibits.
61
Signatures
62
Exhibit Index
2
Item 1. Financial Statements.
Consolidated Statements of Assets and Liabilities
(in thousands, except shares and per share data)
September 30,
2021
December 31,
(unaudited)
2020
ASSETS
Investments, at fair value:
Control investments (cost: $52,889 and $32,969, respectively)
$
43,284
28,253
Affiliate investments (cost: $33,021 and $31,836, respectively)
107,053
81,394
Non-control/non-affiliate investments (cost: $545,353 and $622,222, respectively)
568,787
633,222
Total investments, at fair value (cost: $631,263 and $687,027, respectively)
719,124
742,869
Cash and cash equivalents
98,812
124,308
Interest receivable
8,246
7,548
Prepaid expenses and other assets
1,584
1,015
Total assets
827,766
875,740
LIABILITIES
SBA debentures, net of deferred financing costs (Note 6)
92,146
144,004
Notes, net of deferred financing costs (Note 6)
203,142
300,294
Borrowings under Credit Facility, net of deferred financing costs (Note 6)
39,291
(1,048
)
Secured Borrowings
17,746
-
Accrued interest and fees payable
2,202
3,500
Base management fee payable, net of base management fee waiver – due to affiliate
3,201
3,244
Income incentive fee payable, net of income incentive fee waiver – due to affiliate
2,425
2,610
Capital gains incentive fee payable – due to affiliate
19,669
11,031
Administration fee payable and other – due to affiliate
571
576
Taxes (receivable) payable
(883
275
Accounts payable and other liabilities
711
494
Total liabilities
380,221
464,980
Commitments and contingencies (Note 7)
NET ASSETS
Common stock, $0.001 par value (100,000,000 shares authorized, 24,437,400 and 24,437,400 shares
issued and outstanding at September 30, 2021 and December 31, 2020, respectively)
24
Additional paid-in capital
363,751
Total distributable earnings
83,770
46,985
Total net assets
447,545
410,760
Total liabilities and net assets
Net asset value per common share
18.31
16.81
See Notes to Consolidated Financial Statements (unaudited).
Consolidated Statements of Operations (unaudited)
Three Months Ended
Nine Months Ended
Investment Income:
Interest income
Control investments
927
467
2,495
1,348
Affiliate investments
537
849
2,096
2,663
Non-control/non-affiliate investments
16,395
17,449
50,197
51,060
Total interest income
17,859
18,765
54,788
55,071
Payment-in-kind interest income
724
453
1,661
1,323
86
106
281
175
450
690
1,390
2,013
Total payment-in-kind interest income
1,260
1,249
3,332
3,511
Dividend income
—
568
357
110
465
457
114
699
160
Total dividend income
471
1,377
625
Fee income
400
102
22
370
88
1,545
6,071
2,189
Total fee income
1,647
593
6,841
2,277
Interest on idle funds
(1
9
Total investment income
21,229
21,077
66,345
61,493
Expenses:
Interest and financing expenses
4,662
4,878
14,418
14,701
Base management fee
3,270
3,223
9,661
9,688
Incentive fee - income
2,374
7,644
6,342
Incentive fee (reversal) - capital gains
4,664
2,761
8,638
(6,380
Administrative service expenses
438
412
1,281
1,242
Professional fees
347
301
982
1,508
Other general and administrative expenses
374
224
1,115
1,059
Total expenses before base management and income incentive fee waivers
16,180
14,173
43,739
28,160
Base management and income incentive fee waivers
(69
(98
(423
Total expenses, net of base management and incentive fee waivers
16,111
43,641
27,737
Net investment income before income taxes
5,118
6,904
22,704
33,756
Income tax provision (benefit)
32
146
Net investment income
6,902
22,672
33,610
Net realized and unrealized gains (losses) on investments:
Net realized gains (losses):
(990
(33
30
(65
24,354
9,266
1,380
13,675
8,543
Total net realized gain (loss) on investments
8,306
1,315
13,672
32,897
Income tax (provision) benefit from realized gains on investments
143
(1,065
Net change in unrealized appreciation (depreciation):
1,096
607
(4,889
(1,157
8,106
7,158
24,474
(28,295
6,133
4,899
12,434
(33,982
Total net change in unrealized appreciation (depreciation) on investments
15,335
12,664
32,019
(63,434
Net gain (loss) on investments
23,784
13,979
45,834
(31,602
Realized losses on extinguishment of debt
(460
(174
(2,640
(299
Net increase (decrease) in net assets resulting from operations
28,442
20,707
65,866
1,709
Per common share data:
Net investment income per share-basic and diluted
0.21
0.28
0.93
1.37
Net increase in net assets resulting from operations per share — basic and diluted
1.16
0.85
2.70
0.07
Dividends declared per share
0.42
0.30
1.19
0.99
Weighted average number of shares outstanding — basic and diluted
24,437,400
24,444,120
Consolidated Statements of Changes in Net Assets (unaudited)
(in thousands, except shares)
Common Stock
Additional
Total
Number of
Par
paid-in
distributable
Total net
shares
value
capital
earnings
assets
Balances at December 31, 2019
24,463,119
366,061
46,225
412,310
Repurchases of common stock under Stock Repurchase Program (Note 8)
(25,719
(0
*
(268
17,417
Net realized gain (loss) on investments, net of taxes
30,327
Net unrealized appreciation (depreciation) on investments
(74,590
(125
Dividends declared
(9,537
Balances at March 31, 2020
365,793
9,717
375,534
9,291
190
(1,508
(7,331
Balances at June 30, 2020
10,359
376,176
Balances at September 30, 2020
23,735
389,552
Balances at December 31, 2020
11,081
3,216
(579
(2,180
(9,286
Balances at March 31, 2021
49,237
413,012
6,473
2,150
17,263
(9,531
Balances at June 30, 2021
65,592
429,367
8,449
(10,264
Balances at September 30, 2021
*amount is greater than zero but less than one
Consolidated Statements of Cash Flows (unaudited)
(in thousands)
Nine Months Ended September 30,
Cash Flows from Operating Activities:
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used for) operating activities:
Net change in unrealized (appreciation) depreciation on investments
(32,019
63,434
Net realized (gain) loss on investments
(13,672
(32,897
Interest and dividend income paid-in-kind
(3,437
(3,511
Accretion of original issue discount
(734
(118
Accretion of loan origination fees
(1,832
(866
Purchase of investments
(245,546
(86,121
Proceeds from sales and repayments of investments
319,036
110,149
Proceeds from loan origination fees
1,949
1,444
2,640
299
Amortization of deferred financing costs
1,655
1,680
Changes in operating assets and liabilities:
(698
(740
(504
34
(1,298
(1,383
(43
(110
(185
877
Capital gains incentive fee (reversal) – due to (from) affiliate
(5
67
Taxes payable
(1,158
(424
217
(16
Net cash provided by (used for) operating activities
98,870
47,127
Cash Flows from Financing Activities:
Proceeds received from SBA debentures
11,500
6,000
Repayments of SBA debentures
(63,500
(16,500
Principal payments on Notes
(100,000
Proceeds received from (repayments of) borrowings under Credit Facility, net
40,000
(2,000
Proceeds from Secured Borrowings
Payment of deferred financing costs
(1,031
(490
Dividends paid to stockholders, including expenses
(29,081
(24,199
Repurchases of common stock under Stock Repurchase Program
Net cash provided by (used for) financing activities
(124,366
(37,457
Net increase (decrease) in cash and cash equivalents
(25,496
9,670
Cash and cash equivalents:
Beginning of period
15,012
End of period
24,682
Supplemental disclosure of cash flow information:
Cash payments for interest
14,061
14,404
Cash payments for taxes, net of tax refunds received
1,047
1,635
Consolidated Schedule of Investments (unaudited)
September 30, 2021
Portfolio Company (a)(b)
Variable Index
Rate (e)
Investment
Principal
Fair
Percent of
Investment Type (c)
Industry
Spread / Floor (d)
Cash/PIK
Date (f)
Maturity
Amount
Cost
Value (g)
Net Assets
Control Investments (t)
Hilco Plastics Holdings, LLC (dba Hilco Technologies) (n)
Component Manufacturing
Common Equity (Units N/A)
4/6/2021
50
0
%
Mesa Line Services, LLC
Utilities: Services
Second Lien Debt (j)
5.00%/7.00%
11/30/2017
2/1/2024
21,179
21,125
16,678
Delayed Draw Commitment ($1,500 unfunded commitment) (j)
9/3/2021
2,505
Common Equity (981 shares) (j)
1,148
Common Equity (10 shares) (j)
4/22/2021
24,778
19,183
US GreenFiber, LLC
Building Products Manufacturing
10.00%/3.00%
7/3/2014
8/30/2024
15,965
15,961
13,960
10.00%/5.00%
11/9/2018
5,287
5,034
8/10/2020
5,253
5,057
Common Equity (2,522 units) (h)(j)
586
Common Equity (425,508 units) (j)
8/30/2019
Common Equity (1,022,813 units) (h)(j)
7/1/2020
1,023
28,111
24,051
Total Control Investments
52,889
10
Affiliate Investments (l)
FAR Research Inc. (n)
Specialty Chemicals
Common Equity (1,396 units)
3/31/2014
28
Fiber Materials, Inc. (n)
Aerospace & Defense Manufacturing
Common Equity (10 units)
11/30/2016
41
Medsurant Holdings, LLC
Healthcare Services
Preferred Equity (84,997 units) (h)(j)
4/12/2011
716
918
Warrant (252,588 units) (h)(j)(m)
2,258
3,162
2,974
4,080
Mirage Trailers LLC
Utility Equipment Manufacturing
Second Lien Debt (k)
(L + 10.00%) / (1.00%)
11.00%/5.00%
11/25/2015
4/30/2022
6,618
6,705
6,619
Common Equity (2,500,000 shares)
2,188
3,922
8,893
10,541
Pfanstiehl, Inc.
Healthcare Products
Common Equity (4,250 units) (j)
3/29/2013
425
50,126
11
Pinnergy, Ltd.
Oil & Gas Services
Common Equity - Class A-2 (42,500 units) (j)
10/13/2016
3,000
20,693
Spectra A&D Acquisition, Inc. (fka FDS Avionics Corp.)
First Lien Debt (ag)(k)
(L + 5.50%) / (1.00%)
6.50%/0.00%
2/12/2021
2/11/2026
13,000
12,916
Common Equity (41,290 units) (j)
2,609
4,129
Common Equity (12,035 units) (j)
8/25/2021
1,204
16,729
18,371
Steward Holding LLC (dba Steward Advanced Materials)
Common Equity (1,000,000 units)
11/12/2015
1,000
3,173
Total Affiliate Investments
33,021
Non-control/Non-affiliate Investments
2KDirect, Inc. (dba iPromote)
Information Technology Services
First Lien Debt (k)
(L + 6.75%) / (0.50%)
7.25%/0.00%
6/25/2021
6/25/2026
12,917
First Lien Debt (aa)(j)
7/30/2021
4,000
17,917
Aeronix Inc.
First Lien Debt (ai)
(L + 5.88%) / (0.50%)
6.38%/0.00%
6/11/2021
6/11/2026
6,500
6,457
Common Equity (500 units)
500
6,957
Allredi, LLC (fka Marco Group International OpCo, LLC)
Industrial Cleaning & Coatings
Second Lien Debt
10.50%/1.75%
3/2/2020
9/2/2026
10,215
10,139
8,491
Common Equity (570,636 units) (h)(j)
7/21/2017
637
211
10,776
8,702
Alzheimer's Research and Treatment Center, LLC
Common Equity (500 units) (h)(j)
10/23/2018
1,207
American AllWaste LLC (dba WasteWater Transport Services)
Environmental Industries
First Lien Debt (j)(p)
(L + 6.15%) / (1.00%)
7.15%/0.00%
6/28/2021
6/28/2026
19,000
18,859
First Lien Debt (j)(o)
(L + 3.75%) / (1.00%)
4.75%/0.00%
12/31/2022
330
Preferred Equity (500 units) (h)(j)
5/31/2018
193
Preferred Equity (207 units) (h)(j)
8/6/2019
250
226
Preferred Equity (141 units) (h)(j)
11/2/2020
171
20,110
19,779
Applied Data Corporation
First Lien Debt (k)(v)
(L + 6.25%) / (1.50%)
7.75%/0.00%
11/6/2020
11/6/2025
11,438
Common Equity (22 units)
15
Preferred Equity (1,104,539 units)
1,105
1,196
12,558
12,696
Argo Turboserve Corporation
Business Services
(L + 12.00%) / (2.00%)
14.00%/0.00%
12/26/2018
6/28/2023
12,188
12,159
12,175
AVC Investors, LLC (dba Auveco)
Specialty Distribution
Common Equity (5,000 units) (j)
1/3/2018
382
669
B&B Roadway and Security Solutions, LLC
11.25%/4.00%
2/27/2018
1/1/2022
11,244
11,239
11,162
Common Equity (50,000 units) (h)(j)
497
11,736
Bandon Fitness (Texas), Inc.
Retail
Common Equity (545,810 units) (j)
8/9/2019
931
1,458
BCM One Group Holdings, Inc.
Subordinated Debt (k)
11.00%/0.00%
1/3/2019
7/3/2024
30,000
29,911
Common Equity (1,281 shares)
48
2,330
Preferred Equity (74 shares)
736
30,695
33,066
Bedford Precision Parts LLC
First Lien Debt (j)(s)
(L + 6.25%) / (2.00%)
8.25%/0.00%
3/12/2019
3/12/2024
4,531
4,512
Common Equity (500,000 units) (h)(j)
342
5,012
4,873
Cardback Intermediate, LLC (dba Chargeback Gurus)
First Lien Debt (j)(ah)
(L + 6.75%) / (0.75%)
7.50%/0.00%
8/10/2021
8/10/2026
14,000
13,924
Common Equity (495 shares) (j)
125
Preferred Equity (495 shares) (j)
14,174
Cardboard Box LLC (dba Anthony's Coal Fired Pizza)
Restaurants
Common Equity (521,021 units) (j)
12/15/2015
521
Preferred Equity (1,043,133 units) (j)
12/6/2019
96
26
617
Combined Systems, Inc.
First Lien Debt
(L + 11.00%) / (2.00%)
13.00%/0.00%
1/31/2020
1/31/2025
7,191
7,153
Revolving Loan ($550 unfunded commitment) (j)(ac)
(L + 10.00%) / (2.00%)
12.00%/0.00%
3,450
3,433
10,586
10,641
Comply365, LLC
First Lien Debt (ad)
(L + 8.00%) / (1.00%)
9.00%/0.00%
12/11/2020
12/11/2025
8,996
8,873
1,227
9,873
10,223
CRS Solutions Holdings, LLC (dba CRS Texas)
Common Equity (538,875 units) (h)(j)
3/14/2018
621
581
Dataguise, Inc.
First Lien Debt (j)
12/31/2020
12/31/2023
19,900
19,825
Common Equity (909 shares) (j)
1,500
1,506
21,325
21,406
Diversified Search LLC
First Lien Debt (k)(r)
(L + 6.50%) / (1.00%)
2/7/2019
2/7/2024
17,355
17,206
Common Equity (573 units) (h)(j)
867
17,799
18,222
EBL, LLC (EbLens)
12.00%/1.00%
7/13/2017
1/13/2023
9,302
9,276
Common Equity (75,000 units) (j)
750
68
10,026
9,370
ECM Industries, LLC
Common Equity (1,000,000 units) (h)(j)
4/30/2020
243
1,449
Elements Brands, LLC
Consumer Products
12.25%/0.00%
12/31/2025
5,850
5,822
Revolving Loan ($838 unfunded commitment) (i)(j)
2,162
2,148
7,970
8,012
Frontline Food Services, LLC (f/k/a Accent Food Services, LLC)
Vending Equipment Manufacturing
Preferred Equity (Class A Units) (46 units) (j)
2,000
2,102
Common Equity (Class B Units) (124 units) (j)
Preferred Equity (Class C Units) (100 units) (j)
Global Plasma Solutions, Inc.
Common Equity (947 shares) (j)
9/21/2018
52
3,974
GP&C Operations, LLC (dba Garlock Printing and Converting)
First Lien Debt (w)
(L + 7.25%) / (1.00%)
1/22/2021
1/22/2026
11,000
10,858
Common Equity (515,625 units) (h)(j)
516
574
11,374
11,574
Gurobi Optimization, LLC
Common Equity (3 shares)
12/19/2017
2,475
Haematologic Technologies, Inc.
First Lien Debt (x)
(L + 8.25%) / (2.00%)
10.25%/0.00%
10/11/2019
10/11/2024
5,378
5,353
4,692
Common Equity (630 units) (h)(j)
630
84
5,983
4,776
Hallmark Health Care Solutions, Inc.
First Lien Debt (j)(ae)
(L + 7.25%) / (1.50%)
8.75%/0.00%
12/4/2020
12/4/2025
8,460
8,407
Common Equity (750,000 units) (j)
1,817
9,157
10,277
Healthfuse, LLC
First Lien Debt (af)
11/13/2020
11/13/2025
5,970
5,936
Preferred Equity (197,980 units)
901
6,686
6,871
Hub Acquisition Sub, LLC (dba Hub Pen)
Promotional products
13.50%/0.00%
3/23/2016
3/31/2023
25,000
24,983
22,396
Common Equity (3,750 units)
127
Preferred Equity (868 units) (j)
10/16/2020
153
90
25,263
22,486
IBH Holdings, LLC (fka Inflexxion, Inc.)
Common Equity (150,000 units)
6/20/2018
311
Ipro Tech, LLC
First Lien Debt (j)(u)
(L + 7.00%) / (1.00%)
8.00%/1.00%
6/30/2020
7/28/2025
19,282
18,265
Preferred Equity (j)
7/28/2021
682
18,947
19,964
ISI PSG Holdings, LLC (dba Incentive Solutions, Inc.)
First Lien Debt (j)(aj)
(L + 7.50%) / (0.50%)
8.00%/0.00%
4/5/2021
4/5/2026
11,428
11,343
First Lien Debt (j)(an)
6/30/2021
13,416
Common Equity (256,964 units) (h)(j)
25,259
K2 Merger Agreement Agent, LLC (fka K2 Industrial Services, Inc.) (n)
0.00%/10.00%
1/28/2019
1/28/2023
2,308
The Kyjen Company, LLC (dba Outward Hound)
Common Equity (855 shares) (j)
12/8/2017
933
1,559
Level Education Group, LLC (dba CE4Less)
First Lien Debt (ak)
4/1/2021
4/1/2026
5,466
5,428
Common Equity (1,000,000 units) (j)
6,428
LifeSpan Biosciences, Inc.
Subordinated Debt (j)
11.50%/0.00%
3/19/2021
9/19/2026
16,000
15,928
Common Equity (100 shares) (j)
997
16,928
16,997
LNG Indy, LLC (dba Kinetrex Energy) (n)
Oil & Gas Distribution
12/28/2016
Midwest Transit Equipment, Inc.
Transportation services
Warrant (7,192 shares) (j)(m)
6/23/2017
180
Warrant (4.79% of Junior Subordinated Notes) (j)(q)
109
NGT Acquisition Holdings, LLC (dba Techniks Industries)
Common Equity (378 units) (j)
5/24/2017
227
OMC Investors, LLC (dba Ohio Medical Corporation)
1/26/2021
6/30/2024
5,000
4,960
Common Equity (5,000 units)
1/15/2016
215
720
5,175
5,720
Palisade Company, LLC
Common Equity (50 shares) (j)
11/15/2018
1,166
Palmetto Moon, LLC
Common Equity (499 units) (j)
11/3/2016
460
798
Pool & Electrical Products, LLC
8
11.75%/0.00%
10/28/2020
4/28/2027
12,000
11,897
Common Equity (15,000 units) (h)(j)
5,169
13,397
17,169
Power Grid Components, Inc.
11.00%/1.00%
4/12/2018
12/2/2025
17,526
17,461
Preferred Equity (392 shares) (j)
392
549
Preferred Equity (48 shares) (j)
12/2/2019
Common Equity (10,622 shares) (j)
462
18,363
18,424
PowerGrid Services Acquisition, LLC
(L + 9.50%) / (1.00%)
10.50%/0.00%
9/21/2021
3/21/2029
10,062
9,950
Common Equity (5,000 units) (h)(j)
10,450
Prime AE Group, Inc.
11/25/2019
11/25/2024
6,333
6,212
Preferred Equity (500,000 shares) (j)
292
6,712
6,625
Pugh Lubricants, LLC (n)
Common Equity (3,062 units) (h)(j)
11/10/2016
Revenue Management Solutions, LLC
Common Equity (113 shares)
1/4/2017
1,125
6,319
Rhino Assembly Company, LLC
12.00%/1.50%
8/11/2017
2/11/2023
13,800
13,782
Delayed Draw Commitment ($875 unfunded commitment) (i)(j)
5/17/2022
Common Equity (Class A Units) (8,864 units) (h)(j)
944
1,066
Preferred Equity (Units N/A) (h)(j)
12/10/2020
273
286
Common Equity (Class F Units) (710 units) (h)(j)
14,999
15,152
Road Safety Services, Inc.
11.25%/1.50%
9/18/2018
3/18/2024
10,484
10,463
Common Equity (655 units)
11,084
11,361
SES Investors, LLC (dba SES Foam)
Common Equity (6,000 units) (h)(j)
9/8/2016
585
3,043
Specialized Elevator Services Holdings, LLC
First Lien Debt (j)(y)
(L + 5.50%) / (2.00%)
5/7/2019
5/3/2024
12,889
12,806
Common Equity (596 units) (j)
5/8/2019
596
719
13,402
13,608
SpendMend LLC
1/8/2018
994
1,919
TransGo, LLC
Common Equity (500 units) (j)
2/28/2017
403
1,724
The Tranzonic Companies
10.00%/1.00%
3/27/2018
3/27/2025
7,055
7,019
7,054
Preferred Equity (5,653 units) (j)
565
783
Common Equity (1 units) (j)
1,311
7,584
9,148
UBEO, LLC
4/3/2018
10/3/2024
13,893
13,829
Common Equity (705,000 units) (h)(j)
655
885
14,484
14,778
United Biologics, LLC
Preferred Equity (98,377 units) (h)(j)
4/1/2012
1,008
Warrant (57,469 units) (j)(m)
3/5/2012
566
1,574
UPG Company, LLC
First Lien Debt (j)(al)
(L + 8.25%) / (0.50%)
6/21/2021
6/21/2024
11,914
Virginia Tile Company, LLC
Common Equity (17 units) (j)
12/19/2014
766
Western's Smokehouse, LLC
First Lien Debt (j)(ab)
(L + 6.50%) / (1.25%)
2/28/2020
12/23/2024
9,625
9,524
Winona Foods, Inc.
First Lien Debt (j)(am)
(L + 12.00%) / (1.00%)
3,872
3,871
(L + 13.00%) / (1.00%)
7,000
6,953
10,825
10,824
Wonderware Holdings, LLC (dba CORE Business Technologies)
First Lien Debt ($2,000 unfunded commitment) (k)(z)
2/10/2021
2/9/2026
6,458
Worldwide Express Operations, LLC
(L + 7.00%) / (0.75%)
8/2/2021
7/26/2029
20,000
19,363
Common Equity (795,000) (j)
7/21/2021
795
Common Equity (752,380 units) (h)(j)
7/26/2021
225
20,383
Xeeva, Inc.
(L + 10.50%) / (1.50%)
2/11/2021
8,900
8,854
Total Non-control/Non-affiliate Investments
545,353
Total Investments
631,263
161
(a) See Note 3 to the consolidated financial statements for portfolio composition by geographic location.(b) Equity ownership may be held in shares or units of companies related to the portfolio companies.(c) All debt investments are income producing, unless otherwise indicated. Equity investments are non-income producing unless otherwise noted.(d) Variable rate investments bear interest at a rate indexed to LIBOR (L), which is reset monthly, bimonthly, quarterly, or semi-annually. Certain variable rate investments also include a LIBOR interest rate floor. For each investment, the Company has provided the spread over the reference rate and the LIBOR floor, if any, as of September 30, 2021.(e) Rate includes the cash interest or dividend rate and paid-in-kind interest or dividend rate, if any, as of September 30, 2021. Generally, payment-in-kind interest can be paid-in-kind or all in cash.(f) Investment date represents the date of the initial investment in the
security.(g) The Company’s investment portfolio is comprised entirely of debt and equity securities of privately held companies for which quoted prices falling within the categories of Level 1 and Level 2 inputs are not available. Therefore, the Company values all of its portfolio investments at fair value, as determined in good faith by the board of directors, using significant unobservable Level 3 inputs.(h) Investment is held by a taxable subsidiary of the Company.(i) The disclosed commitment represents the unfunded amount as of September 30, 2021. The Company is earning 0.50% interest on the unfunded balance of the commitment. The interest rate disclosed represents the rate which will be earned if the commitment is funded.(j) Investment pledged as collateral for the Credit Facility and, as a result, is not directly available to the creditors of the Company to satisfy any obligations of the Company other than the Company's obligations under the Credit Facility (see Note 6 to the consolidated financial statements).(k) The portion of the investment not held by the Funds is pledged as collateral for the Credit Facility and, as a result, is not directly available to the creditors of the Company to satisfy any obligations of the Company other than the Company's obligations under the Credit Facility (see Note 6 to the consolidated financial statements).(l) As defined in the 1940 Act, the Company is deemed to be an "Affiliated Person" of this portfolio company because it owns 5% or more of the portfolio company's outstanding voting securities or it has the power to exercise control over the management or policies of such portfolio company. Transactions in which the issuer was an Affiliated Person are detailed in Note 3 to the consolidated financial statements.(m) Warrants entitle the Company to purchase a predetermined number of shares or units of common equity, and are non-income producing. The purchase price and number of shares are subject to adjustment under certain conditions until the expiration date, if any.(n) Investment in portfolio company that has sold its operations and is in the process of winding down.(o) The Company sold a participating interest of approximately $0.3 million in aggregate principal amount of the portfolio company’s first lien senior secured term loan. As the transaction did not qualify as a “true sale” in accordance with U.S. generally accepted accounting principles (“GAAP”), the Company recorded a corresponding secured borrowing in the Consolidated Statements of Assets and Liabilities.(p) In addition to the interest earned based on the stated interest rate of this security, the Company is entitled to receive an additional interest amount of 3.64% on its “last out” tranche of the portfolio company’s senior term debt, which was previously syndicated into “first out” and “last out” tranches, whereby the “first out” tranche will have priority as to the “last out” tranche with respect to payments of principal, interest and any other amounts due thereunder.(q) Warrant entitles the Company to purchase 4.79% of the outstanding principal of Junior Subordinated Notes prior to exercise, and is non-income producing. (r) In addition to the interest earned based on the stated interest rate of this security, the Company is entitled to receive an additional interest amount of 4.59% on its “last out” tranche of the portfolio company’s senior term debt, which was previously syndicated into “first out” and “last out” tranches, whereby the “first out” tranche will have priority as to the “last out” tranche with respect to payments of principal, interest and any other amounts due thereunder.(s) In addition to the interest earned based on the stated interest rate of this security, the Company is entitled to receive an additional interest amount of 2.74% on its “last out” tranche of the portfolio company’s senior term debt, which was previously syndicated into “first out” and “last out” tranches, whereby the “first out” tranche will have priority as to the “last out” tranche with respect to payments of principal, interest and any other amounts due thereunder.(t) As defined in the 1940 Act, the Company is deemed to be both an “Affiliated Person” of and “Control” this portfolio company because it owns 25% or more of the portfolio company’s outstanding voting securities or it has the power to exercise control over the management or policies of such portfolio company. Transactions in which the issuer was both an Affiliated Person and a portfolio company that the Company is deemed to Control are detailed in Note 3 to the consolidated financial statements.(u) In addition to the interest earned based on the stated interest rate of this security, the Company is entitled to receive an additional cash interest amount of 3.00% and PIK interest amount of 1.00% on its “last out” tranche of the portfolio company’s senior term debt, which was previously syndicated into “first out” and “last out” tranches, whereby the “first out” tranche will have priority as to the “last out” tranche with respect to payments of principal, interest and any other amounts due thereunder.(v) In addition to the interest earned based on the stated interest rate of this security, the Company is entitled to receive an additional interest amount of 4.21% on its “last out” tranche of the portfolio company’s senior term debt, which was previously syndicated into “first out” and “last out” tranches, whereby the “first out” tranche will have priority as to the “last out” tranche with respect to payments of principal, interest and any other amounts due thereunder.(w) In addition to the interest earned based on the stated interest rate of this security, the Company is entitled to receive an additional interest amount of 7.13% on its “last out” tranche of the portfolio company’s senior term debt, which was previously syndicated into “first out” and “last out” tranches, whereby the “first out” tranche will have priority as to the “last out” tranche with respect to payments of principal, interest and any other amounts due thereunder.(x) In addition to the interest earned based on the stated interest rate of this security, the Company is entitled to receive an additional interest amount of 2.83% on its “last out” tranche of the portfolio company’s senior term debt, which was previously syndicated into “first out” and “last out” tranches, whereby the “first out” tranche will have priority as to the “last out” tranche with respect to payments of principal, interest and any other amounts due thereunder.(y) In addition to the interest earned based on the stated interest rate of this security, the Company is entitled to receive an additional interest amount of 2.99% on its “last out” tranche of the portfolio company’s senior term debt, which was previously syndicated into “first out” and “last out” tranches, whereby the “first out” tranche will have priority as to the “last out” tranche with respect to payments of principal, interest and any other amounts due thereunder.
(z) In addition to the interest earned based on the stated interest rate of this security, the Company is entitled to receive an additional interest amount of 5.77% on its “last out” tranche of the portfolio company’s senior term debt, which was previously syndicated into “first out” and “last out” tranches, whereby the “first out” tranche will have priority as to the “last out” tranche with respect to payments of principal, interest and any other amounts due thereunder.(aa) The Company sold a participating interest of approximately $4.0 million in aggregate principal amount of the portfolio company’s first lien senior secured term loan. As the transaction did not qualify as a “true sale” in accordance with U.S. generally accepted accounting principles (“GAAP”), the Company recorded a corresponding secured borrowing in the Consolidated Statements of Assets and Liabilities.(ab) In addition to the interest earned based on the stated interest rate of this security, the Company is entitled to receive an additional interest amount of 3.43% on its “last out” tranche of the portfolio company’s senior term debt, which was previously syndicated into “first out” and “last out” tranches, whereby the “first out” tranche will have priority as to the “last out” tranche with respect to payments of principal, interest and any other amounts due thereunder.(ac) The disclosed commitment represents the unfunded amount as of September 30, 2021. The Company is earning 1.00% interest on the unfunded balance of the commitment. The interest rate disclosed represents the rate earned on the outstanding, funded balance of the commitment.(ad) In addition to the interest earned based on the stated interest rate of this security, the Company is entitled to receive an additional interest amount of 3.30% on its “last out” tranche of the portfolio company’s senior term debt, which was previously syndicated into “first out” and “last out” tranches, whereby the “first out” tranche will have priority as to the “last out” tranche with respect to payments of principal, interest and any other amounts due thereunder.(ae) In addition to the interest earned based on the stated interest rate of this security, the Company is entitled to receive an additional interest amount of 3.31% on its “last out” tranche of the portfolio company’s senior term debt, which was previously syndicated into “first out” and “last out” tranches, whereby the “first out” tranche will have priority as to the “last out” tranche with respect to payments of principal, interest and any other amounts due thereunder.(af) In addition to the interest earned based on the stated interest rate of this security, the Company is entitled to receive an additional interest amount of 3.50% on its “last out” tranche of the portfolio company’s senior term debt, which was previously syndicated into “first out” and “last out” tranches, whereby the “first out” tranche will have priority as to the “last out” tranche with respect to payments of principal, interest and any other amounts due thereunder.(ag) In addition to the interest earned based on the stated interest rate of this security, the Company is entitled to receive an additional interest amount of 5.65% on its “last out” tranche of the portfolio company’s senior term debt, which was previously syndicated into “first out” and “last out” tranches, whereby the “first out” tranche will have priority as to the “last out” tranche with respect to payments of principal, interest and any other amounts due thereunder.(ah) In addition to the interest earned based on the stated interest rate of this security, the Company is entitled to receive an additional interest amount of 1.74% on its “last out” tranche of the portfolio company’s senior term debt, which was previously syndicated into “first out” and “last out” tranches, whereby the “first out” tranche will have priority as to the “last out” tranche with respect to payments of principal, interest and any other amounts due thereunder.(ai) In addition to the interest earned based on the stated interest rate of this security, the Company is entitled to receive an additional interest amount of 4.84% on its “last out” tranche of the portfolio company’s senior term debt, which was previously syndicated into “first out” and “last out” tranches, whereby the “first out” tranche will have priority as to the “last out” tranche with respect to payments of principal, interest and any other amounts due thereunder.(aj) In addition to the interest earned based on the stated interest rate of this security, the Company is entitled to receive an additional interest amount of 4.11% on its “last out” tranche of the portfolio company’s senior term debt, which was previously syndicated into “first out” and “last out” tranches, whereby the “first out” tranche will have priority as to the “last out” tranche with respect to payments of principal, interest and any other amounts due thereunder.(ak) In addition to the interest earned based on the stated interest rate of this security, the Company is entitled to receive an additional interest amount of 4.83% on its “last out” tranche of the portfolio company’s senior term debt, which was previously syndicated into “first out” and “last out” tranches, whereby the “first out” tranche will have priority as to the “last out” tranche with respect to payments of principal, interest and any other amounts due thereunder.(al) In addition to the interest earned based on the stated interest rate of this security, the Company is entitled to receive an additional interest amount of 3.56% on its “last out” tranche of the portfolio company’s senior term debt, which was previously syndicated into “first out” and “last out” tranches, whereby the “first out” tranche will have priority as to the “last out” tranche with respect to payments of principal, interest and any other amounts due thereunder.(am) In addition to the interest earned based on the stated interest rate of this security, the Company is entitled to receive an additional interest amount of 7.89% on its “last out” tranche of the portfolio company’s senior term debt, which was previously syndicated into “first out” and “last out” tranches, whereby the “first out” tranche will have priority as to the “last out” tranche with respect to payments of principal, interest and any other amounts due thereunder.(an) The Company sold a participating interest of approximately $13.5 million in aggregate principal amount of the portfolio company’s first lien senior secured term loan. As the transaction did not qualify as a “true sale” in accordance with U.S. generally accepted accounting principles (“GAAP”), the Company recorded a corresponding secured borrowing in the Consolidated Statements of Assets and Liabilities.
Consolidated Schedule of Investments
December 31, 2020
FDS Avionics Corp. (dba Flight Display Systems)
6.00%/9.00%
11/5/2014
12/31/2021
4,836
Revolving Loan ($30 unfunded commitment)
Common Equity (7,478 shares) (j)
11/10/2017
748
Preferred Equity (2,550 shares)
12/26/2019
2,550
2,269
8,420
7,391
8.00%/5.00%
15,382
15,378
13,078
8.50%/6.50%
5,028
5,183
2,533
2,601
24,549
20,862
32,969
12/18/2015
3/10/2022
8,031
8,028
8,091
Preferred Equity (63,331 units) (h)(j)
673
620
2,249
10,959
10,960
11/25/2021
6,410
6,483
Common Equity (2,500,000 shares) (o)
8,671
6,494
33,505
20,589
10/31/2021
7,783
7,781
1,994
8,781
9,777
31,836
20
Allied 100 Group, Inc.
11.25%/0.00%
7/31/2019
5/26/2023
21,500
21,432
Common Equity (625,000 units) (j)
11/26/2014
1,087
22,057
22,587
10,080
9,993
7,761
10,630
8,036
First Lien Debt (j)(w)
(L + 5.75%) / (2.00%)
10/23/2023
6,471
6,584
6,971
7,350
11/30/2023
17,503
17,434
241
18,355
18,141
First Lien Debt (v)
8,000
7,949
Preferred Equity (1,070,614 units)
1,071
9,020
(L + 10.75%) / (2.00%)
12.75%/0.00%
13,031
12,990
7/3/2023
22,500
22,448
487
464
22,935
22,964
10,910
10,890
10,782
11,387
First Lien Debt (j)(z)
(L + 6.50%) / (2.25%)
8.75%/0.25%
8/9/2024
14,680
14,289
15,591
554
15,220
16,145
29,887
458
737
30,671
31,195
4,507
263
5,007
4,794
12
7,600
7,553
Revolving Loan ($1,050 unfunded commitment) (j)(ac)
(L + 9.00%) / (2.00%)
2,950
2,930
10,483
10,550
10,000
9,855
10,855
10.50%/1.50%
4/30/2024
11,305
11,270
Common Equity (450,382 units) (h)(j)
488
321
11,758
11,626
21,400
(L + 8.00%) / (1.75%)
9.75%/0.00%
17,159
17,752
17,849
Second Lien Debt (j)(p)
9,253
9,214
5,454
9,964
5/23/2026
11,295
1,562
12,295
13,062
5,967
2,146
8,113
French Transit, LLC
(L + 10.00%) / (2.25%)
6/21/2019
4,116
4,088
9,995
592
1,660
5,500
5,469
Common Equity (549 units) (h)(j)
255
6,018
5,755
8,500
8,437
9,187
5,960
6,710
Hilco Plastics Holdings, LLC (dba Hilco Technologies)
11.50%/1.50%
9/23/2016
12/31/2019
10,301
8,878
Revolving Loan (j)
(L + 6.50%) / (0.00%)
6.65%/0.00%
12/20/2019
12/15/2019
5,962
(L + 6.95%) / (0.00%)
7.10%/0.00%
5,092
Preferred Equity (1,000,000 units) (h)(j)
4/18/2018
Common Equity (72,507 units) (h)(j)
473
22,828
19,932
24,976
24,106
131
283
154
158
25,261
24,547
235
(L + 8.50%) / (2.00%)
6/30/2025
2,469
1,923
1/28/2021
2,140
6/8/2024
15,000
14,960
Common Equity (765 shares) (j)
765
841
15,725
15,841
LNG Indy, LLC (dba Kinetrex Energy)
11/12/2021
10,127
10,108
959
10,608
11,086
10.50%/0.50%
8/1/2024
17,511
17,442
1,076
18,590
18,587
118
248
366
6/30/2022
9,985
869
10,447
10,869
11.50%/2.50%
4,779
4,773
159
5,267
4,938
11,883
13,383
22,433
22,357
509
63
740
23,259
23,745
6,833
6,683
7,183
7,399
13
3,081
10,682
10,655
629
136
137
Common Equity (Class F Units) (355 units) (h)(j)
11,735
11,448
10,379
10,351
882
10,972
11,261
Rohrer Corporation
Packaging
10.50%/1.00%
10/1/2018
4/1/2024
14,017
13,976
Common Equity (400 shares) (j)
7/18/2016
780
1,591
14,756
15,608
Routeware, Inc.
First Lien Debt (k)(aa)
(L + 7.00%) / (1.75%)
2/7/2020
2/7/2025
14,888
14,814
12/29/2022
1,869
1,534
2,869
Software Technology, LLC
12/23/2016
6/23/2023
9,980
Common Equity (6 shares)
646
942
10,626
10,942
(L + 5.25%) / (2.00%)
12,782
647
13,378
13,536
972
1,915
474
996
7,001
6,959
730
683
7,524
8,414
13,814
668
661
14,482
14,554
4/7/2022
11,998
12,340
12,521
9,876
Wheel Pros, Inc.
(L + 9.00%) / (1.00%)
10.00%/0.00%
11/10/2020
11/10/2028
19,411
Preferred Equity (347,222 units) (j)
5/15/2019
1,031
19,712
20,442
2/27/2017
2/3/2025
19,791
Common Equity (2,000 units) (h)(j)
1,478
1,942
21,269
21,942
622,222
687,027
181
(a) See Note 3 to the consolidated financial statements for portfolio composition by geographic location.(b) Equity ownership may be held in shares or units of companies related to the portfolio companies.(c) All debt investments are income producing, unless otherwise indicated. Equity investments are non-income producing unless otherwise noted.(d) Variable rate investments bear interest at a rate indexed to LIBOR (L), which is reset monthly, bimonthly, quarterly, or semi-annually. Certain variable rate investments also include a LIBOR interest rate floor. For each investment, the Company has provided the spread over the reference rate and the LIBOR floor, if any, as of December 31, 2020.(e) Rate includes the cash interest or dividend rate and paid-in-kind interest or dividend rate, if any, as of December 31, 2020. Generally, payment-in-kind interest can be paid-in-kind or all in cash.(f) Investment date represents the date of the initial investment in the security.(g) The Company’s investment portfolio is comprised entirely of debt and equity securities of privately held companies for which quoted prices falling within the categories of Level 1 and Level 2 inputs are not available. Therefore, the Company values all of its portfolio investments at fair value, as determined in good faith by the board of directors, using significant unobservable Level 3 inputs.(h) Investment is held by a taxable subsidiary of the Company.(i) The disclosed commitment represents the unfunded amount as of December 31, 2020. The Company is earning 0.50% interest on the unfunded balance of the commitment. The interest rate disclosed represents the rate which will be earned if the commitment is funded.(j) Investment pledged as collateral for the Credit Facility and, as a result, is not directly available to the creditors of the Company to satisfy any obligations of the Company other than the Company's obligations under the Credit Facility (see Note 6 to the consolidated financial statements).(k) The portion of the investment not held by the Funds is pledged as collateral for the Credit Facility and, as a result, is not directly available to the creditors of the Company to satisfy any obligations of the Company other than the Company's obligations under the Credit Facility (see Note 6 to the consolidated financial
14
statements).(l) As defined in the 1940 Act, the Company is deemed to be an "Affiliated Person" of this portfolio company because it owns 5% or more of the portfolio company's outstanding voting securities or it has the power to exercise control over the management or policies of such portfolio company. Transactions in which the issuer was an Affiliated Person are detailed in Note 3 to the consolidated financial statements.(m) Warrants entitle the Company to purchase a predetermined number of shares or units of common equity, and are non-income producing. The purchase price and number of shares are subject to adjustment under certain conditions until the expiration date, if any.(n) Investment in portfolio company that has sold its operations and is in the process of winding down.(o) Income producing. Maturity date, if any, represents mandatory redemption date.(p) Investment was on PIK-only non-accrual status as of December 31, 2020, meaning the Company has ceased recognizing PIK interest income on the investment.(q) Warrant entitles the Company to purchase 4.79% of the outstanding principal of Junior Subordinated Notes prior to exercise, and is non-income producing. (r) In addition to the interest earned based on the stated interest rate of this security, the Company is entitled to receive an additional interest amount of 5.92% on its “last out” tranche of the portfolio company’s senior term debt, which was previously syndicated into “first out” and “last out” tranches, whereby the “first out” tranche will have priority as to the “last out” tranche with respect to payments of principal, interest and any other amounts due thereunder.(s) In addition to the interest earned based on the stated interest rate of this security, the Company is entitled to receive an additional interest amount of 3.34% on its “last out” tranche of the portfolio company’s senior term debt, which was previously syndicated into “first out” and “last out” tranches, whereby the “first out” tranche will have priority as to the “last out” tranche with respect to payments of principal, interest and any other amounts due thereunder.(t) As defined in the 1940 Act, the Company is deemed to be both an “Affiliated Person” of and “Control” this portfolio company because it owns 25% or more of the portfolio company’s outstanding voting securities or it has the power to exercise control over the management or policies of such portfolio company. Transactions in which the issuer was both an Affiliated Person and a portfolio company that the Company is deemed to Control are detailed in Note 3 to the consolidated financial statements.(u) In addition to the interest earned based on the stated interest rate of this security, the Company is entitled to receive an additional interest amount of 4.50% on its “last out” tranche of the portfolio company’s senior term debt, which was previously syndicated into “first out” and “last out” tranches, whereby the “first out” tranche will have priority as to the “last out” tranche with respect to payments of principal, interest and any other amounts due thereunder.(v) In addition to the interest earned based on the stated interest rate of this security, the Company is entitled to receive an additional interest amount of 4.25% on its “last out” tranche of the portfolio company’s senior term debt, which was previously syndicated into “first out” and “last out” tranches, whereby the “first out” tranche will have priority as to the “last out” tranche with respect to payments of principal, interest and any other amounts due thereunder.(w) In addition to the interest earned based on the stated interest rate of this security, the Company is entitled to receive an additional interest amount of 3.27% on its “last out” tranche of the portfolio company’s senior term debt, which was previously syndicated into “first out” and “last out” tranches, whereby the “first out” tranche will have priority as to the “last out” tranche with respect to payments of principal, interest and any other amounts due thereunder.(x) In addition to the interest earned based on the stated interest rate of this security, the Company is entitled to receive an additional interest amount of 3.13% on its “last out” tranche of the portfolio company’s senior term debt, which was previously syndicated into “first out” and “last out” tranches, whereby the “first out” tranche will have priority as to the “last out” tranche with respect to payments of principal, interest and any other amounts due thereunder.(y) In addition to the interest earned based on the stated interest rate of this security, the Company is entitled to receive an additional interest amount of 3.93% on its “last out” tranche of the portfolio company’s senior term debt, which was previously syndicated into “first out” and “last out” tranches, whereby the “first out” tranche will have priority as to the “last out” tranche with respect to payments of principal, interest and any other amounts due thereunder.(z) In addition to the interest earned based on the stated interest rate of this security, the Company is entitled to receive an additional interest amount of 4.21% on its “last out” tranche of the portfolio company’s senior term debt, which was previously syndicated into “first out” and “last out” tranches, whereby the “first out” tranche will have priority as to the “last out” tranche with respect to payments of principal, interest and any other amounts due thereunder.(aa) In addition to the interest earned based on the stated interest rate of this security, the Company is entitled to receive an additional interest amount of 2.84% on its “last out” tranche of the portfolio company’s senior term debt, which was previously syndicated into “first out” and “last out” tranches, whereby the “first out” tranche will have priority as to the “last out” tranche with respect to payments of principal, interest and any other amounts due thereunder.(ab) In addition to the interest earned based on the stated interest rate of this security, the Company is entitled to receive an additional interest amount of 2.95% on its “last out” tranche of the portfolio company’s senior term debt, which was previously syndicated into “first out” and “last out” tranches, whereby the “first out” tranche will have priority as to the “last out” tranche with respect to payments of principal, interest and any other amounts due thereunder.(ac) The disclosed commitment represents the unfunded amount as of December 31, 2020. The Company is earning 1.00% interest on the unfunded balance of the commitment. The interest rate disclosed represents the rate earned on the outstanding, funded balance of the commitment.(ad) In addition to the interest earned based on the stated interest rate of this security, the Company is entitled to receive an additional interest amount of 3.33% on its “last out” tranche of the portfolio company’s senior term debt, which was previously syndicated into “first out” and “last out” tranches, whereby the “first out” tranche will have priority as to the “last out” tranche with respect to payments of principal, interest and any other amounts due thereunder.(ae) In addition to the interest earned based on the stated interest rate of this security, the Company is entitled to receive an additional interest amount of 3.31% on its “last out” tranche of the portfolio company’s senior term debt, which was previously syndicated into “first out” and “last out” tranches, whereby the “first out” tranche will have priority as to the “last out” tranche with respect to payments of principal, interest and any other amounts due thereunder.(af) In addition to the interest earned based on the stated interest rate of this security, the Company is entitled to receive an additional interest amount of 4.03% on its “last out” tranche of the portfolio company’s senior term debt, which was previously syndicated into “first out” and “last out” tranches, whereby the “first out”
tranche will have priority as to the “last out” tranche with respect to payments of principal, interest and any other amounts due thereunder.
See Notes to Consolidated Financial Statements.
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Note 1. Organization and Nature of Business
Fidus Investment Corporation (“FIC,” and together with its subsidiaries, the “Company”), a Maryland corporation, operates as an externally managed, closed-end, non-diversified business development company (“BDC”) under the Investment Company Act of 1940, as amended (“1940 Act”). FIC completed its initial public offering, or IPO, in June 2011. In addition, for federal income tax purposes, the Company has elected, and intends to qualify annually, to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).
The Company provides customized debt and equity financing solutions to lower middle-market companies, and may make investments directly or through its two wholly-owned investment company subsidiaries, Fidus Mezzanine Capital II, L.P. (“Fund II”) and Fidus Mezzanine Capital III, L.P. (“Fund III”) (collectively, Fund II and Fund III are referred to as the “Funds”). The Funds are licensed by the U.S. Small Business Administration (the “SBA”) as small business investment companies (“SBIC”). The SBIC licenses allow the Funds to obtain leverage by issuing SBA-guaranteed debentures (“SBA debentures”), subject to the issuance of leverage commitments by the SBA and other customary procedures. As SBICs, the Funds are subject to a variety of regulations and oversight by the SBA under the Small Business Investment Act of 1958, as amended (the “SBIC Act”), concerning, among other things, the size and nature of the companies in which they may invest and the structure of those investments.
We believe that utilizing both FIC and the Funds as investment vehicles provides us with access to a broader array of investment opportunities. Given our access to lower cost capital through the SBA’s SBIC debenture program, we expect that we will continue to make investments through the Funds until the Funds reach their borrowing limit under the program. For two or more SBICs under common control, the maximum amount of outstanding SBA debentures cannot exceed $350,000.
Fund II and Fund III are not registered under the 1940 Act and rely on the exclusion from the definition of investment company contained in Section 3(c)(7) of the 1940 Act.
The Company pays a quarterly base management fee and an incentive fee to Fidus Investment Advisors, LLC, our investment advisor (the “Investment Advisor” or “Fidus Investment Advisors”) under an investment advisory agreement (the “Investment Advisory Agreement”).
Note 2. Significant Accounting Policies
Basis of presentation: The accompanying consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) pursuant to the requirements for reporting on Form 10-Q, Accounting Standards Codification (“ASC”) 946, Financial Services – Investment Companies (“ASC 946”), and Articles 6 or 10 of Regulation S-X. In the opinion of management, the consolidated financial statements reflect all adjustments and reclassifications that are necessary for the fair presentation of financial results as of and for the periods presented. Certain prior period amounts have been reclassified to conform to the current period presentation. The current period’s results of operation are not necessarily indicative of results that ultimately may be achieved for the year. Therefore, the unaudited financial statements and notes should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2020.
Use of estimates: The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Consolidation: Pursuant to Article 6 of Regulation S-X and ASC 946, the Company will generally not consolidate its investments in a company other than an investment company subsidiary or a controlled operating company whose business consists of providing services to the Company. As a result, the consolidated financial statements of the Company include only the accounts of the Company and its wholly-owned subsidiaries, including the Funds. All significant intercompany balances and transactions have been eliminated.
Investment risks: The Company’s investments are subject to a variety of risks. These risks may include, but are not limited to the following:
Fair value of financial instruments: The Company measures and discloses fair value with respect to substantially all of its financial instruments in accordance with ASC Topic 820 — Fair Value Measurements and Disclosures (“ASC Topic 820”). ASC Topic 820 defines fair value, establishes a framework used to measure fair value, and requires disclosures for fair value measurements, including the categorization of financial instruments into a three-level hierarchy based on the transparency of valuation inputs. See Note 4 to the consolidated financial statements for further discussion regarding the fair value measurements and hierarchy.
Investment classification: The Company classifies its investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, “Control Investments” are defined as investments in those companies where the Company owns more than 25% of the voting securities of such company or has rights to maintain greater than 50% of the board representation. Under the 1940 Act, “Affiliate Investments” are defined as investments in those companies where the Company owns between 5% and 25% of the voting securities of such company. “Non-Control/Non-Affiliate Investments” are those that neither qualify as Control Investments nor Affiliate Investments.
Segments: In accordance with ASC Topic 280 — Segment Reporting, the Company has determined that it has a single reporting segment and operating unit structure.
Cash and cash equivalents: Cash and cash equivalents are highly liquid investments with an original maturity of three months or less at the date of acquisition. The Company places its cash in financial institutions and, at times, such balances may be in excess of the Federal Deposit Insurance Corporation insurance limits. The Company does not believe its cash balances are exposed to any significant credit risk.
Deferred financing costs: Deferred financing costs consist of fees and expenses paid in connection with the SBA debentures, the Credit Facility and the Notes (as defined in Note 6). Deferred financing costs are capitalized and amortized to interest and financing expenses over the term of the debt agreement using the effective interest method. Unamortized deferred financing costs are presented as an offset to the corresponding debt liabilities on the consolidated statements of assets and liabilities.
Realized losses on extinguishment of debt: Upon the repayment of debt obligations which are deemed to be extinguishments, the difference between the principal amount due at maturity, adjusted for any unamortized deferred financing costs, is recognized as a loss (i.e., the unamortized deferred financing costs are recognized as a loss upon extinguishment of the underlying debt obligation). There is no change in historical net increase in net assets resulting from operations due to this change in presentation.
Deferred offering costs: Deferred offering costs include registration expenses related to shelf filings. These expenses primarily consist of U.S. Securities and Exchange Commission (“SEC”) registration fees, legal fees and accounting fees incurred. These expenses are included in prepaid expenses and other assets on the consolidated statements of assets and liabilities. Upon the completion of an equity offering or a debt offering, the deferred expenses are charged to additional paid-in capital or deferred
18
financing costs, respectively. If no offering is completed prior to the expiration of the registration statement, the deferred costs are charged to expense.
Realized gains or losses and unrealized appreciation or depreciation on investments: Realized gains or losses on investments are recorded upon the sale or disposition of a portfolio investment and are calculated as the difference between the net proceeds from the sale or disposition and the cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized. Net change in unrealized appreciation or depreciation on the consolidated statements of operations includes changes in the fair value of investments from the prior period, as determined in good faith by the Company’s board of directors (the “Board”) through the application of the Company’s valuation policy, as well as reclassifications of any prior period unrealized appreciation or depreciation on exited investments to realized gains or losses on investments.
Interest and dividend income: Interest and dividend income are recorded on the accrual basis to the extent that the Company expects to collect such amounts. Interest is accrued daily based on the outstanding principal amount and the contractual terms of the debt. Dividend income is recorded as dividends are declared or at the point an obligation exists for the portfolio company to make a distribution, and is generally recognized when received. Distributions from portfolio companies are evaluated to determine if the distribution is a distribution of earnings or a return of capital. Distributions of earnings are included in dividend income while a return of capital is recorded as a reduction in the cost basis of the investment. Estimates are adjusted as necessary after the relevant tax forms are received from the portfolio company.
PIK income: Certain of the Company’s investments contain a payment-in-kind (“PIK”) income provision. The PIK income, computed at the contractual rate specified in the applicable investment agreement, is added to the principal balance of the investment, rather than being paid in cash, and recorded as interest or dividend income, as applicable, on the consolidated statements of operations. Generally, PIK can be paid-in-kind or all in cash. The Company stops accruing PIK income when there is reasonable doubt that PIK income will be collected. PIK income that has been contractually capitalized to the principal balance of the investment prior to the non-accrual designation date is not reserved against interest or dividend income, but rather is assessed through the valuation of the investment (with corresponding adjustments to unrealized depreciation, as applicable). PIK income is included in the Company’s taxable income and, therefore, affects the amount the Company is required to pay to shareholders in the form of dividends in order to maintain the Company’s tax treatment as a RIC and to avoid corporate federal income tax, even though the Company has not yet collected the cash.
Non-accrual: Debt investments or preferred equity investments (for which the Company is accruing PIK dividends) are placed on non-accrual status when principal, interest or dividend payments become materially past due, or when there is reasonable doubt that principal, interest or dividends will be collected. Any original issue discount and market discount are no longer accreted to interest income as of the date the loan is placed on full non-accrual status. Interest and dividend payments received on non-accrual investments may be recognized as interest or dividend income or may be applied to the investment principal balance based on management’s judgment. Non-accrual investments are restored to accrual status when past due principal, interest or dividends are paid and, in management’s judgment, payments are likely to remain current.
Origination and closing fees: The Company also typically receives debt investment origination or closing fees in connection with such investments. Such debt investment origination and closing fees are capitalized as unearned income and offset against investment cost basis on the consolidated statements of assets and liabilities and accreted into interest income over the life of the investment. Upon the prepayment of a debt investment, any unaccreted debt investment origination and closing fees are accelerated into interest income.
Warrants: In connection with the Company’s debt investments, the Company will sometimes receive warrants or other equity-related securities from the borrower (“Warrants”). The Company determines the cost basis of Warrants based upon their respective fair values on the date of receipt in proportion to the total fair value of the debt and Warrants received. Any resulting difference between the face amount of the debt and its recorded fair value resulting from the assignment of value to the Warrants is treated as original issue discount (“OID”), and accreted into interest income using the effective interest method over the term of the debt investment. Upon the prepayment of a debt investment, any unaccreted OID is accelerated into interest income.
Fee income: Transaction fees earned in connection with the Company’s investments are recognized as fee income and are generally non-recurring. Such fees typically include fees for services, including structuring and advisory services, provided to portfolio companies. The Company recognizes income from fees for providing such structuring and advisory services when the services are rendered or the transactions are completed. Upon the prepayment of a debt investment, any prepayment penalties are recorded as fee income when earned. In 2020, the Company elected to change the manner in which it presents the recognition of management services fees income. Previously, the Company classified management services fees as a component of interest on idle funds and other income on the consolidated statements of operations. Currently management services fees are a component of fee income on the consolidated statements of operations. Comparative prior periods presented have been reclassified retrospectively to
19
conform to the revised presentation. There is no change in historical net increase in net assets resulting from operations due to this change in presentation.
Partial loan and equity sales: The Company follows the guidance in ASC 860, Transfers and Servicing, when accounting for loan (debt investment) participations, equity assignments and other partial loan sales. Such guidance requires a participation, assignment or other partial loan or equity sale to meet the definition of a “participating interest,” as defined in the guidance, in order for sale treatment to be allowed. Participations, assignments or other partial loan or equity sales which do not meet the definition of a participating interest should remain on the Company’s consolidated statements of assets and liabilities and the proceeds recorded as a secured borrowing until the definition is met. For these partial loan sales, the interest earned on the entire loan balance is recorded within “interest income” and the interest earned by the buyer in the partial loan sale is recorded within “interest and financing expenses” in the accompanying consolidated statements of operations.
Income taxes: The Company has elected, and intends to qualify annually, to be treated as a RIC under Subchapter M of the Code, which will generally relieve the Company from U.S. federal income taxes with respect to all income distributed to stockholders. To maintain the tax treatment of a RIC, the Company is required to timely distribute to its stockholders at least 90.0% of “investment company taxable income,” as defined by Subchapter M of the Code, each year. 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; however, the Company will pay a 4.0% excise tax if it does not distribute at least 98.0% of the current year’s ordinary taxable income. Any such carryover taxable income must be distributed through a dividend declared prior to the later of the date on which the final tax return related to the year in which the Company generated such taxable income is filed or the 15th day of the 10th month following the close of such taxable year. In addition, the Company will be subject to federal excise tax if it does not distribute at least 98.2% of its net capital gains realized, computed for any one year period ending October 31.
In the future, the Funds may be limited by provisions of the SBIC Act and SBA regulations governing SBICs from making certain distributions to FIC that may be necessary to enable FIC to make the minimum distributions required to maintain the tax treatment of a RIC.
The Company has certain wholly-owned taxable subsidiaries (the “Taxable Subsidiaries”), each of which generally holds one or more of the Company’s portfolio investments listed on the consolidated schedules of investments. The Taxable Subsidiaries are consolidated for financial reporting purposes, such that the Company’s consolidated financial statements reflect the Company’s investment in the portfolio company investments owned by the Taxable Subsidiaries. The purpose of the Taxable Subsidiaries is to permit the Company to hold equity investments in portfolio companies that are taxed as partnerships for U.S. federal income tax purposes (such as entities organized as limited liability companies (“LLCs”) or other forms of pass through entities) while complying with the “source-of-income” requirements contained in the RIC tax provisions. The Taxable Subsidiaries are not consolidated with the Company for U.S. federal corporate income tax purposes, and each Taxable Subsidiary will be subject to U.S. federal corporate income tax on its taxable income. Any such income or expense is reflected in the consolidated statements of operations.
U.S. federal income tax regulations differ from GAAP, and as a result, distributions in accordance with tax regulations may differ from net investment income and realized gains recognized under GAAP. Differences may be permanent or temporary. Permanent differences may arise as a result of, among other items, a difference in the book and tax basis of certain assets and nondeductible federal income taxes. Temporary differences arise when certain items of income, expense, gain or loss are recognized at some time in the future.
ASC Topic 740 — Accounting for Uncertainty in Income Taxes (“ASC Topic 740”) provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the consolidated financial statements. ASC Topic 740 requires the evaluation of tax positions taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” to be respected by the applicable tax authorities. Tax benefits of positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax expense in the current year. It is the Company’s policy to recognize accrued interest and penalties related to uncertain tax benefits included in the income tax provision, if any. There were no material uncertain income tax positions at September 30, 2021 and December 31, 2020. The Company’s tax returns are generally subject to examination by U.S. federal and most state tax authorities for a period of three years from the date the respective returns are filed, and, accordingly, the Company’s 2018 through 2020 tax years remain subject to examination.
Dividends to stockholders: Dividends to stockholders are recorded on the record date with respect to such distributions. The amount, if any, to be distributed to stockholders, is determined by the Board each quarter and is generally based upon the earnings estimated by management. Net realized capital gains, if any, may be distributed at least annually, although the Company may decide to retain such capital gains for investment.
The determination of the tax attributes for the Company’s distributions is made annually, and is based upon the Company’s taxable income and distributions paid to its stockholders for the full year. Ordinary dividend distributions from a RIC do not qualify
for the preferential tax rate on qualified dividend income from domestic corporations and qualified foreign corporations, except to the extent that the RIC received the income in the form of qualifying dividends from domestic corporations and qualified foreign corporations. The tax characterization of the Company’s distributions generally includes both ordinary income and capital gains but may also include qualified dividends or return of capital.
The Company has adopted a dividend reinvestment plan (“DRIP”) that provides for the reinvestment of dividends on behalf of its stockholders, unless a stockholder has elected to receive dividends in cash. As a result, if the Company declares a cash dividend, the Company’s stockholders who have not “opted out” of the DRIP at least two days prior to the dividend payment date will have their cash dividend automatically reinvested into additional shares of the Company’s common stock. The Company has the option to satisfy the share requirements of the DRIP through the issuance of new shares of common stock or through open market purchases of common stock by the DRIP plan administrator. Newly issued shares are valued based upon the final closing price of the Company’s common stock on a date determined by the Board. Shares purchased in the open market to satisfy the DRIP requirements will be valued based upon the average price of the applicable shares purchased by the DRIP plan administrator before any associated brokerage or other costs. See Note 9 to the consolidated financial statements regarding dividend declarations and distributions.
Earnings and net asset value per share: The earnings per share calculations for the three and nine months ended September 30, 2021 and 2020, are computed utilizing the weighted average shares outstanding for the period. Net asset value per share is calculated using the number of shares outstanding as of the end of the period.
Stock Repurchase Program: The Company has an open market stock repurchase program (the “Stock Repurchase Program”) under which the Company may acquire up to $5,000 of its outstanding common stock. Under the Stock Repurchase Program, the Company may, but is not obligated to, repurchase outstanding common stock in the open market from time to time provided that the Company complies with the prohibitions under its insider trading policies and the requirements of Rule 10b-18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including certain price, market value and timing constraints. The timing, manner, price and amount of any share repurchases will be determined by the Company’s management, in its discretion, based upon the evaluation of economic and market conditions, stock price, capital availability, applicable legal and regulatory requirements and other corporate considerations. On October 26, 2020, the Board extended the Stock Repurchase Program through December 31, 2021, or until the approved dollar amount has been used to repurchase shares. The Stock Repurchase Program does not require the Company to repurchase any specific number of shares and the Company cannot assure that any shares will be repurchased under the Stock Repurchase Program. The Stock Repurchase Program may be suspended, extended, modified or discontinued at any time. The Company did not make any repurchases of common stock during the three and nine months ended September 30, 2021. During the three and nine months ended September 30, 2020, the Company repurchased zero and 25,719 shares of common stock on the open market for zero and $268, respectively. Refer to Note 8 for additional information concerning stock repurchases.
Recent accounting pronouncements:
In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-04, “Reference Rate Reform (Topic 848),” which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The Company has agreements that have LIBOR as a reference rate with certain portfolio companies and under the Credit Facility (as described in Note 6). Many of these agreements (including the credit agreement relating to the Credit Facility) include an alternative successor rate or language for choosing an alternative successor rate when LIBOR reference is no longer considered to be appropriate. With respect to other agreements, the Company intends to work with its portfolio companies to modify agreements to choose an alternative successor rate. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. The expedients and exceptions provided by the amendments do not apply to contract modifications and hedging relationships entered into or evaluated after December 31, 2022, except for hedging transactions as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The Company did not utilize the optional expedients and exceptions provided by ASU 2020-04 during the nine months ended September 30, 2021.
SEC Rule 1-02(w)(2) Update:
In May 2020, the SEC adopted rule amendments that will impact the requirement of investment companies, including BDCs, to disclose the financial statements of certain of their portfolio companies or certain acquired funds (the “Final Rules”). The Final Rules adopted a new definition of “significant subsidiary” set forth in Rule 1-02(w)(2) of Regulation S-X under the Securities Act. Rules 3-09 and 4-08(g) of Regulation S-X require investment companies to include separate financial statements or summary financial information, respectively, in such investment company’s periodic reports for any portfolio company that meets the definition of “significant subsidiary.” The Final Rules adopted a new definition of “significant subsidiary” applicable only to investment companies that (i) modifies the investment test and the income test, and (ii) eliminates the asset test currently in the definition of “significant subsidiary” in Rule 1-02(w) of Regulation S-X. The new Rule 1-02(w)(2) of Regulation S-X is intended to
21
more accurately capture those portfolio companies that are more likely to materially impact the financial condition of an investment company. The Final Rules became effective on January 1, 2021; however, the Company elected to early adopt this rule change as of December 31, 2020. The adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.
SEC Regulation S-K Update:
In November 2020, the SEC issued a final rule that modernized and simplifies Management's Discussion and Analysis and certain financial disclosure requirements in Regulation S-K (the “Amendments”). Specifically, the Amendments: (i) eliminate Item 301 of Regulation S-K (Selected Financial Data); (ii) simplify Item 302 of Regulation S-K (Supplementary Financial Information); and (iii) amend certain aspects of Item 303 of Regulation S-K (Management's Discussion and Analysis of Financial Condition and Results of Operations). The Amendments became effective on February 10, 2021 and compliance will be required for the registrants' fiscal year ending on or after August 9, 2021. Early adoption of the Amendments is permitted on an item-by-item basis after the effective date; however, a registrant must fully comply with each adopted item in its entirety. The Company adopted the Amendments on the effective date which did not have a material impact on the Company’s Consolidated Financial Statements.
Note 3. Portfolio Company Investments
The Company’s portfolio investments principally consist of secured and unsecured debt, equity warrants and direct equity investments in privately held companies. The debt investments may or may not be secured by either a first or second lien on the assets of the portfolio company. The debt investments bear interest at fixed rates or variable rates, and generally mature between five and seven years from the original investment. In connection with a debt investment, the Company also may receive nominally priced equity warrants and/or make a direct equity investment in the portfolio company. The Company’s warrants or equity investments may be investments in a holding company related to the portfolio company. In addition, the Company periodically makes equity investments in its portfolio companies through Taxable Subsidiaries. In both situations, the investment is generally reported under the name of the operating company on the consolidated schedules of investments.
As of September 30, 2021, the Company had active investments in 70 portfolio companies and residual investments in six portfolio companies that have sold their underlying operations. The aggregate fair value of the total portfolio was $719,124 and the weighted average effective yield on the Company’s debt investments was 12.3% as of such date. As of September 30, 2021, the Company held equity investments in 88.2% of its portfolio companies and the average fully diluted equity ownership in those portfolio companies was 5.6%.
As of December 31, 2020, the Company had active investments in 66 portfolio companies and residual investments in three portfolio companies that have sold their underlying operations. The aggregate fair value of the total portfolio was $742,869 and the weighted average effective yield on the Company’s debt investments was 12.2% as of such date. As of December 31, 2020, the Company held equity investments in 88.4% of its portfolio companies and the average fully diluted equity ownership in those portfolio companies was 5.3%.
The weighted average yield of the Company’s debt investments is not the same as a return on investment for its stockholders but, rather, relates to a portion of the Company’s investment portfolio and is calculated before the payment of all of the Company’s and its subsidiaries’ fees and expenses. The weighted average yields were computed using the effective interest rates for debt investments at cost as of September 30, 2021 and December 31, 2020, including accretion of OID and debt investment origination fees, but excluding investments on non-accrual status and investments recorded as a secured borrowing, if any.
Purchases of debt and equity investments for the nine months ended September 30, 2021 and 2020 totaled $245,544 and $86,121, respectively. Proceeds from sales and repayments, including principal, return of capital distributions and realized gains, of portfolio investments for the nine months ended September 30, 2021 and 2020 totaled $319,036 and $110,149, respectively.
Investments by type with corresponding percentage of total portfolio investments consisted of the following:
Fair Value
First Lien Debt(1)
296,998
41.2
187,353
25.2
295,412
46.8
184,585
26.9
201,305
28.0
332,154
44.7
212,311
33.6
341,947
49.7
Subordinated Debt
69,452
9.7
107,911
14.5
69,192
11.0
107,343
15.6
Equity
148,098
20.6
112,836
15.2
51,154
8.1
49,958
7.3
Warrants
3,271
0.5
2,615
0.4
3,194
100.0
All investments made by the Company as of September 30, 2021 and December 31, 2020 were made in portfolio companies headquartered in the U.S. The following table shows portfolio composition by geographic region at fair value and cost and as a percentage of total investments. The geographic composition is determined by the location of the corporate headquarters of the portfolio company, which may not be indicative of the primary source of the portfolio company’s business.
Midwest
133,746
18.6
225,745
30.4
78,907
12.6
189,560
27.6
Southeast
193,743
153,291
167,516
26.5
129,974
18.9
Northeast
149,247
20.8
123,268
16.6
147,986
23.4
127,833
West
86,538
12.0
108,673
14.6
80,408
12.7
109,221
15.9
Southwest
155,850
21.7
131,892
17.8
156,446
24.8
130,439
19.0
The following table shows portfolio composition by type and by geographic region at fair value as a percentage of net assets.
By Type
By Geographic Region
66.4
45.6
29.9
55.0
45.0
80.9
43.3
37.3
15.5
26.3
33.4
30.0
33.1
27.5
19.3
0.7
0.6
34.8
32.1
160.7
180.9
As of September 30, 2021 and December 31, 2020, the Company had no portfolio company investments that represented more than 10% of the total investment portfolio on a fair value or cost basis. As of September 30, 2021, the Company had one portfolio company investment that represented more than 5% of its total assets. As of December 31, 2020, the Company had no portfolio company investments that represented more than 5% of its total assets.
As of September 30, 2021, the Company had no debt investments on non-accrual status. As of December 31, 2020, the Company had a debt investment in one portfolio company on non-accrual status.
Portfolio Company
Value
(1)
(2)
Portfolio company debt investment was not on non-accrual status at September 30, 2021.
Portfolio company was on PIK-only non-accrual status at December 31, 2020, meaning the Company has ceased recognizing PIK interest income on the investment.
Consolidated Schedule of Investments In and Advances To Affiliates
The table below represents the fair value of control and affiliate investments as of December 31, 2020 and any additions and reductions made to such investments during the nine months ended September 30, 2021, the ending fair value as of September 30, 2021, and the total investment income earned on such investments during the period.
23
Nine Months Ended September 30, 2021
Portfolio Company (1)
September 30, 2021 Principal Amount - Debt Investments
December 31, 2020Fair Value
Gross Additions (2)
Gross Reductions (3)
September 30, 2021 Fair Value
Net Realized Gains (Losses) (4)
Net Change in Unrealized Appreciation (Depreciation)
Interest Income
Payment-in-kind Interest Income
Dividend Income
Fee Income
Control Investments
Hilco Plastics Holdings, LLC (dba Hilco Technologies)(6)
1,627
(1,577
308
Mesa Line Services, LLC (6)
23,684
24,779
(5,596
600
Spectra A&D Acquisition, Inc. (fka FDS Avionics Corp.)(5)
1,986
(9,377
957
1,028
26,505
3,561
(372
(371
1,659
1,061
50,189
31,953
(16,922
Affiliate Investments
FAR Research Inc.
Fiber Materials, Inc.
1,151
(8,031
1,104
331
91
4,091
(44
3,825
569
251
16,622
104
18,464
(93
1,643
735
279
1,208
(7,812
1,176
461
19,618
41,640
(15,981
The investment type, industry, ownership detail for equity investments, and if the investment is income producing is disclosed in the consolidated schedule of investments.
Gross additions include increases in the cost basis of investments resulting from new portfolio investments, follow-on investments, accrued PIK interest and PIK dividend income, accretion of OID and origination fees, and net unrealized appreciation recognized during the period. Gross additions also include transfers of portfolio companies into the control or affiliate classification during the period, as applicable.
(3)
Gross reductions include decreases in the cost basis of investments resulting from principal repayments or sales and net unrealized (depreciation) recognized during the period. Gross reductions also include transfers of portfolio companies out of the control or affiliate classification during the period, as applicable.
(4)
The schedule does not reflect realized gains or losses on escrow receivables for investments which were previously exited and were not held during the period presented. Gains and losses on escrow receivables are classified in the consolidated statements of operations according to the control classification at the time the investment was exited. Escrow receivables are presented in prepaid expenses and other assets on the consolidated statements of assets and liabilities.
(5)
Portfolio company was transferred to Affiliate investments from Control investments during the nine months ended September 30, 2021
(6)
Portfolio company was transferred to Control investments from Non-control/Non-affiliate investments during the nine months ended September 30, 2021
The table below represents the fair value of control and affiliate investments as of December 31, 2019 and any additions and reductions made to such investments during the year ended December 31, 2020, including the total investment income earned on such investments during the period.
Year Ended December 31, 2020
December 31, 2020 Principal Amount - Debt Investments
December 31, 2019Fair Value
December 31, 2020 Fair Value
5,122
5,403
1,988
298
442
22,943
16,417
5,830
(1,385
(363
1,306
28,065
21,820
7,818
1,182
1,889
1,748
10,449
9,681
(20,089
(9,762
354
16,980
1,721
(7,741
1,714
(2,304
1,145
79
Microbiology Research Associates, Inc.(5)
11,611
(11,632
(751
7,218
(959
718
32,822
20,128
(19,445
12,812
7,309
478
32,978
(12,690
(9,388
9,469
186
934
117
25
22,224
121,555
32,395
(72,556
24,508
(15,669
287
837
120
Portfolio company was transferred to Non-control/Non-affiliate investments from Affiliate investments during the twelve months ended December 31, 2020
Note 4. Fair Value Measurements
Investments
The Board has established and documented processes and methodologies for determining the fair values of portfolio company investments on a recurring basis in accordance with ASC Topic 820 and consistent with the requirements of the 1940 Act. Fair value is the price, determined at the measurement date, that would be received in the sale of an asset or paid to transfer a liability in an
orderly transaction between market participants. Where available, fair value is based on observable market prices or parameters, or derived from such prices or parameters. Where observable prices or inputs are not available or reliable, valuation techniques described below are applied. Under ASC Topic 820, portfolio investments recorded at fair value in the consolidated financial statements are classified within the fair value hierarchy based upon the level of judgment associated with the inputs used to measure their value, as defined below:
Level 1 — Inputs are unadjusted, quoted prices in active markets for identical assets as of the measurement date.
Level 2 — Inputs include quoted prices for similar assets in active markets, or that are quoted prices for identical or similar assets in markets that are not active and inputs that are observable, either directly or indirectly, for substantially the full term, if applicable, of the investment.
Level 3 — Inputs include those that are both unobservable and significant to the overall fair value measurement.
An investment’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s investment portfolio is comprised entirely of debt and equity securities of privately held companies for which quoted prices falling within the categories of Level 1 and Level 2 inputs are not available. Therefore, the Company values all of its portfolio investments at fair value, as determined in good faith by the Board, using Level 3 inputs. The degree of judgment exercised by the Board in determining fair value is greatest for investments classified as Level 3 inputs. Due to the inherent uncertainty of determining the fair values of investments that do not have readily available market values, the Board’s estimate of fair values may differ significantly from the values that would have been used had a ready market for the securities existed, and those differences may be material. In addition, changes in the market environment, portfolio company performance and other events that may occur over the lives of the investments may cause the amounts ultimately realized on these investments to be materially different than the valuations currently assigned.
With respect to investments for which market quotations are not readily available, the Board undertakes a multi-step valuation process each quarter, as described below:
In making the good faith determination of the value of portfolio investments, the Board starts with the cost basis of the security. The transaction price is typically the best estimate of fair value at inception. When evidence supports a subsequent change to the carrying value from the original transaction price, adjustments are made to reflect the expected exit values.
Consistent with the policies and methodologies adopted by the Board, the Company performs detailed valuations of its debt and equity investments, including an analysis on the Company’s unfunded debt investment commitments, using both the market and income approaches as appropriate. Under the market approach, the Company typically uses the enterprise value methodology to determine the fair value of an investment. There is no one methodology to estimate enterprise value and, in fact, for any one portfolio company, enterprise value is generally best expressed as a range of values, from which the Company derives a single estimate of enterprise value. Under the income approach, the Company typically prepares and analyzes discounted cash flow models to estimate the present value of future cash flows of either an individual debt investment or of the underlying portfolio company itself.
The Company evaluates investments in portfolio companies using the most recent portfolio company financial statements and forecasts. The Company also consults with the portfolio company’s senior management to obtain further updates on the portfolio company’s performance, including information such as industry trends, new product development and other operational issues.
For the Company’s debt investments the primary valuation technique used to estimate the fair value is the discounted cash flow method. However, if there is deterioration in credit quality or a debt investment is in workout status, the Company may consider other methods in determining the fair value, including the value attributable to the debt investment from the enterprise value of the portfolio company or the proceeds that would be received in a liquidation analysis. The Company’s discounted cash flow models estimate a range of fair values by applying an appropriate discount rate to the future cash flow streams of its debt investments, based on future interest and principal payments as set forth in the associated debt investment agreements. The Company prepares a weighted average cost of capital for use in the discounted cash flow model for each investment, based on factors including, but not limited to: current pricing and credit metrics for similar proposed or executed investment transactions of private companies; the portfolio company’s historical financial results and outlook; and the portfolio company’s current leverage and credit quality as compared to leverage and credit quality as of the date the investment was made. The Company may also consider the following factors when determining the fair value of debt investments: the portfolio company’s ability to make future scheduled payments; prepayment penalties and other fees; estimated remaining life; the nature and realizable value of any collateral securing such debt investment; and changes in the interest rate environment and the credit markets that generally may affect the price at which similar investments may be made. The Company estimates the remaining life of its debt investments to generally be the legal maturity date of the instrument, as the Company generally intends to hold its debt investments to maturity. However, if the Company has information available to it that the debt investment is expected to be repaid in the near term, it would use an estimated remaining life based on the expected repayment date.
For the Company’s equity investments, including equity and warrants, the Company generally uses a market approach, including valuation methodologies consistent with industry practice, to estimate the enterprise value of portfolio companies. Typically, the enterprise value of a private company is based on multiples of EBITDA, net income, revenues, or in limited cases, book value. In estimating the enterprise value of a portfolio company, the Company analyzes various factors consistent with industry practice, including but not limited to original transaction multiples, the portfolio company’s historical and projected financial results, applicable market trading and transaction comparables, applicable market yields and leverage levels, the nature and realizable value of any collateral, the markets in which the portfolio company does business, and comparisons of financial ratios of peer companies that are public.
The Company may also utilize an income approach when estimating the fair value of its equity securities, either as a primary methodology if consistent with industry practice or if the market approach is otherwise not applicable, or as a supporting methodology to corroborate the fair value ranges determined by the market approach. The Company typically prepares and analyzes discounted cash flow models based on projections of the future free cash flows (or earnings) of the portfolio company. The Company considers various factors, including, but not limited to, the portfolio company’s projected financial results, applicable market trading and transaction comparables, applicable market yields and leverage levels, the markets in which the portfolio company does business, and comparisons of financial ratios of peer companies that are public.
The Company reviews the fair value hierarchy classifications on a quarterly basis. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in or out of the Level 3 category as of the beginning of the quarter in which the reclassifications occur. There were no transfers among Levels 1, 2, and 3 during the nine months ended September 30, 2021 and 2020.
The following tables present a reconciliation of the beginning and ending balances for fair valued investments measured using significant unobservable inputs (Level 3) for the nine months ended September 30, 2021 and 2020:
First Lien
Second Lien
Subordinated
Debt
Balance, December 31, 2019
108,327
383,077
140,843
126,564
8,108
766,919
Net realized gains (losses) on investments
(4
81
30,958
1,862
Net change in unrealized appreciation (depreciation) on investments
(105
(31,030
(29,485
(2,874
49,239
22,000
13,500
1,382
86,121
(26,264
(25,195
(10,565
(43,633
(4,492
(110,149
3,022
371
(1,036
(158
(250
(1,444
333
380
150
866
72
46
Balance, September 30, 2020
130,680
352,223
144,109
85,789
2,604
715,405
Balance, December 31, 2020
13,673
(1,182
(1,213
(308
34,066
656
172,506
43,850
18,500
10,688
245,544
(61,008
(177,719
(57,039
(23,270
(319,036
3,142
105
3,437
(1,765
(104
(80
(1,949
985
387
1,833
734
Balance, September 30, 2021
Net change in unrealized appreciation/(depreciation) of $17,067 and $33,223 for the three and nine months ended September 30, 2021, respectively, was attributable to Level 3 investments held at September 30, 2021. Net change in unrealized appreciation/(depreciation) of $12,489 and $(62,591) for the three and nine months ended September 30, 2020, respectively, was attributable to Level 3 investments held at September 30, 2020.
The following tables summarize the significant unobservable inputs by valuation technique used to determine the fair value of the Company’s Level 3 debt and equity investments as of September 30, 2021 and December 31, 2020. The tables are not intended to be all-inclusive, but instead capture the significant unobservable inputs relevant to the Company’s determination of fair values.
Fair Value at
Valuation
Unobservable
Range
Techniques
Inputs
(weighted average)(1)
Debt investments:
277,274
Discounted cash flow
Weighted average cost of capital
4.0% - 22.8% (12.7%)
Enterprise value
Asset Coverage
1.2x - 1.2x (1.2x)
Revenue multiples
4.5x - 4.5x (4.5x)
182,318
10.5% - 26.9% (14.7%)
EBITDA multiples
9.8x - 9.8x (9.8x)
2,309
1.1x - 1.1x (1.1x)
66,947
11.5% - 12.0% (11.6%)
Equity investments:
3.3x - 17.8x (8.0x)
4.5x - 6.0x (6.0x)
27
183,238
6.8% - 16.3% (10.3%)
4,115
1.8x - 1.8x (1.8x)
306,405
9.3% - 27.0% (14.0%)
3.9x - 3.9x (3.9x)
5,123
2.1x - 2.1x (2.1x)
15,172
11.5% - 12.0% (11.7%)
110,568
3.9x - 15.3x (8.1x)
2,268
4.5x - 6.5x (6.2x)
The significant unobservable input used in determining the fair value under the discounted cash flow technique is the weighted average cost of capital of each security. Significant increases (or decreases) in this input would likely result in significantly lower (or higher) fair value estimates.
The significant unobservable inputs used in determining fair value under the enterprise value technique are revenue and EBITDA multiples, as well as asset coverage. Significant increases (or decreases) in these inputs could result in significantly higher (or lower) fair value estimates.
Other Financial Assets and Liabilities
ASC Topic 820 requires disclosure of the fair value of financial instruments for which it is practical to estimate such value. The Company believes that the carrying amounts of its other financial instruments such as cash and cash equivalents, interest receivable and accounts payable and other liabilities approximate the fair value of such items due to the short maturity of such instruments. The Company’s borrowings under the Credit Facility (as defined in Note 6), SBA debentures, and Notes (as defined in Note 6) are recorded at their respective carrying values.
The following tables summarize the carrying value and fair value of the Company’s debt obligations as of September 30, 2021 and December 31, 2020.
September 30, 2021(6)
Carrying Value (1)
SBA debentures (2)
95,000
147,000
Credit Facility borrowings (3)
2023 Notes (4)
50,000
50,620
February 2024 Notes (4)
19,426
69,000
69,745
November 2024 Notes (4)
63,250
64,034
64,389
2026 Notes (5)
125,000
125,275
342,250
343,735
454,250
456,754
The following table summarizes the inputs used to value the Company’s debt obligations if measured at fair value as of September 30, 2021 and December 31, 2020.
Valuation Inputs
Level 1
83,460
184,754
Level 2
Level 3
260,275
272,000
Note 5. Related Party Transactions
Investment Advisory Agreement: The Company has entered into an Investment Advisory Agreement with the Investment Advisor. On June 10, 2021, the Board approved the renewal of the Investment Advisory Agreement through June 20, 2022. Pursuant to the Investment Advisory Agreement and subject to the overall supervision of the Board, the Investment Advisor provides investment advisory services to the Company. For providing these services, the Investment Advisor receives a fee, consisting of two components — a base management fee and an incentive fee.
The base management fee is calculated at an annual rate of 1.75% based on the average value of total assets (other than cash or cash equivalents but including assets purchased with borrowed amounts) at the end of the two most recently completed calendar quarters. The Board of Directors accepted a voluntary, non-contractual, and unconditional waiver from the Investment Advisor to exclude any investments recorded as secured borrowings as defined under GAAP from the base management fee payable as of September 30, 2021. The base management fee is payable quarterly in arrears. The base management fee under the Investment Advisory Agreement was $3,270 and $9,661 for the three and nine months ended September 30, 2021, and $3,223 and $9,688 for the three and nine months ended September 30, 2020, respectively. The base management fee waiver was $69 and $98 for the three and nine months ended September 30, 2021, respectively. There was no base management fee waiver for the three and nine months ended September 30, 2020. As of September 30, 2021 and December 31, 2020, the base management fee payable (net of the base management fee waiver) was $3,201 and $3,244, respectively.
The incentive fee consists of two parts. The first part is calculated and payable quarterly in arrears based on the Company’s pre-incentive fee net investment income for the quarter. Pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees such as commitment, origination, structuring, diligence and consulting fees or other fees that the Company receives from portfolio companies but excluding fees for providing managerial assistance) accrued during the calendar quarter, minus operating expenses for the quarter (including the base management fee, any expenses payable under the Administration Agreement (defined below) and any interest expense and dividends paid on any outstanding preferred stock, but excluding the incentive fee and excise taxes on realized gains). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as market discount, original issue discount, debt instruments with PIK income, preferred stock with PIK dividends and zero-coupon securities), accrued income the Company has not yet received in cash. The Investment Advisor is not under any obligation to reimburse the Company for any part of the incentive fee it receives that was based on accrued interest that the Company never collects.
Pre-incentive fee net investment income does not include any realized capital gains, taxes associated with such realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. Because of the structure of the incentive fee, it is possible that the Company may pay an incentive fee in a quarter where the Company incurs a loss. For example, if the Company generates pre-incentive fee net investment income in excess of the hurdle rate (as defined below) for a quarter, the Company will pay the applicable incentive fee even if the Company has incurred a loss in that quarter due to a net loss on investments.
Pre-incentive fee net investment income, expressed as a rate of return on the value of the Company’s net assets (defined as total assets less indebtedness and before taking into account any incentive fees payable during the period) at the end of the immediately preceding calendar quarter, is compared to a fixed “hurdle rate” of 2.0% per quarter. If market interest rates rise, the Company may be able to invest funds in debt instruments that provide for a higher return, which would increase the Company’s pre-incentive fee net investment income and make it easier for the Investment Advisor to surpass the fixed hurdle rate and receive an incentive fee based on such net investment income.
29
The Company pays the Investment Advisor an incentive fee with respect to pre-incentive fee net investment income in each calendar quarter as follows:
The sum of the calculations above equals the income incentive fee. The income incentive fee is appropriately prorated for any period of less than three months and adjusted for any share issuances or repurchases during the calendar quarter. The income incentive fee was $2,425 and $7,644 for the nine months ended September 30, 2021, respectively, and $2,374 and $6,342 for the three and nine months ended September 30, 2020, respectively. The Investment Advisor, in consultation with the Board, agreed to voluntarily waive $423 of the income incentive fee for the three and nine months ended September 30, 2020. There was no income incentive fee waiver for the three and nine months ended September 30, 2021. As of September 30, 2021 and December 31, 2020, the income incentive fee payable (net of the income incentive fee waiver) was $2,425 and $2,610, respectively.
The second part of the incentive fee is a capital gains incentive fee that is determined and paid in arrears as of the end of each fiscal year (or upon termination of the Investment Advisory Agreement, as of the termination date), and equals 20.0% of the net capital gains as of the end of the fiscal year. In determining the capital gains incentive fee to be paid in cash to the Investment Advisor, the Company calculates the cumulative aggregate realized capital gains and losses since the Formation Transactions (realized capital gains and losses include realized gains and losses on investments, net of income tax provision from realized gains on investments, and realized losses on extinguishment of debt), and the aggregate unrealized capital depreciation on investments as of the date of the calculation. At the end of the applicable year, the amount of capital gains that serves as the basis for the calculation of the capital gains incentive fee to be paid equals the cumulative aggregate realized capital gains on investments, less cumulative aggregate realized capital losses on investments, less aggregate unrealized capital depreciation on investments, and less cumulative aggregate realized losses on extinguishment of debt. If this number is positive at the end of such year, then the capital gains incentive fee to be paid in cash for such year equals 20.0% of such amount, less the aggregate amount of any capital gains incentive fees paid in all prior years. As of September 30, 2021 and December 31, 2020, the capital gains incentive fee payable in cash was $0 (as cumulative aggregate realized capital gains and losses on investments plus aggregate unrealized capital depreciation on investments plus realized losses on extinguishment of debt was negative as of each period). The aggregate amount of capital gains incentive fees paid from the IPO through September 30, 2021 was $348.
In addition, the Company accrues, but does not pay in cash, a capital gains incentive fee in connection with any unrealized capital appreciation on investments, as applicable. If, on a cumulative basis, the sum of (i) net realized gains/(losses) on investments plus (ii) net unrealized appreciation/(depreciation) on investments plus (iii) realized losses on extinguishment of debt decreases during a period, the Company will reverse any excess capital gains incentive fee previously accrued such that the amount of capital gains incentive fee accrued is no more than 20.0% of the sum of (i) net realized gains/(losses) on investments plus (ii) net unrealized appreciation/(depreciation) on investments plus (iii) realized losses on extinguishment of debt. The capital gains incentive fee accrued (reversed) during the three and nine months ended September 30, 2021 was $4,664 and $8,638, respectively, and $2,761 and $(6,380) for the three and nine months ended September 30, 2020, respectively. As of September 30, 2021 and December 31, 2020, the accrued capital gains incentive fee payable was $19,669 and $11,031, respectively.
Unless terminated earlier as described below, the Investment Advisory Agreement will continue in effect from year to year if approved annually by the Board or by the affirmative vote of the holders of a majority of the Company’s outstanding voting securities, and, in either case, if also approved by a majority of the directors who are not “interested persons” of the Company, as such term is defined under Section 2(a)(19) of the 1940 Act (the “Independent Directors”). The Investment Advisory Agreement automatically terminates in the event of its assignment, as defined in the 1940 Act, by the Investment Advisor and may be terminated by either party without penalty upon not less than 60 days’ written notice to the other. The holders of a majority of the Company’s outstanding voting securities may also terminate the Investment Advisory Agreement without penalty.
Administration Agreement: The Company also entered into an administration agreement (the “Administration Agreement”) with the Investment Advisor. On June 10, 2021, the Board approved the renewal of the Administration Agreement through June 20,
2022. Under the Administration Agreement, the Investment Advisor furnishes the Company with office facilities and equipment, provides clerical, bookkeeping, and record keeping services at such facilities and provides the Company with other administrative services necessary to conduct its day-to-day operations. The Company reimburses the Investment Advisor for the allocable portion of overhead expenses incurred in performing its obligations under the Administration Agreement, including rent and the Company’s allocable portion of the cost of its chief financial officer and chief compliance officer and their respective staffs. Under the Administration Agreement, the Investment Advisor also provides managerial assistance to those portfolio companies to which the Company is required to provide such assistance and the Company reimburses the Investment Advisor for fees and expenses incurred with providing such services. In addition, the Company reimburses the Investment Advisor for fees and expenses incurred while performing due diligence on the Company’s prospective portfolio companies, including “dead deal” expenses. Under the Administration Agreement, administrative service expenses for the three and nine months ended September 30, 2021 were $438 and $1,281, respectively, and $412 and $1,242 for the three and nine months ended September 30, 2020, respectively. As of September 30, 2021 and December 31, 2020, the accrued administrative service expense payable was $585 and $593, respectively.
Fidus Equity Fund I, L.P.: On February 25, 2020, the Company entered into a Limited Partnership Agreement (the “Agreement”) with Fidus Equity Fund I, L.P. (“FEF I”). Pursuant to the Agreement, the Company will serve as the General Partner of FEF I. Owned by third-party investors, FEF I was formed to purchase 50% of select equity investments from the Company. On February 25, 2020, the Company sold 50% of its equity investments in 20 portfolio companies to FEF I and received net proceeds of $35,903, resulting in a realized gain, net of estimated taxes, of $20,404. The Company will not receive any fees from FEF I for any services provided in its capacity as the General Partner of FEF I.
Note 6. Debt
Revolving Credit Facility: On June 16, 2014, FIC entered into a senior secured revolving credit agreement (the "Credit Agreement" and the senior secured revolving credit facility, the “Credit Facility”) with ING Capital LLC (“ING”), as the administrative agent, collateral agent, and lender. The Credit Facility is secured by certain portfolio investments held by the Company, but portfolio investments held by the Funds are not collateral for the Credit Facility. On April 24, 2019, the Company entered into an Amended & Restated Senior Secured Revolving Credit Agreement (the “Amended Credit Agreement”) among the Company, as borrower, the lenders party thereto, and ING Capital LLC, as administrative agent. The Amended Credit Agreement amends, restates, and replaces the Credit Agreement. On June 26, 2020, the Company amended the Amended Credit Agreement, but the material terms were unchanged. Among other revisions, the amendment to the Amended Credit Agreement modifies certain covenants therein, including to amend the minimum consolidated interest coverage ratio to be 2.25 to 1.00 for the four quarter period ending on June 30, 2020, 2.00 to 1.00 for the four quarter periods ending on each of September 30, 2020 and December 31, 2020, and 1.75 to 1.00 for each four quarter period ending at the end of each quarter thereafter.
Under the Amended Credit Agreement, (i) revolving commitments by lenders were increased from $90,000 to $100,000, with an accordion feature that allows for an increase in total commitments up to $250,000, subject to satisfaction of certain conditions at the time of any such future increase, (ii) the maturity date of the Credit Facility was extended from June 16, 2019 to April 24, 2023, and (iii) borrowings under the Credit Facility bear interest, at our election, at a rate per annum equal to (a) 3.00% (or 2.75% if certain conditions are satisfied, including if (x) no equity interests are included in the borrowing base, (y) the contribution to the borrowing base of eligible portfolio investments that are performing first lien bank loans is greater than or equal to 35%, and (z) the contribution to the borrowing base of eligible portfolio investments that are performing first lien bank loans, performing last out loans, or performing second lien loans is greater than or equal to 60%) plus the one, two, three or six month LIBOR rate, as applicable, or (b) 2.00% (or 1.75% if the above conditions are satisfied) plus the highest of (A) a prime rate, (B) the Federal Funds rate plus 0.5%, (C) three month LIBOR plus 1.0%, and (D) zero. The Company pays a commitment fee that varies depending on the size of the unused portion of the Credit Facility: 3.00% per annum on the unused portion of the Credit Facility at or below 35% of the commitments and 0.50% per annum on any remaining unused portion of the Credit Facility between the total commitments and the 35% minimum utilization. The Amended Credit Agreement also modifies certain covenants in the Credit Facility, including to provide for a minimum asset coverage ratio of 2.00 to 1 (on a regulatory basis). The Credit Facility is secured by a first priority security interest in all of our assets, excluding the assets of our SBIC subsidiaries.
Amounts available to borrow under the Credit Facility are subject to a minimum borrowing/collateral base that applies an advance rate to certain investments held by the Company, excluding investments held by the Funds. The Company is subject to limitations with respect to the investments securing the Credit Facility, including, but not limited to, restrictions on sector concentrations, loan size, payment frequency and status and collateral interests, as well as restrictions on portfolio company leverage, which may also affect the borrowing base and therefore amounts available to borrow.
The Company has made customary representations and warranties and is required to comply with various covenants, reporting requirements and other customary requirements for similar credit facilities. These covenants are subject to important limitations and exceptions that are described in the documents governing the Credit Facility. As of September 30, 2021 and December 31, 2020, the Company was in compliance in all material respect with the terms of the Credit Facility.
31
SBA debentures: The Company uses debenture leverage provided through the SBA to fund a portion of its investment purchases.
Under the SBA debenture program, the SBA commits to purchase debentures issued by SBICs; such debentures have 10-year terms with the entire principal balance due at maturity and are guaranteed by the SBA. Interest on SBA debentures is payable semi-annually on March 1 and September 1. As of September 30, 2021 and December 31, 2020, approved and unused SBA debenture commitments were $75,000 and $11,500, respectively. The SBA may limit the amount that may be drawn each year under these commitments, and each issuance of leverage is conditioned on the Company’s full compliance, as determined by the SBA, with the terms and conditions set forth in the SBIC Act.
As of September 30, 2021 and December 31, 2020, the Company’s issued and outstanding SBA debentures mature as follows:
Pooling
Fixed
Date (1)
Date
Interest Rate
3/25/2015
3/1/2025
3.277
9/23/2015
9/1/2025
3.571
16,700
3/1/2026
3.267
3.249
2,500
21,800
9/21/2016
9/1/2026
2.793
3/29/2017
3/1/2027
3.587
9/20/2017
9/1/2027
3.260
3.190
33,000
3/21/2018
3/1/2028
3.859
3.534
9,000
10,500
9/25/2019
9/1/2029
2.377
7,500
3/25/2020
3/1/2030
2.172
9/22/2021
9/1/2031
1.398
Total outstanding SBA debentures
The SBA has two scheduled pooling dates for debentures (in March and in September). Certain debentures funded during the reporting periods may not be pooled until the subsequent pooling date.
Notes: On February 2, 2018, the Company closed the public offering of approximately $43,478 in aggregate principal amount of its 5.875% notes due 2023, or the “2023 Notes.” On February 22, 2018, the underwriters exercised their option to purchase an additional $6,522 in aggregate principal of the 2023 Notes. The total net proceeds to the Company from the 2023 Notes, including the exercise of the underwriters’ option, after deducting underwriting discounts of approximately $1,500 and offering expenses of $438, were approximately $48,062. The 2023 Notes mature on February 1, 2023 and bear interest at a rate of 5.875%. The 2023 Notes may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after February 1, 2020. On January 19, 2021, the Company redeemed $50,000 in aggregate principal amount of the issued and outstanding 2023 Notes, resulting in a realized loss on extinguishment of debt of approximately $794.
On February 8, 2019, the Company closed the public offering of approximately $60,000 in aggregate principal amount of its 6.000% notes due 2024, or the “February 2024 Notes”. On February 19, 2019, the underwriters exercised their option to purchase an additional $9,000 in aggregate principal of the February 2024 Notes. The total net proceeds to the Company from the February 2024 Notes, including the exercise of the underwriters’ option, after deducting underwriting discounts of approximately $2,070 and estimated offering expenses of $409, were approximately $66,521.
The February 2024 Notes mature on February 15, 2024 and bear interest at a rate of 6.000%. The February 2024 Notes may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after February 15, 2021. Interest on the February 2024 Notes is payable quarterly on February 15, May 15, August 15 and November 15 of each year. The February 2024 Notes are listed on the NASDAQ Global Select Market under the trading symbol “FDUSZ.” On February 16, 2021, the Company redeemed $50,000 of the $69,000 aggregate principal amount on the February 2024 Notes, resulting in a realized loss on extinguishment of debt of approximately $1,081.
On October 16, 2019, the Company closed the public offering of approximately $55,000 in aggregate principal amount of its 5.375% notes due 2024, or the “November 2024 Notes” (and collectively with the 2023 Notes and February 2024 Notes, the “Public Notes”). On October 23, 2019, the underwriters exercised their option to purchase an additional $8,250 in aggregate principal of the November 2024 Notes. The total net proceeds to the Company from the November 2024 Notes, including the exercise of the underwriters’ option, after deducting underwriting discounts of approximately $1,898 and estimated offering expenses of $300, were approximately $61,053. The November 2024 Notes will mature on November 1, 2024 and bear interest at a rate of 5.375%. The
November 2024 Notes may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after November 1, 2021. Interest on the November 2024 Notes is payable quarterly on February 1, May 1, August 1 and November 1 of each year. The November 2024 Notes are listed on the NASDAQ Global Select Market under the trading symbol “FDUSG.”
On December 23, 2020, the Company closed the offering of approximately $125,000 in aggregate principal amount of its 4.75% notes due 2026, or the “2026 Notes” (collectively with the Public Notes, the “Notes”). The total net proceeds to the Company from the 2026 Notes after deducting underwriting discounts of $2,500 and estimated offering expenses of $400, were approximately $122,100. The 2026 Notes will mature on January 31, 2026 and bear interest at a rate of 4.75%. The 2026 Notes may be redeemed in whole or in part at any time or from time to time at our option subject to a make whole provision if redeemed more than three months prior to maturity and at par thereafter. Interest on the 2026 Notes is payable on January 31 and July 31 of each year. The Company does not intend to list the 2026 Notes on any securities exchange or automated dealer quotation system.
Each of the Notes are unsecured obligations of the Company and rank pari passu with the Company’s existing and future unsecured indebtedness; effectively subordinated to all of the Company’s existing and future secured indebtedness; and structurally subordinated to all existing and future indebtedness and other obligations of any of its 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.
Secured Borrowing
As of September 30, 2021, secured borrowings at fair value totaled $17,746 and the fair value of the associated loans included in investments was $17,746. As of December 31, 2020, there were no secured borrowings outstanding. These secured borrowings were created as a result of our completion of partial loan sales of certain unitranche loan assets that did not meet the definition of a “participating interest.” As a result, sale treatment was not permitted and these partial loan sales were treated as secured borrowings. The weighted average interest rate on our secured borrowings was approximately 4.4% as of September 30, 2021.
As of September 30, 2021, and December 31, 2020, the aggregate amount outstanding of the senior securities (including secured borrowings) issued by the Company was $264,996 and $307,250, respectively, for which our asset coverage was 268.9% and 233.7%, respectively. The SBA-guaranteed debentures are not subject to the asset coverage requirements of the 1940 Act as a result of exemptive relief granted to us by the SEC on June 30, 2014. The asset coverage ratio for a class of senior securities representing indebtedness is calculated as our consolidated total assets, less all liabilities and indebtedness not represented by senior securities, divided by total senior securities representing indebtedness.
Interest and Financing Expenses
Interest and fees related to the Company’s debt for the three and nine months ended September 30, 2021 and 2020 which are included in interest and financing expenses on the consolidated statements of operations, were as follows:
Three Months Ended September 30, 2021
Three Months Ended September 30, 2020
SBA
Credit
Secured
debentures
Facility
Borrowings
Notes
Stated interest expense
368
222
2,603
4,124
1,285
2,619
4,296
138
115
285
538
116
582
Total interest and financing expenses
1,069
483
2,888
1,421
508
2,949
Nine Months Ended September 30, 2020
SBA debentures
Credit Facility
3,102
1,101
8,338
12,763
3,918
1,246
7,857
13,021
408
340
907
416
282
3,510
1,441
9,245
4,334
1,528
8,839
Weighted average stated interest rate, period end
2.899
3.125
4.392
5.055
4.239
3.297
3.188
N/A
5.749
4.558
Unused commitment fee rate, period end
0.500
0.890
Realized Losses on Extinguishment of Debt
During the nine months ended September 30, 2021 and 2020, the Company prepaid $63,500 and $16,500 of SBA debentures, respectively, which were scheduled to mature on dates ranging from 2025 to 2028 and 2024 to 2028, respectively. During the nine months ended September 30, 2021, the Company redeemed $50,000 and $50,000 of 2023 and 2024 Notes, respectively. As a result of the prepayments, the Company recognized realized losses on extinguishment of debt of $2,640 and $299, respectively, equal to the write-off of the related unamortized deferred financing costs, during the nine months ended September 30, 2021 and 2020.
Deferred Financing Costs
33
Deferred financing costs are amortized into interest and financing expenses on the consolidated statements of operations, using the effective interest method, over the term of the respective financing instrument. Deferred financing costs related to the Credit Facility, the SBA debentures, and the Notes as of September 30, 2021 and December 31, 2020 were as follows:
SBA debenture commitment fees
1,750
SBA debenture leverage fees
4,246
3,966
Credit Facility upfront fees
3,238
Notes underwriting discounts
6,468
7,968
Notes debt issue costs
1,579
Total deferred financing costs
6,746
7,544
17,528
5,716
9,547
18,501
Less: accumulated amortization
(3,892
(2,529
(3,436
(9,857
(2,720
(2,190
(2,591
(7,501
Unamortized deferred financing costs
2,854
709
4,108
7,671
2,996
1,048
6,956
Unamortized deferred financing costs are presented as a direct offset to the SBA debentures, Credit Facility and Notes liabilities on the consolidated statements of assets and liabilities. The following table summarizes the outstanding debt net of unamortized deferred financing costs as of September 30, 2021 and December 31, 2020:
September 30, 2021(1)
Outstanding debt
207,250
307,250
Less: unamortized deferred financing costs
(2,854
(709
(4,108
(7,671
(2,996
(6,956
Debt, net of deferred financing costs
334,579
As of September 30, 2021, the Company’s debt liabilities are scheduled to mature as follows (1):
Year
Facility (2)
Total (3)
2022
2023
2024
82,250
2025
Thereafter
72,500
17,416
214,916
359,996
The table above presents scheduled maturities of the Company’s outstanding debt liabilities as of a point in time pursuant to the terms of those instruments. The timing of actual repayments of outstanding debt liabilities may not ultimately correspond with the scheduled maturity dates depending on the terms of the underlying instruments and the potential for earlier prepayments.
The Credit Facility matures on April 24, 2023.
Note 7. Commitments and Contingencies
Commitments: The Company had outstanding commitments to portfolio companies to fund various undrawn revolving loans, other debt investments and capital commitments totaling $8,615 and $5,645 as of September 30, 2021 and December 31, 2020, respectively. Such outstanding commitments are summarized in the following table:
Unfunded
Portfolio Company - Investment
Commitment
Combined Systems, Inc. - Revolving Loan
550
1,050
Elements Brands, LLC - Revolving Loan
838
Mesa Line Services, LLC - Delayed Draw Term Loan
Rhino Assembly Company, LLC - Delayed Draw Commitment
875
Safety Products Group, LLC - Common Equity (Units)
2,852
Spectra A&D Acquisition, Inc. (fka FDS Avionics Corp.) - Revolving Loan
Wonderware Holdings, LLC (dba CORE Business Technologies) - Delayed Draw Term Loan
16,727
8,615
10,977
5,645
Additional detail for each of the commitments above is provided in the Company’s consolidated schedules of investments.
The commitments are generally subject to the borrowers meeting certain criteria such as compliance with financial and nonfinancial covenants. Since commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements.
Indemnifications: In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties that provide indemnifications under certain circumstances. In addition, in connection with the disposition of an investment in a portfolio company, the Company may be required to make representations about the business and financial affairs of such portfolio company typical of those made in connection with the sale of a business. The Company may also be required to indemnify the purchasers of such investment to the extent that any such representations are inaccurate. The Company’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. The Company expects the risk of future obligation under these indemnifications to be remote.
Legal proceedings: In the normal course of business, the Company may be subject to legal and regulatory proceedings that are generally incidental to its ongoing operations. While the outcome of any such legal proceedings cannot be predicted with certainty, the Company does not believe any such legal proceedings will have a material adverse effect on the Company’s consolidated financial statements.
Note 8. Common Stock
Public Offerings of Common Stock
The following table summarizes the cumulative total shares issued, net proceeds received, and weighted average offering price in public offerings of the Company’s common stock since the IPO.
Period
Cumulative Number of Shares
Cumulative Gross Proceeds
Cumulative Underwriting Fees and Commissions and Offering Costs (1)
Weighted Average Offering Price
Cumulative since IPO
14,388,414
236,597
8,989
16.44
(1) Fidus Investment Advisors, LLC agreed to bear a cumulative of $1,925 of underwriting fees and commissions and offering costs associated with these offerings (such amounts are not included in the number reported above). All such payments made by Fidus Investment Advisors, LLC are not subject to reimbursement by the Company.
No shares have been issued for the three and nine months ended September 30, 2021 and 2020.
Common Stock ATM Program
On August 21, 2014, the Company entered into an equity distribution agreement with Raymond James & Associates, Inc. and Robert W. Baird & Co. Incorporated through which the Company could sell, by means of at-the-market offerings from time to time, shares of the Company’s common stock having an aggregate offering price of up to $50,000 (the “ATM Program”). There were no issuances of common stock under the ATM program during the last two fiscal years and for the nine months ended September 30, 2021.
Stock Repurchase Program
As described in Note 2, the Company has a Stock Repurchase Program under which the Company may acquire up to $5,000 of its outstanding common stock. The Company did not make any repurchases of common stock during the three and nine months ended September 30, 2021. During the three and nine months ended September 30, 2020, the Company repurchased zero and 25,719 shares of common stock, respectively, on the open market for zero and $268, respectively. The Company’s NAV per share increased by approximately zero and $0.01 for the three and nine months ended September 30, 2020, respectively, as a result of the share repurchases. The following table summarizes the Company’s share repurchases under the Stock Repurchase Program for the three and nine months ended September 30, 2021 and 2020:
35
Three Months Ended September 30,
Repurchases of Common Stock
Number of shares repurchased
25,719
Cost of shares repurchased, including commissions
268
Weighted average price per share
10.37
Weighted average discount to net asset value prior to repurchases
38.5
Refer to Note 9 for additional information regarding the issuance of shares under the DRIP.
The Company had 24,437,400 shares of common stock outstanding as of September 30, 2021 and December 31, 2020.
Note 9. Dividends and Distributions
The Company’s dividends and distributions are recorded on the record date. The following table summarizes the dividends paid during the last two fiscal years and for the nine months ended September 30, 2021.
DRIP
Record
Payment
Cash
Shares
Share
Declared
Per Share
Distribution
Issue Price
Year Ended December 31, 2019:
1/31/2019
3/8/2019
3/22/2019
0.39
9,541
4/29/2019
6/7/2019
9,540
7/29/2019
9/6/2019
9/20/2019
10/29/2019
10/29/2019 (1)
0.04
978
1.60
39,141
Year Ended December 31, 2020:
2/14/2020
3/13/2020
3/27/2020
9,537
4/29/2020
6/12/2020
6/26/2020
7,331
8/03/2020
9/11/2020
9/25/2020
10/26/2020
12/18/2020
10/26/2020 (2)
1.33
32,508
Nine Months Ended September 30, 2021:
2/09/2021
3/12/2021
3/26/2021
0.31
7,575
2/09/2021 (2)
1,711
5/03/2021
6/14/2021
7,576
5/03/2021 (2)
0.08
1,955
8/02/2021
9/14/2021
9/28/2021
0.32
7,820
8/02/2021 (2)
0.06
1,466
8/02/2021 (1)
29,081
Special dividend
Supplemental dividend
During the nine months ended September 30, 2021 and the years ended December 31, 2020 and 2019, the Company directed the DRIP plan administrator to repurchase shares on the open market in order to satisfy the DRIP obligation to deliver shares of common stock in lieu of issuing new shares. Accordingly, the Company purchased and reissued shares to satisfy the DRIP obligation as follows:
Average
Purchased
Price Paid
Fiscal Year Ended December 31, 2019:
and Reissued
Amount Paid
January 1, 2019 through March 31, 2019
21,855
15.25
April 1, 2019 through June 30, 2019
14,067
16.23
228
July 1, 2019 through September 30, 2019
15,289
15.35
October 1, 2019 through December 31, 2019
17,525
15.27
68,736
15.48
1,064
36
Fiscal Year Ended December 31, 2020:
January 1, 2020 through March 31, 2020
31,586
7.58
239
April 1, 2020 through June 30, 2020
21,904
9.04
198
July 1, 2020 through September 30, 2020
28,871
10.18
294
October 1, 2020 through December 31, 2020
20,222
12.91
261
102,583
9.67
992
January 1, 2021 through March 31, 2021
15,562
15.62
April 1, 2021 through June 30, 2021
17,042
17.20
293
July 1, 2021 through September 30, 2021
18,201
17.82
324
50,805
16.93
860
Note 10. Financial Highlights
The following is a schedule of financial highlights for the nine months ended September 30, 2021 and 2020:
Per share data:
Net asset value at beginning of period
16.85
Net investment income (1)
Net realized gain (loss) on investments, net of tax (provision) (1)
0.57
1.31
Net unrealized appreciation (depreciation) on investments (1)
(2.60
Realized losses on extinguishment of debt (1)
(0.11
(0.01
Total increase from investment operations (1)
Accretive (dilutive) effect of share issuances and repurchases
0.01
Dividends to stockholders
(1.19
(0.99
Other (12)
Net asset value at end of period
15.94
Market value at end of period
17.44
9.85
Shares outstanding at end of period
Weighted average shares outstanding during the period
Net assets at end of period
Average net assets (6)
425,171
388,393
Ratios to average net assets:
Total expenses (2)(4)(11)
13.7
9.9
Net investment income (2)(5)
7.1
11.5
Total return based on market value (3)
46.1
(25.8
%)
Total return based on net asset value (8)
16.0
Portfolio turnover ratio (9)
44.9
Supplemental Data:
Average debt outstanding (7)
382,587
368,125
Average debt per share (1)
15.66
15.06
37
Weighted average per share data.
Annualized with the exception of the income incentive fee waiver and income tax (provision) benefit from realized gains on investments.
Total return based on market value equals the change in the market value of the Company’s common stock per share during the period divided by the market value per share at the beginning of the period, and assumes reinvestment of dividends at prices obtained by our dividend reinvestment plan during the period. The return does not reflect any sales load that may be paid by an investor.
The total expenses to average net assets ratio is calculated using (i) the “total expenses, net of base management and income incentive fee waiver”, (ii) the “income tax provision (benefit)”, and (iii) the “income tax (provision) benefit from realized gains on investments” captions, as presented on the consolidated statements of operations.
The net investment income to average net assets ratio is calculated using the net investment income caption as presented on the consolidated statements of operations, which includes incentive fee.
Average net assets is calculated as the average of the net asset balances as of each quarter end during the fiscal year and the prior year end.
(7)
Average debt outstanding is calculated as the average of the outstanding debt balances, including secured borrowings, as of each quarter end during the fiscal year and the prior year end.
(8)
Total return based on net asset value per share equals the change in net asset value per share during the period, plus dividends paid per share during the period, less other non-operating changes during the period, and divided by beginning net asset value per share for the period. Non-operating changes include any items that affect net asset value per share other than increase from investment operations, such as the effects of share issuances and repurchases and other miscellaneous items.
(9)
Annualized.
(10)
The ratio of waived incentive fees to average net assets was zero and (0.11)% for the nine months ended September 30, 2021 and 2020, respectively.
(11)
The following is a schedule of supplemental expense ratios to average net assets:
Ratio to average net assets:
Expenses other than incentive fee (2)
8.6
10.0
Incentive fee, net of incentive fee waiver (2)(10)
5.1
(0.1
Total expenses (2)(4)
(12)
Represents the impact of different share amounts used in calculating per share data as a result of calculating certain per share data based on weighted average shares outstanding during the period and certain per share data based on the shares outstanding as of a period end or transaction date, or other rounding.
Note 11. Subsequent Events
On October 1, 2021, the Company invested $8,500 in first lien debt, subordinated debt, and common equity of Auto CRM LLC (dba Dealer Holdings), a leading SaaS-based provider of customer communication software to the auto repair market.
On October 6, 2021, the Company invested $18,500 in first lien debt, common equity, and warrants of Acendre Midco, Inc., a market leading provider of cloud-based talent management software solutions.
On October 8, 2021, the Company closed the public offering of approximately $125,000 in aggregate principal amount of its 3.50% notes due 2026, or the “November 2026 Notes.” The total net proceeds to the Company from the November 2026 Notes, based on a public offering price of 99.996% of par, after deducting underwriting discounts of $2,500 and estimated offering expenses of $400, were approximately $122,095.
The November 2026 Notes will mature on November 15, 2026 and bear interest at a rate of 3.50% per year. The November 2026 Notes are unsecured obligations and rank pari passu with the Company’s existing and future unsecured indebtedness; and structurally subordinated to all existing and future indebtedness and other obligations of any of its 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. The November 2026 Notes may be redeemed in whole or in part at any time or from time to time at the Company’s option subject to a make whole provision if redeemed more than three months prior to maturity or at par thereafter. Interest on the November 2026 Notes is payable on May 15 and November 15 of each year, beginning May 15, 2022. The Company does not intend to list the November 2026 Notes on any securities exchange or automated dealer quotation system.
On October 26, 2021. the Company exited its debt investment in the Tranzonic Companies. The Company received payment in full of $7,066 on its subordinated debt, which includes a prepayment fee.
On October 29, 2021, the Company committed $16,000 in second lien debt in a leading marketing technology platform for digital customer acquisition across all consumer verticals, including financial services, home services, and insurance.
On November 1, 2021, the Board declared a regular quarterly dividend of $0.32 per share, a supplemental dividend of $0.04 per share, and a special dividend of $0.05 per share payable December 17, 2021, to stockholders of record as of December 3, 2021.
On November 2, 2021, the Company fully redeemed $19,000 and $63,250 of the issued and outstanding February 2024 Notes and November 2024 Notes, respectively, resulting in a realized loss on extinguishment of debt of approximately $1,623.
38
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Fidus Investment Corporation’s consolidated financial statements and related notes appearing in our annual report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 25, 2021. The information contained in this section should also be read in conjunction with our unaudited consolidated financial statements and related notes thereto appearing elsewhere in this quarterly report on Form 10-Q.
Except as otherwise specified, references to “we,” “us,” “our,” “Fidus” and “FIC” refer to Fidus Investment Corporation and its consolidated subsidiaries.
Forward Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about Fidus Investment Corporation, our current and prospective portfolio investments, our industry, our beliefs, and our assumptions. Words such as “anticipates,” “expects,” “intends,” “plans,” “will,” “may,” “continue,” “believes,” “seeks,” “estimates,” “would,” “could,” “should,” “targets,” “projects” and variations of these words and similar expressions are intended to identify forward-looking statements. The forward-looking statements contained in this Quarterly Report on Form 10-Q involve risks and uncertainties, including statements as to:
These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including without limitation:
Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. Important assumptions include our ability to originate new debt investments, certain margins and levels of profitability and the availability of additional capital. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this Quarterly Report on Form 10-Q should not be regarded as a representation by us that our plans and objectives will be achieved. These risks and uncertainties include those described or identified in Item 1.A – Risk Factors contained in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 25, 2021. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q.
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Overview
General and Corporate Structure
We provide customized debt and equity financing solutions to lower middle-market companies, which we define as U.S. based companies having revenues between $10.0 million and $150.0 million. Our investment objective is to provide attractive risk-adjusted returns by generating both current income from our debt investments and capital appreciation from our equity related investments. Our investment strategy includes partnering with business owners, management teams and financial sponsors by providing customized financing for ownership transactions, recapitalizations, strategic acquisitions, business expansion and other growth initiatives. Although we are classified as a non-diversified investment company within the meaning of the 1940 Act, we maintain the flexibility to operate as a diversified investment company and have done so for an extended period of time. We seek to maintain a diversified portfolio of investments in order to help mitigate the potential effects of adverse economic events related to particular companies, regions or industries.
FIC was formed as a Maryland corporation on February 14, 2011. We completed our initial public offering, or IPO, in June 2011. FIC has elected to be treated as business development company, or BDC, under the 1940 Act and our investment activities are managed by Fidus Investment Advisors, our investment advisor, and supervised by the Board, a majority of whom are independent of us. On March 29, 2013, we commenced operations of a wholly-owned subsidiary, Fund II. On April 18, 2018, we commenced operations of another wholly-owned subsidiary, Fund III. Fund II and Fund III are collectively referred to as the “Funds.”
Fund II and Fund III received their SBIC licenses on May 28, 2013, and March 21, 2019, respectively. We plan to continue to operate the Funds as SBICs, subject to SBA approval, and to utilize the proceeds of the sale of SBA-guaranteed debentures to enhance returns to our stockholders. We have also made, and continue to make, investments directly through FIC. We believe that utilizing FIC and the Funds as investment vehicles provides us with access to a broader array of investment opportunities.
We have certain wholly-owned taxable subsidiaries (the “Taxable Subsidiaries”), each of which generally holds one or more of our portfolio investments listed on the consolidated schedules of investments. The Taxable Subsidiaries are consolidated for financial reporting purposes, such that our consolidated financial statements reflect our investment in the portfolio company investments owned by the Taxable Subsidiaries. The purpose of the Taxable Subsidiaries is to permit us to hold equity investments in portfolio companies that are taxed as partnerships for U.S. federal income tax purposes (such as entities organized as limited liability companies (“LLCs”) or other forms of pass through entities) while complying with the “source-of-income” requirements contained in the RIC tax provisions. The Taxable Subsidiaries are not consolidated with us for U.S. federal corporate income tax purposes, and each Taxable Subsidiary will be subject to U.S. federal corporate income tax on its taxable income. Any such income or expense is reflected in the consolidated statements of operations.
COVID-19 Update
On March 11, 2020, the World Health Organization declared the novel coronavirus, or COVID-19, as a pandemic, and on March 13, 2020 the United States declared a national emergency with respect to COVID-19. The outbreak of COVID-19 has severely impacted global economic activity and caused significant volatility and negative pressure in financial markets. We have been closely monitoring, and will continue to monitor, the impact of the COVID-19 pandemic and its impact on all aspects of our business, including how it will impact our portfolio companies, employees, due diligence and underwriting processes, and financial markets. Given the fluidity of the pandemic, we cannot estimate the long-term impact of COVID-19 on our business, future results of operations, financial position or cash flows at this time. Further, the operational and financial performance of the portfolio companies in which we make investments may be significantly impacted by COVID-19, which may in turn impact the valuation of our investments. We believe our portfolio companies have taken, and continue to take, immediate actions to effectively and efficiently respond to the challenges posed by COVID-19 and related orders imposed by state and local governments, including developing liquidity plans supported by internal cash reserves, and shareholder support. The COVID-19 pandemic and preventative measures taken to contain or mitigate its spread have caused, and are continuing to cause, business shutdowns and cancellations of events and travel. In addition, while consumer demand for goods and services has begun to rebound, we continue to see reductions in business activity and financial transactions, supply chain interruptions and overall economic and financial market instability both in the United States and globally. Such effects will likely continue for the duration of the pandemic, which is uncertain, and for some period thereafter.
We seek to create a diversified investment portfolio that primarily includes debt investments and, to a lesser extent, equity securities. Our investments typically range between $5.0 million to $35.0 million per portfolio company, although this investment size may vary proportionately with the size of our capital base. Our investment objective is to provide attractive risk-adjusted returns by generating both current income from our debt investments and capital appreciation from our equity related investments. We may
invest in the equity securities of our portfolio companies, such as preferred stock, common stock, warrants and other equity interests, either directly or in conjunction with our debt investments.
First Lien Debt. We structure some of our investments as senior secured or first lien debt investments. First lien debt investments are secured by a first priority lien on existing and future assets of the borrower and may take the form of term loans or revolving lines of credit. First lien debt is typically senior on a lien basis to other liabilities in the issuer’s capital structure and has the benefit of a first-priority security interest in assets of the issuer. The security interest ranks above the security interest of any second lien lenders in those assets. Our first lien debt may include stand-alone first lien loans, “last out” first lien loans, or “unitranche” loans. Stand-alone first lien loans are traditional first lien loans. All lenders in the facility have equal rights to the collateral that is subject to the first-priority security interest. “Last out” first lien loans have a secondary priority behind super-senior “first out” first lien loans in the collateral securing the loans in certain circumstances. The arrangements for a “last out” first lien loan are set forth in an “agreement among lenders,” which provides lenders with “first out” and “last out” payment streams based on a single lien on the collateral. Since the “first out” lenders generally have priority over the “last out” lenders for receiving payment under certain specified events of default, or upon the occurrence of other triggering events under intercreditor agreements or agreements among lenders, the “last out” lenders bear a greater risk and, in exchange, receive a higher effective interest rate, through arrangements among the lenders, than the “first out” lenders or lenders in stand-alone first lien loans. Agreements among lenders also typically provide greater voting rights to the “last out” lenders than the intercreditor agreements to which second lien lenders often are subject.
Many of our debt investments also include excess cash flow sweep features, whereby principal repayment may be required before maturity if the portfolio company achieves certain defined operating targets. Additionally, our debt investments typically have principal prepayment penalties in the early years of the debt investment. The majority of our debt investments provide for a variable interest rate, generally with a LIBOR floor.
Second Lien Debt. Some of our debt investments take the form of second lien debt, which includes senior subordinated notes. Second lien debt investments obtain security interests in the assets of the portfolio company as collateral in support of the repayment of such loans. Second lien debt typically is senior on a lien basis to other liabilities in the issuer’s capital structure and has the benefit of a security interest over assets of the issuer, though ranking junior to first lien debt secured by those assets. First lien lenders and second lien lenders typically have separate liens on the collateral, and an intercreditor agreement provides the first lien lenders with priority over the second lien lenders’ liens on the collateral. These loans typically provide for no contractual loan amortization, with all amortization deferred until loan maturity, and may include payment-in-kind (“PIK”) interest, which increases the principal balance over the term and, coupled with the deferred principal payment provision, increases credit risk exposure over the life of the loan.
Subordinated Debt. These investments are typically structured as unsecured, subordinated notes. Structurally, subordinated debt usually ranks subordinate in priority of payment to first lien and second lien debt and may not have the benefit of financial covenants common in first lien and second lien debt. Subordinated debt may rank junior as it relates to proceeds in certain liquidations where it does not have the benefit of a lien in specific collateral held by creditors (typically first lien and/or second lien) who have a perfected security interest in such collateral. However, subordinated debt ranks senior to common and preferred equity in an issuer’s capital structure. These loans typically have relatively higher fixed interest rates (often representing a combination of cash pay and PIK interest) and amortization of principal deferred to maturity. The PIK feature (meaning a feature allowing for the payment of interest in the form of additional principal amount of the loan instead of in cash), which effectively operates as negative amortization of loan principal, coupled with the deferred principal payment provision, increases credit risk exposure over the life of the loan.
Equity Securities. Our equity securities typically consist of either a direct minority equity investment in common or preferred stock or membership/partnership interests of a portfolio company, or we may receive warrants to buy a minority equity interest in a portfolio company in connection with a debt investment. Warrants we receive with our debt investments typically require only a nominal cost to exercise, and thus, as a portfolio company appreciates in value, we may achieve additional investment return from this equity interest. Our equity investments are typically not control-oriented investments, and in many cases, we acquire equity securities as part of a group of private equity investors in which we are not the lead investor. We may structure such equity investments to include provisions protecting our rights as a minority-interest holder, as well as a “put,” or right to sell such securities back to the issuer, upon the occurrence of specified events. In many cases, we may also seek to obtain registration rights in connection with these equity interests, which may include demand and “piggyback” registration rights. Our equity investments typically are made in connection with debt investments to the same portfolio companies.
Revenues: We generate revenue in the form of interest and fee income on debt investments and dividends, if any, on equity investments. Our debt investments, whether in the form of second lien, subordinated or first lien loans, typically have terms of five to seven years and most bear interest at fixed rates or variable rates. In some instances, we receive payments on our debt investments based on scheduled amortization of the outstanding balances. In addition, we may receive repayments of some of our debt investments prior to their scheduled maturity dates, which may include prepayment penalties. The frequency or volume of these repayments fluctuates significantly from period to period. Our portfolio activity may reflect the proceeds of sales of securities. In
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some cases, our investments provide for deferred interest payments or PIK interest. The principal amount of debt investments and any accrued but unpaid interest generally become due at the maturity date. In addition, we may generate revenue in the form of commitment, origination, amendment, or structuring fees and fees for providing managerial assistance. Debt investment origination fees, OID and market discount or premium, if any, are capitalized, and we accrete or amortize such amounts into interest income. We record prepayment penalties on debt investments as fee income when earned. Interest and dividend income is recorded on the accrual basis to the extent that we expect to collect such amounts. Interest is accrued daily based on the outstanding principal amount and the contractual terms of the debt investment. Dividend income is recorded as dividends are declared or at the point an obligation exists for the portfolio company to make a distribution, and is generally recognized when received. Distributions of earnings from portfolio companies are evaluated to determine if the distribution is a distribution of earnings or a return of capital. Distributions of earnings are included in dividend income while a return of capital is recorded as a reduction in the cost basis of the investment. Estimates are adjusted as necessary after the relevant tax forms are received from the portfolio company. Debt investments or preferred equity investments (for which we are accruing PIK dividends) are placed on non-accrual status when principal, interest or dividend payments become materially past due, or when there is reasonable doubt that principal, interest or dividends will be collected. Interest and dividend payments received on non-accrual investments may be recognized as interest or dividend income or may be applied to the investment principal balance based on management’s judgment. Non-accrual investments are restored to accrual status when past due principal, interest or dividends are paid and, in management’s judgment, payments are likely to remain current. See “Critical Accounting Policies and Use of Estimates – Revenue Recognition.”
We recognize realized gains or losses on investments based on the difference between the net proceeds from the disposition and the cost basis of the investment, without regard to unrealized gains or losses previously recognized. We record current period changes in fair value of investments that are measured at fair value as a component of the net change in unrealized appreciation (depreciation) on investments in the consolidated statements of operations.
Expenses: All investment professionals of the Investment Advisor and/or its affiliates, when and to the extent engaged in providing investment advisory and management services to us, and the compensation and routine overhead expenses allocable to personnel who provide these services to us, are provided and paid for by the Investment Advisor and not by us. We bear all other out-of-pocket costs and expenses of our operations and transactions, including, without limitation, those relating to:
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Portfolio Composition, Investment Activity and Yield
During the nine months ended September 30, 2021 and 2020, we invested $245.5 million and $86.1 million, respectively, in debt and equity investments including twelve and five new portfolio companies, respectively. During the nine months ended September 30, 2021 and 2020, we received proceeds from sales or repayments, including principal, return of capital dividends and net realized gains (losses), of $319.0 million and $110.1 million, respectively, including exits of six and three portfolio companies, respectively. The following table summarizes investment purchases and sales and repayments of investments by type for the nine months ended September 30, 2021 and 2020 (dollars in millions).
Purchases of Investments
Sales and Repayments of Investments
Nine Months Ended June 30,
172.5
70.3
49.2
57.2
61.0
19.1
26.2
23.8
43.9
22.0
25.5
177.8
55.8
22.9
18.4
7.5
13.5
15.7
56.8
10.6
9.6
10.7
4.4
1.4
1.6
43.6
39.6
4.5
4.1
245.5
86.1
319.0
110.1
(1) For the nine months ended September 30, 2021 and 2020, includes unitranche securities, which account for 66.4% and 42.9% of purchases, respectively. For the nine months ended September 30, 2021 and 2020, includes unitranche securities, which account for 12.7% and 3.4% of repayments, respectively.
As of September 30, 2021, the fair value of our investment portfolio totaled $719.1 million and consisted of 70 active portfolio companies and six portfolio companies that have sold their underlying operations. As of September 30, 2021, 28 portfolio companies’ debt investments bore interest at a variable rate, which represented $317.2 million, or 55.9%, of our debt investment portfolio on a fair value basis, and the remainder of our debt investment portfolio was comprised of fixed rate investments. Overall, the portfolio had net unrealized appreciation of $87.9 million as of September 30, 2021. As of September 30, 2021, our average active portfolio company investment at amortized cost was $9.0 million, which excludes investments in the six portfolio companies that have sold their underlying operations.
As of December 31, 2020, the fair value of our investment portfolio totaled $742.9 million and consisted of 66 active portfolio companies and three portfolio companies that have sold their underlying operations. As of December 31, 2020, 22 portfolio companies’ debt investments bore interest at a variable rate, which represented $230.9 million, or 36.8%, of our debt investment portfolio on a fair value basis, and the remainder of our debt investment portfolio was comprised of fixed rate investments. Overall, the portfolio had net unrealized appreciation of $55.8 million as of December 31, 2020. As of December 31, 2020, our average active portfolio company investment at amortized cost was $10.4 million, which excludes investments in the three portfolio companies that have sold their underlying operations.
The weighted average yield on debt investments as of September 30, 2021 and December 31, 2020 was 12.3% and 12.2%, respectively. The weighted average yield of our debt investments is not the same as a return on investment for our stockholders but, rather, relates to a portion of our investment portfolio and is calculated before the payment of all of our and our subsidiaries’ fees and expenses. The weighted average yields were computed using the effective interest rates for debt investments at cost including the accretion of OID and debt investment origination fees, but excluding investments on non-accrual status and investments recorded as a secured borrowing, if any.
The following table shows the portfolio composition by investment type at fair value and cost and as a percentage of total investments (dollars in millions):
297.0
187.4
295.4
184.6
201.3
332.2
212.3
341.9
69.5
107.9
69.2
107.3
148.0
112.8
51.2
50.0
3.3
2.6
3.2
719.1
742.9
631.3
687.0
(1) Includes unitranche investments, which account for 34.7% and 39.3% of our portfolio on a fair value and cost basis as of September 30, 2021, respectively. Includes unitranche investments, which account for 17.3% and 18.4% of our portfolio on a fair value and cost basis as of December 31, 2020, respectively.
All investments made by us as of September 30, 2021 and December 31, 2020 were made in portfolio companies headquartered in the U.S. The following table shows portfolio composition by geographic region at fair value and cost and as a percentage of total investments (dollars in millions). The geographic composition is determined by the location of the corporate headquarters of the portfolio company, which may not be indicative of the primary source of the portfolio company’s business.
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133.8
225.7
79.0
189.6
193.7
153.3
167.5
130.0
149.2
123.3
127.8
86.5
108.7
80.4
109.2
155.9
131.9
156.4
130.4
The following table shows the detailed industry composition of our portfolio at fair value and cost as a percentage of total investments:
20.0
12.8
21.0
13.2
12.3
17.3
13.0
15.8
11.2
17.0
10.1
9.0
3.6
4.8
6.9
5.2
7.2
5.6
5.9
7.4
5.7
2.5
2.7
3.8
5.4
4.3
6.0
Promotional Products
3.1
4.0
3.7
2.9
2.8
Transportation Services
3.0
2.4
5.5
1.8
1.5
2.1
1.9
0.9
1.3
0.3
0.0
0.1
(1) Percentage is less than 0.1% of respective total.
Portfolio Asset Quality
In addition to various risk management and monitoring tools, the Investment Advisor uses an internally developed investment rating system to characterize and monitor the credit profile and our expected level of returns on each investment in our portfolio. We use a five-level numeric rating scale. The following is a description of the conditions associated with each investment rating:
As the COVID-19 pandemic continues to evolve, we are maintaining close communications with our portfolio companies to proactively assess and manage risks across our investment portfolio. We have also increased oversight and analysis of credits in vulnerable industries in an attempt to improve performance and reduce credit risk.
The following table shows the distribution of our investments on the 1 to 5 investment rating scale at fair value and cost as of September 30, 2021 and December 31, 2020 (dollars in millions):
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Investment Rating
111.0
15.4
109.3
14.7
13.6
2.2
38.7
541.8
75.4
544.4
73.3
535.1
84.7
537.6
78.3
46.2
6.4
80.1
10.8
51.1
87.5
20.1
1.2
26.1
2.0
9.5
Based on our investment rating system, the weighted average rating of our portfolio as of September 30, 2021 and December 31, 2020 was 2.0 and 2.0, respectively, on a fair value basis and 2.2 and 2.2, respectively, on a cost basis.
Non-Accrual
As of September 30, 2021, we had no debt investments on non-accrual status. As of December 31, 2020, we had a debt investment in one portfolio company on non-accrual status (dollars in millions).
9.2
(1) Portfolio company debt investment was not on non-accrual status at September 30, 2021.
(2) Portfolio company was on PIK-only non-accrual status at December 31, 2020, meaning we ceased recognizing PIK interest income on the investment.
Discussion and Analysis of Results of Operations
Comparison of three and nine months ended September 30, 2021 and 2020
Investment Income
Below is a summary of the changes in total investment income for the three months ended September 30, 2021 as compared to the same period in 2020 (dollars in millions):
$ Change
% Change (1)(2)
17.9
18.8
(0.9
(4.8
NM
1.0
177.7
Interest on idle funds and other income
21.2
21.1
(1) NM = Not meaningful
(2) Percent change calculated based on underlying dollar amounts in thousands as presented on the consolidated statements of operations.
For the three months ended September 30, 2021, total investment income was $21.2 million, an increase of $0.1 million or 0.7%, from the $21.1 million of total investment income for the three months ended September 30, 2020. As reflected in the table above, the increase is primarily attributable to the following:
Below is a summary of the changes in total investment income for the nine months ended September 30, 2021 as compared to the same period in 2020 (dollars in millions):
54.8
55.1
(0.3
(0.5
3.5
(0.2
(5.1
0.8
120.3
6.8
2.3
200.4
66.3
61.5
7.9
For the nine months ended September 30, 2021, total investment income was $66.3 million, an increase of $4.8 million or 7.9%, from the $61.5 million of total investment income for the nine months ended September 30, 2020. As reflected in the table above, the increase is primarily attributable to the following:
Expenses
Below is a summary of the changes in total expenses, including income tax provision, for the three months ended September 30, 2021 as compared to the same period in 2020 (dollars in millions):
4.7
4.9
(4.4
68.9
0.2
67.0
Total expenses, before base management and income incentive fee waivers
16.2
14.2
Total expenses, before income tax provision
16.1
Total expenses, including income tax provision
For the three months ended September 30, 2021, total expenses, including income tax provision, were $16.1 million, an increase of $1.9 million or 13.7%, from the $14.2 million of total expenses for the three months ended September 30, 2020. As reflected in the table above, changes across periods were primarily attributable to the following:
Below is a summary of the changes in total expenses, including income tax provision, for the nine months ended September 30, 2021 as compared to the same period in 2020 (dollars in millions):
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14.4
(1.9
7.6
6.3
20.5
Incentive fee - capital gains
(6.4
15.0
(235.4
(34.9
1.1
5.3
43.7
28.2
55.3
(0.4
(76.8
27.8
57.3
(78.1
56.6
For the nine months ended September 30, 2021, total expenses, including income tax provision, were $43.7 million, an increase of $15.7 million or 56.6%, from the $28.0 million of total expenses for the nine months ended September 30, 2020. As reflected in the table above, changes across periods were primarily attributable to the following:
Net Investment Income
Net investment income decreased by $(1.8) million, or (25.8%), to $5.1 million during the three months ended September 30, 2021 as compared to the same period in 2020, as a result of the $1.9 million increase in total expenses, including base management and incentive fee waivers and income tax provision, partially offset by the $0.1 increase in total investment income.
Net investment income decreased by $(10.9) million, or (32.5%), to $22.6 million during the nine months ended September 30, 2021 as compared to the same period in 2020, as a result of the $15.7 million increase in total expenses, including base management and incentive fee waivers and income tax provision, partially offset by the $4.8 increase in total investment income.
Net Gain (Loss) on Investments
For the three and nine months ended September 30, 2021, the total net realized gain/(loss) on investments, before income tax (provision)/benefit, was $8.3 million and $13.7 million, respectively. Income tax (provision) benefit from realized gains on investments was $0.1 million and $0.1 million for the three and nine months ended September 30, 2021, respectively. Realized gains (losses) for the three and nine months ended September 30, 2021 are summarized below (dollars in millions):
Period Ended September 30, 2021
Three
Nine
Realization Event (1)
Months
Sale of portfolio company
Exit of portfolio company
(1.0
Pugh Lubricants, LLC
Net realized gain (loss) on investments
8.3
Net realized gain (loss), net of income tax provision, on investments
8.4
13.8
(1) As it relates to realization events, we define an 'exit' of a portfolio company as situations where we have completely exited our position in all of the portfolio company's securities and no longer carry the portfolio company on our consolidated schedule of investments. We define a 'sale' of a portfolio company, distinguished from an exit, as situations where the underlying operations of a portfolio company have been sold, but where we retain a residual ownership interest in the legacy entity (we generally distinguish these residual portfolio company investments from 'active' portfolio company investments).
For the three and nine months ended September 30, 2020, the total net realized gain/(loss) on investments, before income tax (provision)/benefit, was $1.3 million and $32.9 million, respectively. Income tax (provision) benefit from realized gains on investments was zero and $(1.1) million for the three and nine months ended September 30, 2020, respectively. Realized gains (losses) for the three and nine months ended September 30, 2020 are summarized below (dollars in millions):
Period Ended September 30, 2020
Sold 50% of equity investment
Microbiology Research Associates, Inc.
1.7
ControlScan, Inc.
New Era Technology, Inc.
Escrow distribution
Apex Microtechnology, Inc.
Restaurant Finance Co, LLC
Vanguard Dealer Services, L.L.C.
Other
32.9
(1.1
31.8
(1) As it relates to realization events, we define an 'exit' of a portfolio company as situations where we have completely exited our position in all of the portfolio company's securities and no longer carry the portfolio company on our schedule of investments. We define a 'sale' of a portfolio company, distinguished from an exit, as situations where the underlying operations of a portfolio company have been sold, but where we retain a residual ownership interest in the legacy entity (we generally distinguish these residual portfolio company investments from 'active' portfolio company investments).
During the nine months ended September 30, 2021 and 2020, we recorded a net change in unrealized appreciation (depreciation) on investments attributable to the following (dollars in millions):
Unrealized Appreciation (Depreciation)
Exit, sale or restructuring of investments
(2.6
(5.9
(30.0
Fair value adjustments to debt investments
(0.6
(31.1
Fair value adjustments to equity investments
14.1
(2.3
Net change in unrealized appreciation (depreciation)
15.3
32.0
(63.4
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Net Increase in Net Assets Resulting From Operations
Net increase (decrease) in net assets resulting from operations during the three months ended September 30, 2021 and 2020 was $28.4 million and $20.7 million, respectively, as a result of the events described above.
Net increase (decrease) in net assets resulting from operations during the nine months ended September 30, 2021 and 2020 was $65.8 million and $1.7 million, respectively, as a result of the events described above.
Liquidity and Capital Resources
As of September 30, 2021, we had $98.8 million in cash and cash equivalents and our net assets totaled $447.5 million. We believe that our current cash and cash equivalents on hand, our Credit Facility, our continued access to SBA-guaranteed debentures, and our anticipated cash flows from investments will provide adequate capital resources with which to operate and finance our investment business and make distributions to our stockholders for at least the next 12 months. We intend to generate additional cash primarily from the future offerings of securities (including the “at-the-market” program) and future borrowings, as well as cash flows from operations, including income earned from investments in our portfolio companies. On both a short-term and long-term basis, our primary use of funds will be investments in portfolio companies and cash distributions to our stockholders. During the nine months ended September 30, 2021, we repaid $63.5 million of SBA debentures which would have matured during the period September 1, 2025 through March 1, 2028. Our remaining outstanding SBA debentures continue to mature in 2025 and subsequent years through 2031, which will require repayment on or before the respective maturity dates.
Cash Flows
For the nine months ended September 30, 2021, we experienced a net decrease in cash and cash equivalents in the amount of $25.5 million. During that period, we received proceeds of $98.9 million of cash for operating activities, which included proceeds received from sales and repayments of investments of $319.0 million, which were partially offset by the funding of $245.5 million of investments. During the same period, we received proceeds of $17.7 million on our secured borrowings, made repayments on outstanding unsecured notes of $100.0 million, made repayments of SBA debentures of $63.5 million; which were partially offset by proceeds from the issuances of SBA debentures of $11.5 million, paid cash dividends paid to stockholders of $29.1 million, and made payment of deferred financing costs related to our debt financings of $1.0 million.
Capital Resources
We anticipate that we will continue to fund our investment activities on a long-term basis through a combination of additional debt and equity capital.
The Funds are licensed SBICs, and have the ability to issue debentures guaranteed by the SBA at favorable interest rates. Under the Small Business Investment Act and the SBA rules applicable to SBICs, an SBIC can have outstanding at any time debentures guaranteed by the SBA in an amount up to twice its regulatory capital. The SBA regulations currently limit the amount that is available to be borrowed by any SBIC and guaranteed by the SBA to 300.0% of an SBIC’s regulatory capital or $175.0 million, whichever is less. For two or more SBICs under common control, the maximum amount of outstanding SBA debentures cannot exceed $350.0 million. SBA debentures have fixed interest rates that approximate prevailing 10-year Treasury Note rates plus a spread and have a maturity of ten years with interest payable semi-annually. The principal amount of the SBA debentures is not required to be paid before maturity but may be pre-paid at any time. As of September 30, 2021, Fund II and Fund III had $70.0 million and $25.0 million of outstanding SBA debentures, respectively. Subject to SBA regulatory requirements and approval, Fund III may access up to $150.0 million of additional SBA debentures under the SBIC debenture program. For more information on the SBA debentures, please refer to Note 6 to our consolidated financial statements.
In June 2014, we entered into a senior secured revolving credit agreement (the "Credit Agreement" and the senior secured revolving credit facility) to provide additional funding for our investment and operational activities. On April 24, 2019, we entered into the Amended Credit Agreement, which amends, restates, and replaces the Credit Agreement. On June 26, 2020, the Company amended the Amended Credit Agreement, but the material terms were unchanged. Among other revisions, the amendment to the Amended Credit Agreement modifies certain covenants therein, including to amend the minimum consolidated interest coverage ratio to be 2.25 to 1.00 for the four quarter period ending on June 30, 2020, 2.00 to 1.00 for the four quarter periods ending on each of September 30, 2020 and December 31, 2020, and 1.75 to 1.00 for each four quarter period ending at the end of each quarter thereafter. The Credit Facility is secured by substantially all of our assets, excluding the assets of the Funds.
Under the Amended Credit Agreement, (i) revolving commitments by lenders were increased from $90.0 million to $100.0 million, with an accordion feature that allows for an increase in total commitments up to $250.0 million, subject to satisfaction of certain conditions at the time of any such future increase, (ii) the maturity date of the Credit Facility was extended from June 16, 2019 to April 24, 2023, and (iii) borrowings under the Credit Facility bear interest, at our election, at a rate per annum equal to (a) 3.00% (or 2.75% if certain conditions are satisfied, including if (x) no equity interests are included in the borrowing base, (y) the contribution to the borrowing base of eligible portfolio investments that are performing first lien bank loans is greater than or equal to 35%, and (z) the contribution to the borrowing base of eligible portfolio investments that are performing first lien bank loans, performing last out loans, or performing second lien loans is greater than or equal to 60%) plus the one, two, three or six month LIBOR rate, as applicable, or (b) 2.00% (or 1.75% if the above conditions are satisfied) plus the highest of (A) a prime rate, (B) the Federal Funds rate plus 0.5%, (C) three month LIBOR plus 1.0%, and (D) zero. We pay a commitment fee that varies depending on the size of the unused portion of the Credit Facility: 3.00% per annum on the unused portion of the Credit Facility at or below 35% of the commitments and 0.50% per annum on any remaining unused portion of the Credit Facility between the total commitments and the 35% minimum utilization. The Amended Credit Agreement also modifies certain covenants in the Credit Facility, including to provide for a minimum asset coverage ratio of 2.00 to 1 (on a regulatory basis). The Credit Facility is secured by a first priority security interest in all of our assets, excluding the assets of our SBIC subsidiaries.
Amounts available to borrow under the Credit Facility are subject to a minimum borrowing/collateral base that applies an advance rate to certain investments held by us, excluding investments held by the Funds. We are subject to limitations with respect to the investments securing the Credit Facility, including, but not limited to, restrictions on sector concentrations, loan size, payment frequency and status and collateral interests, as well as restrictions on portfolio company leverage, which may also affect the borrowing base and therefore amounts available to borrow.
We have made customary representations and warranties and are required to comply with various covenants, reporting requirements and other customary requirements for similar credit facilities. These covenants are subject to important limitations and exceptions that are described in the documents governing the Credit Facility. As of September 30, 2021, we were in compliance with all covenants of the Credit Facility.
On February 2, 2018, we closed the public offering of approximately $43.5 million in aggregate principal amount of our 5.875% notes due 2023, or the “2023 Notes.” On February 22, 2018, the underwriters exercised their option to purchase an additional $6.5 million in aggregate principal of the 2023 Notes. The total net proceeds to us from the 2023 Notes, including the exercise of the underwriters’ option, after deducting underwriting discounts of approximately $1.5 million and offering expenses of $0.4 million, were approximately $48.1 million. The 2023 Notes will mature on February 1, 2023 and bear interest at a rate of 5.875%. The 2023 Notes may be redeemed in whole or in part at any time or from time to time at our option on or after February 1, 2020. On January 19, 2021, we redeemed $50.0 million in aggregate principal amount on the issued and outstanding 2023 Notes, resulting in a realized loss on extinguishment of debt of approximately $0.8 million.
On February 8, 2019, we closed the public offering of approximately $60.0 million in aggregate principal amount of our 6.000% notes due 2024, or the “February 2024 Notes”. On February 19, 2019, the underwriters exercised their option to purchase an additional $9.0 million in aggregate principal of the February 2024 Notes. The total net proceeds to us from the February 2024 Notes, including the exercise of the underwriters’ option, after deducting underwriting discounts of approximately $2.1 million and estimated offering expenses of $0.4 million, were approximately $66.5 million. The February 2024 Notes will mature on February 15, 2024 and bear interest at a rate of 6.000%. The February 2024 Notes may be redeemed in whole or in part at any time or from time to time at our option on or after February 15, 2021. Interest on the February 2024 Notes is payable quarterly on February 15, May 15, August 15 and November 15 of each year. The February 2024 Notes are listed on the NASDAQ Global Select Market under the trading symbol “FDUSZ.” On February 16, 2021, we redeemed $50.0 million of the $69.0 million aggregate principal amount on the February 2024 Notes, resulting in a realized loss on extinguishment of debt of approximately $1.1 million. As of September 30, 2021, the outstanding principal balance of the February 2024 Notes was $19.0 million.
On October 16, 2019, we closed the public offering of approximately $55.0 million in aggregate principal amount of our 5.375% notes due 2024, or the “November 2024 Notes” (and collectively with the 2023 Notes and the February 2024 Notes, the “Public Notes”). On October 23, 2019, the underwriters exercised their option to purchase an additional $8.3 million in aggregate principal of the November 2024 Notes. The total net proceeds to us from the November 2024 Notes, including the exercise of the underwriters’ option, after deducting underwriting discounts of approximately $1.9 million and estimated offering expenses of $0.3 million, were approximately $61.1 million. The November 2024 Notes will mature on November 1, 2024 and bear interest at a rate of 5.375%. The November 2024 Notes may be redeemed in whole or in part at any time or from time to time at our option on or after November 1, 2021. Interest on the November 2024 Notes is payable quarterly on February 1, May 1, August 1 and November 1 of each year. The November 2024 Notes are listed on the NASDAQ Global Select Market under the trading symbol “FDUSG.” As of September 30, 2021, the outstanding principal balance of the November 2024 Notes was approximately $63.3 million.
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On December 23, 2020, we closed the offering of approximately $125.0 million in aggregate principal amount of our 4.75% notes due 2026, or the “2026 Notes” (collectively with the Public Notes, the “Notes”). The total net proceeds to us from the 2026 Notes after deducting underwriting discounts of $2.5 million and estimated offering expenses of $0.4 million, were approximately $122.1 million. The 2026 Notes will mature on January 31, 2026 and bear interest at a rate of 4.75%. The 2026 Notes may be redeemed in whole or in part at any time or from time to time at our option subject to a make whole provision if redeemed more than three months prior to maturity or at par thereafter. Interest on the 2026 Notes is payable on January 31 and July 31 of each year. We do not intend to list the 2026 Notes on any securities exchange or automated dealer quotation system. As of September 30, 2021, the outstanding principal balance of the 2026 Notes was approximately $125.0 million.
Each of the Notes are unsecured obligations and rank pari passu with our existing and future unsecured indebtedness; effectively subordinated to all of our existing and future secured indebtedness; and structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries, financing vehicles, or similar facilities we may form in the future, with respect to claims on the assets of any such subsidiaries, financing vehicles, or similar facilities.
As of September 30, 2021, secured borrowings at fair value totaled $17.7 million and the fair value of the associated loans included in investments was $17.7 million. As of December 31, 2020, there were no secured borrowings outstanding. These secured borrowings were created as a result of our completion of partial loan sales of certain unitranche loan assets that did not meet the definition of a “participating interest.” As a result, sale treatment was not permitted and these partial loan sales were treated as secured borrowings. The weighted average interest rate on our secured borrowings was approximately 4.4% as of September 30, 2021.
As of September 30, 2021, the weighted average stated interest rates for our SBA debentures, Secured Borrowings, Notes, and the Credit Facility were 2.899%, 4.392%, 5.055%, and 3.125% respectively. As of September 30, 2021, we had $60.0 million of unutilized commitment under our Credit Facility, and we were subject to a 0.500% fee on such amount. As of September 30, 2021, the weighted average stated interest rate on total debt outstanding was 4.239%.
As a BDC, we are generally required to meet an asset coverage ratio of at least 150.0% (defined as the ratio which the value of our consolidated total assets, less all consolidated liabilities and indebtedness not represented by senior securities, bears to the aggregate amount of senior securities representing indebtedness), which includes borrowings and any preferred stock we may issue in the future. This requirement limits the amount that we may borrow. On April 29, 2019, our Board, including a majority of the non-interested directors, approved a minimum asset coverage ratio of 150% under Sections 18(a)(1) and 18(a)(2) of the 1940 Act. As a result, we are subject to the 150% asset coverage ratio effective as of April 29, 2020. We have received exemptive relief from the SEC to allow us to exclude any indebtedness guaranteed by the SBA and issued by the Funds from the 150.0% asset coverage requirements, which, in turn, will enable us to fund more investments with debt capital.
As a BDC, we are generally not permitted to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common stock, or warrants, options or rights to acquire our common stock, at a price below the then-current net asset value per share of our common stock if the Board, including the Independent Directors, determines that such sale is in the best interests of us and our stockholders, and if our stockholders approve such sale. On July 14, 2021, our stockholders voted to allow us to sell or otherwise issue common stock at a price below net asset value per share for a period of one year ending on the earlier of June 14, 2022 or the date of our 2022 Annual Meeting of Stockholders. We expect to present to our stockholders a similar proposal at our 2022 Annual Meeting of Stockholders. Our stockholders specified that the cumulative number of shares sold in each offering during the one-year period ending on the earlier of June 14, 2022 or the date of our 2022 Annual Meeting of Stockholders may not exceed 25.0% of our outstanding common stock immediately prior to each such sale.
We have an open market stock repurchase program (the “Stock Repurchase Program”) under which we may acquire up to $5.0 million of our outstanding common stock. Under the Stock Repurchase Program, we may, but are not obligated to, repurchase outstanding common stock in the open market from time to time provided that we comply with the prohibitions under our insider trading policies and the requirements of Rule 10b-18 of the Securities Exchange Act of 1934, as amended, including certain price, market value and timing constraints. The timing, manner, price and amount of any share repurchases will be determined by our management, in its discretion, based upon the evaluation of economic and market conditions, stock price, capital availability, applicable legal and regulatory requirements and other corporate considerations. On November 1, 2021, the Board extended the Stock Repurchase Program through December 31, 2022, or until the approved dollar amount has been used to repurchase shares. The Stock Repurchase Program does not require us to repurchase any specific number of shares and we cannot assure that any shares will be repurchased under the Stock Repurchase Program. The Stock Repurchase Program may be suspended, extended, modified or discontinued at any time. We did not make any repurchases of common stock during the three and nine months ended September 30, 2021. During the three and nine months ended September 30, 2020, we repurchased zero and 25,719 shares of
common stock on the open market for zero and $0.3 million, respectively. Refer to Note 8 to our consolidated financial statements for additional information concerning stock repurchases.
Critical Accounting Policies and Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make certain estimates and assumptions affecting amounts reported in the financial statements. We have identified investment valuation, revenue recognition and transfers of financial assets as our most critical accounting policies and estimates. We continuously evaluate our policies and estimates, including those related to the matters described below. These estimates are based on the information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from those estimates under different assumptions or conditions. A discussion of our critical accounting policies follows.
Valuation of Portfolio Investments
As a BDC, we report our assets and liabilities at fair value at all times consistent with GAAP and the 1940 Act. Accordingly, we are required to periodically determine the fair value of all of our portfolio investments.
Our investments generally consist of illiquid securities including debt and equity investments in lower middle-market companies. Investments for which market quotations are readily available are valued at such market quotations. Because we expect that there will not be a readily available market for substantially all of the investments in our portfolio, we value substantially all of our portfolio investments at fair value as determined in good faith by the Board using a documented valuation policy and consistently applied valuation process. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the difference could be material.
In making the good faith determination of the value of portfolio investments, we start with the cost basis of the security. The transaction price is typically the best estimate of fair value at inception. When evidence supports a subsequent change to the carrying value from the original transaction price, adjustments are made to reflect the expected exit values.
Consistent with the policies and methodologies adopted by the Board, we perform detailed valuations of our debt and equity investments, including an analysis on the Company’s unfunded debt investment commitments, using both the market and income approaches as appropriate. Under the market approach, we typically use the enterprise value methodology to determine the fair value of an investment. There is no one methodology to estimate enterprise value and, in fact, for any one portfolio company, enterprise value is generally best expressed as a range of values, from which we derive a single estimate of enterprise value. Under the income approach, we typically prepare and analyze discounted cash flow models to estimate the present value of future cash flows of either an individual debt investment or of the underlying portfolio company itself.
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We evaluate investments in portfolio companies using the most recent portfolio company financial statements and forecasts. We also consult with the portfolio company’s senior management to obtain further updates on the portfolio company’s performance, including information such as industry trends, new product development and other operational issues.
For our debt investments the primary valuation technique used to estimate the fair value is the discounted cash flow method. However, if there is deterioration in credit quality or a debt investment is in workout status, we may consider other methods in determining the fair value, including the value attributable to the debt investment from the enterprise value of the portfolio company or the proceeds that would be received in a liquidation analysis. Our discounted cash flow models estimate a range of fair values by applying an appropriate discount rate to the future cash flow streams of our debt investments, based on future interest and principal payments as set forth in the associated debt investment agreements. We prepare a weighted average cost of capital for use in the discounted cash flow model for each investment, based on factors including, but not limited to: current pricing and credit metrics for similar proposed or executed investment transactions of private companies; the portfolio company’s historical financial results and outlook; and the portfolio company’s current leverage and credit quality as compared to leverage and credit quality as of the date the investment was made. We may also consider the following factors when determining the fair value of debt investments: the portfolio company’s ability to make future scheduled payments; prepayment penalties and other fees; estimated remaining life; the nature and realizable value of any collateral securing such debt investment; and changes in the interest rate environment and the credit markets that generally may affect the price at which similar investments may be made. We estimate the remaining life of our debt investments to generally be the legal maturity date of the instrument, as we generally intend to hold debt investments to maturity. However, if we have information available to us that the debt investment is expected to be repaid in the near term, we would use an estimated remaining life based on the expected repayment date.
For our equity investments, including equity securities and warrants, we generally use a market approach, including valuation methodologies consistent with industry practice, to estimate the enterprise value of portfolio companies. Typically, the enterprise value of a private company is based on multiples of EBITDA, net income, revenues, or in limited cases, book value. In estimating the enterprise value of a portfolio company, we analyze various factors consistent with industry practice, including but not limited to original transaction multiples, the portfolio company’s historical and projected financial results, applicable market trading and transaction comparables, applicable market yields and leverage levels, the nature and realizable value of any collateral, the markets in which the portfolio company does business, and comparisons of financial ratios of peer companies that are public.
We may also utilize an income approach when estimating the fair value of our equity securities, either as a primary methodology if consistent with industry practice or if the market approach is otherwise not applicable, or as a supporting methodology to corroborate the fair value ranges determined by the market approach. We typically prepare and analyze discounted cash flow models based on projections of the future free cash flows (or earnings) of the portfolio company. We consider various factors, including but not limited to the portfolio company’s projected financial results, applicable market trading and transaction comparables, applicable market yields and leverage levels, the markets in which the portfolio company does business, and comparisons of financial ratios of peer companies that are public.
Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our consolidated financial statements express the uncertainties with respect to the possible effect of such valuations, and any changes in such valuations, on the consolidated financial statements.
Revenue Recognition
Investments and related investment income. Realized gains or losses on investments are recorded upon the sale or disposition of a portfolio investment and are calculated as the difference between the net proceeds from the sale or disposition and the cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized. Net change in unrealized appreciation or depreciation on the consolidated statements of operations includes changes in the fair value of investments from the prior period, as determined by the Board through the application of our valuation policy, as well as reclassifications of any prior period unrealized appreciation or depreciation on exited investments to realized gains or losses on investments.
Interest and dividend income. Interest and dividend income are recorded on the accrual basis to the extent that we expect to collect such amounts. Interest is accrued daily based on the outstanding principal amount and the contractual terms of the debt. Dividend income is recorded as dividends are declared or at the point an obligation exists for the portfolio company to make a distribution, and is generally recognized when received. Distributions from portfolio companies are evaluated to determine if the distribution is a distribution of earnings or a return of capital. Distributions of earnings are included in dividend income while a return of capital is recorded as a reduction in the cost basis of the investment. Estimates are adjusted as necessary after the relevant tax forms are received from the portfolio company.
PIK income. Certain of our investments contain a PIK income provision. The PIK income, computed at the contractual rate specified in the applicable investment agreement, is added to the principal balance of the investment, rather than being paid in cash, and recorded as interest or dividend income, as applicable, on the consolidated statements of operations. Generally, PIK can be paid-in-kind or all in cash. We stop accruing PIK income when there is reasonable doubt that PIK income will be collected. PIK income
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that has been contractually capitalized to the principal balance of the investment prior to the non-accrual designation date is not reserved against interest or dividend income, but rather is assessed through the valuation of the investment (with corresponding adjustments to unrealized depreciation, as applicable). PIK income is included in our taxable income and, therefore, affects the amount we are required to pay to our stockholders in the form of dividends in order to maintain our tax treatment as a RIC and to avoid paying corporate-level U.S. federal income tax, even though we have not yet collected the cash.
Non-accrual. Debt investments or preferred equity investments (for which we are accruing PIK dividends) are placed on non-accrual status when principal, interest or dividend payments become materially past due, or when there is reasonable doubt that principal, interest or dividends will be collected. Any original issue discount and market discount are no longer accreted to interest income as of the date the loan is placed on full non-accrual status. Interest and dividend payments received on non-accrual investments may be recognized as interest or dividend income or applied to the investment principal balance based on management’s judgment. Non-accrual investments are restored to accrual status when past due principal, interest or dividends are paid and, in management’s judgment, are likely to remain current.
Warrants. In connection with our debt investments, we will sometimes receive warrants or other equity-related securities (Warrants). We determine the cost basis of Warrants based upon their respective fair values on the date of receipt in proportion to the total fair value of the debt and Warrants received. Any resulting difference between the face amount of the debt and its recorded fair value resulting from the assignment of value to the Warrants is treated as OID and accreted into interest income using the effective interest method over the term of the debt investment. Upon the prepayment of a debt investment, any unaccreted OID is accelerated into interest income.
Fee income. All transaction fees earned in connection with our investments are recognized as fee income and are generally non-recurring. Such fees typically include fees for services, including structuring and advisory services, provided to portfolio companies. We recognize income from fees for providing such structuring and advisory services when the services are rendered or the transactions are completed. Upon the prepayment of a debt investment, any prepayment penalties are recorded as fee income when earned. In 2020, the Company elected to change the manner in which it presents the recognition of management services fees income. Previously, the Company classified management services fees as a component of interest on idle funds and other income on the Consolidated Statement of Operations. Comparative prior periods presented have been reclassified retrospectively to conform to the revised presentation. There is no change in historical net increase in net assets resulting from operations due to this change in presentation.
We also typically receive debt investment origination or closing fees in connection with investments. Such debt investment origination and closing fees are capitalized as unearned income and offset against investment cost basis on our consolidated statements of assets and liabilities and accreted into interest income over the term of the investment. Upon the prepayment of a debt investment, any unaccreted debt investment origination and closing fees are accelerated into interest income.
Transfers of Financial Assets
Partial loan and equity sales. The Company follows the guidance in ASC 860, Transfers and Servicing, when accounting for loan (debt investment) participations, equity assignments and other partial loan sales. Such guidance requires a participation, assignment or other partial loan or equity sale to meet the definition of a “participating interest,” as defined in the guidance, in order for sale treatment to be allowed. Participations, assignments or other partial loan or equity sales which do not meet the definition of a participating interest should remain on the Company’s consolidated statements of assets and liabilities and the proceeds recorded as a secured borrowing until the definition is met.
Recently Issued Accounting Standards
SEC Rule 1-02(w)(2) Update
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In May 2020, the SEC adopted rule amendments that will impact the requirement of investment companies, including BDCs, to disclose the financial statements of certain of their portfolio companies or certain acquired funds (the “Final Rules”). The Final Rules adopted a new definition of “significant subsidiary” set forth in Rule 1-02(w)(2) of Regulation S-X under the Securities Act. Rules 3-09 and 4-08(g) of Regulation S-X require investment companies to include separate financial statements or summary financial information, respectively, in such investment company’s periodic reports for any portfolio company that meets the definition of “significant subsidiary.” The Final Rules adopt a new definition of “significant subsidiary” applicable only to investment companies that (i) modifies the investment test and the income test, and (ii) eliminates the asset test currently in the definition of “significant subsidiary” in Rule 1-02(w) of Regulation S-X. The new Rule 1-02(w)(2) of Regulation S-X is intended to more accurately capture those portfolio companies that are more likely to materially impact the financial condition of an investment company. The Final Rules became effective on January 1, 2021; however, the Company elected to early adopt this rule change as of December 31, 2020. The adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.
SEC Regulation S-K Update
In November 2020, the SEC issued a final rule that modernized and simplifies Management’s Discussion and Analysis of Financial Condition and Results of Operations and certain financial disclosure requirements in Regulation S-K (the “Amendments”). Specifically, the Amendments: (i) eliminate Item 301 of Regulation S-K (Selected Financial Data); (ii) simplify Item 302 of Regulation S-K (Supplementary Financial Information); and (iii) amend certain aspects of Item 303 of Regulation S-K (Managements Discussion and Analysis of Financial Condition and Results of Operations). The Amendments became effective on February 10, 2021 and compliance will be required for the registrant’s fiscal year ending on or after August 9, 2021. Early adoption of the Amendments is permitted on an item-by-item basis after the effective date; however, a registrant must fully comply with each adopted item in its entirety. The Company adopted the Amendments on the effective date which did not have a material impact on the Company’s Consolidated Financial Statements.
Off-Balance Sheet Arrangements
We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. We had off-balance sheet arrangements consisting of outstanding commitments to fund various undrawn revolving loans, other debt investments and capital commitments totaling $8.6 million and $5.6 million as of September 30, 2021 and December 31, 2020, respectively. Such outstanding commitments are summarized in the following table (dollars in millions):
3.9
16.7
(1) Portfolio company was no longer held at period end. The commitment represents our maximum potential liability related to certain guaranteed obligations stemming from the prior sale of the portfolio company's underlying operations.
Additional detail for each of the commitments above is provided in our consolidated schedules of investments.
The Company believes its assets will provide adequate coverage to satisfy these outstanding commitments. As of September 30, 2021, the Company had cash and cash equivalents of approximately $98.8 million and $60.0 million in available borrowings under the Credit Facility.
Related Party Transactions
We have entered into a number of business relationships with affiliated or related parties, including the following:
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In connection with the IPO and our election to be regulated as a BDC, we applied for and received exemptive relief from the SEC on March 27, 2012 to allow us to take certain actions that would otherwise be prohibited by the 1940 Act, as applicable to BDCs. Effective June 30, 2014, pursuant to separate exemptive relief from the SEC, any SBA debentures issued by Fund II and Fund III are not considered senior securities for purposes of the asset coverage requirements.
While we may co-invest with investment entities managed by the Investment Advisor or its affiliates, to the extent permitted by the 1940 Act and the rules and regulations thereunder, the 1940 Act imposes significant limits on co-investment. On January 4, 2017, the SEC staff has granted us relief sought in an exemptive order that expands our ability to co-invest in portfolio companies with other funds managed by the Investment Advisor or its affiliates in a manner consistent with our investment objective, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors, subject to compliance with certain conditions (the “Order”). Pursuant to the Order, we are permitted to co-invest with our affiliates if a “required majority” (as defined in Section 57(o) of the 1940 Act) or the Independent Directors make certain conclusions in connection with a co-investment transaction, including that (1) the terms of the transactions, including the consideration to be paid, are reasonable and fair to us and our stockholders and do not involve overreaching by us or our stockholders on the part of any person concerned, and (2) the transaction is consistent with the interests of our stockholders and is consistent with our investment objective and strategies. However, neither we nor our affiliates are obligated to invest or co-invest when investment opportunities are referred to us or them.
In addition, we and our Investment Advisor have each adopted a joint code of ethics pursuant to Rule 17j-1 under the 1940 Act that governs the conduct of our and the Investment Advisor’s officers, directors and employees. Additionally, the Investment Advisor has adopted a code of ethics pursuant to Rule 204A-1 under the Advisers Act of 1940, as amended, and in accordance with Rule 17j-1(c) under the 1940 Act. We have also adopted a code of business conduct that is applicable to all officers, directors and employees of Fidus and our Investment Advisor. Our officers and directors also remain subject to the duties imposed by both the 1940 Act and the Maryland General Corporation Law.
Recent Developments
On October 1, 2021, we invested $8.5 million in first lien debt, subordinated debt, and common equity of Auto CRM LLC (dba Dealer Holdings), a leading SaaS-based provider of customer communication software to the auto repair market.
On October 6, 2021, we invested $18.5 million in first lien debt, common equity, and warrants of Acendre Midco, Inc., a market leading provider of cloud-based talent management software solutions.
On October 8, 2021, we closed the public offering of approximately $125.0 million in aggregate principal amount of our 3.50% notes due 2026, or the “November 2026 Notes.” The total net proceeds to us from the November 2026 Notes, based on a public offering price of 99.996% of par, after deducting underwriting discounts of $2.5 million and estimated offering expenses of $0.4 million, were approximately $122.1 million.
The November 2026 Notes will mature on November 15, 2026 and bear interest at a rate of 3.50% per year. The November 2026 Notes are unsecured obligations and rank pari passu with our existing and future unsecured indebtedness; and structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries, financing vehicles, or similar
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facilities we may form in the future, with respect to claims on the assets of any such subsidiaries, financing vehicles, or similar facilities. The November 2026 Notes may be redeemed in whole or in part at any time or from time to time at our option subject to a make whole provision if redeemed more than three months prior to maturity or at par thereafter. Interest on the November 2026 Notes is payable on May 15 and November 15 of each year, beginning May 15, 2022. We do not intend to list the November 2026 Notes on any securities exchange or automated dealer quotation system.
On October 26, 2021, we exited our debt investment in the Tranzonic Companies. The Company received payment in full of $7.1 million on our subordinated debt, which includes a prepayment fee.
On October 29, 2021, we committed $16.0 million in second lien debt in a leading marketing technology platform for digital customer acquisition across all consumer verticals, including financial services, home services, and insurance.
On November 1, 2021, our Board declared a regular quarterly dividend of $0.32 per share, a supplemental dividend of $0.04 per share, and a special dividend of $0.05 per share payable December 17, 2021, to stockholders of record as of December 3, 2021.
On November 2, 2021, we fully redeemed $19.0 million and $63.3 million of the issued and outstanding February 2024 Notes and November 2024 Notes, respectively, resulting in a realized loss on extinguishment of debt of approximately $1.6 million.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are subject to financial market risks, including changes in interest rates. Changes in interest rates affect both our cost of funding and the valuation of our investment portfolio. Our risk management systems and procedures are designed to identify and analyze our risk, to set appropriate policies and limits and to continually monitor these risks and limits by means of reliable administrative and information systems and other policies and programs. In addition, U.S. and global capital markets and credit markets have experienced a higher level of stress due to the global COVID-19 pandemic, which has resulted in an increase in the level of volatility across such markets and a general decline in value of the securities held by us.
In the future, our investment income may also be affected by changes in various interest rates, including LIBOR and prime rates, to the extent of any debt investments that include floating interest rates. In connection with the COVID-19 pandemic, the U.S. Federal Reserve and other central banks have reduced certain interest rates and LIBOR has decreased. A prolonged reduction in interest rates will reduce our gross investment income and could result in a decrease in our net investment income if such decreases in LIBOR are not offset by a corresponding increase in the spread over LIBOR that we earn on any portfolio investments, a decrease in in our operating expenses, including with respect to our income incentive fee, or a decrease in the interest rate of our floating interest rate liabilities tied to LIBOR. As of September 30, 2021 and December 31, 2020, 28 and 22 portfolio company’s debt investments, respectively, bore interest at a variable rate, which represented $317.2 million and $230.9 million of our portfolio on a fair value basis, respectively, and the remainder of our debt portfolio was comprised entirely of fixed rate investments. Our pooled SBA debentures and our Notes bear interest at fixed rates. Our Credit Facility bears interest, at our election, at a rate per annum equal to (a) 3.00% (or 2.75% if certain conditions are satisfied, including if (x) no equity interests are included in the borrowing base, (y) the contribution to the borrowing base of eligible portfolio investments that are performing first lien bank loans is greater than or equal to 35%, and (z) the contribution to the borrowing base of eligible portfolio investments that are performing first lien bank loans, performing last out loans, or performing second lien loans is greater than or equal to 60%) plus the one, two, three or six month LIBOR rate, as applicable, or (b) 2.00% (or 1.75% if the above conditions are satisfied) plus the highest of (A) a prime rate, (B) the Federal Funds rate plus 0.5%, (C) three month LIBOR plus 1.0%, and (D) zero.
Because we currently borrow, and plan to borrow in the future, money to make investments, our net investment income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest the funds borrowed. Accordingly, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. In periods of rising interest rates, our cost of funds would increase, which could reduce our net investment income if there is not a corresponding increase in interest income generated by our investment portfolio.
The following table shows the approximate annualized increase or decrease in the components of net investment income due to hypothetical base rate changes in interest rates, assuming no changes in our investments and borrowings as of September 30, 2021 (dollars in millions):
Interest Expense
Increase
Net Increase
Net Investment
Basis Point Increase (Decrease)
(Decrease) (1) (2)
(Decrease)
Income (3)
(200
(150
(100
(50
100
200
3.4
5.0
300
6.6
(1) Certain of our variable rate debt investments have a LIBOR interest rate floor, which lessens the impact of decreases in interest rates.
(2) Interest income calculated assuming three-month LIBOR rate as of September 30, 2021.
(3) Includes the impact of income incentive fee at 20.0% on net increase (decrease) in net interest.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on the evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective. It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the third quarter of 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 1. Legal Proceedings.
We are not, and the Investment Advisor is not, currently subject to any material legal proceedings.
Item 1A. Risk Factors.
In addition to other information set forth in this report, you should carefully consider the “Risk Factors” discussed in our Form 10-K for the year ended December 31, 2020 and filed with the SEC on February 25, 2021, which are incorporated herein by reference. These Risk Factors could materially affect our business, financial condition and/or operating results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially affect our business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
We have an open market stock repurchase program (the “Stock Repurchase Program”) under which we may acquire up to $5.0 million of our outstanding common stock. Under the Stock Repurchase Program, we may, but are not obligated to, repurchase outstanding common stock in the open market from time to time provided that we comply with the prohibitions under our insider trading policies and the requirements of Rule 10b-18 of the Securities Exchange Act of 1934, as amended, including certain price, market value and timing constraints. The timing, manner, price and amount of any share repurchases will be determined by our management, in its discretion, based upon the evaluation of economic and market conditions, stock price, capital availability, applicable legal and regulatory requirements and other corporate considerations. On November 1, 2021, the Board extended the Stock Repurchase Program through December 31, 2022, or until the approved dollar amount has been used to repurchase shares. The Stock Repurchase Program does not require us to repurchase any specific number of shares and we cannot assure that any shares will be repurchased under the Stock Repurchase Program. The Stock Repurchase Program may be suspended, extended, modified or discontinued at any time.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Item 6. Exhibits.
Number
Exhibit
Articles of Amendment and Restatement of the Registrant (Filed as Exhibit (a)(1) to Pre-Effective Amendment No. 2 to the Registrant’s Registration Statement on Form N-2 (File No. 333-172550) filed with the U.S. Securities and Exchange Commission on April 29, 2011 and incorporated herein by reference).
Bylaws of the Registrant (Filed as Exhibit (b)(1) to Pre-Effective Amendment No. 2 to the Registrant’s Registration Statement on Form N-2 (File No. 333-172550) filed with the U.S. Securities and Exchange Commission on April 29, 2011 and incorporated herein by reference).
Form of Stock Certificate of the Registrant (Filed as Exhibit (d) to Pre-Effective Amendment No. 2 to the Registrant’s Registration Statement on Form N-2 (File No. 333-172550) filed with the U.S. Securities and Exchange Commission on April 29, 2011 and incorporated herein by reference).
4.2
Agreement to Furnish Certain Instruments (Filed as Exhibit (f)(2) to Pre-Effective Amendment No. 3 to the Registrant’s Registration Statement on Form N-2 (File No. 333-172550) filed with the U.S. Securities and Exchange Commission on May 26, 2011 and incorporated herein by reference).
Form of Indenture (Filed as Exhibit (d)(5) to Post-Effective Amendment No. 2 to the Registrant’s Registration Statement on Form N-2 (File No. 333-202531) filed with the U.S. Securities and Exchange Commission on April 29, 2016 and incorporated herein by reference).
Fourth Supplemental Indenture dated as of December 23, 2020 between Fidus Investment Corporation and U.S. Bank National Association, as trustee (Filed as Exhibit 4.1 to the Registrant’s Current report on Form 8-K filed with the U.S. Securities and Exchange Commission on December 23, 2020 and incorporated herein by reference).
Form of Global Note with respect to the 4.75% Notes due 2026 (Filed as Exhibit 4.1 to the Registrant’s Current report on Form 8-K filed with the U.S. Securities and Exchange Commission on December 23, 2020 and incorporated herein by reference).
4.6
Fifth Supplemental Indenture dated as of October 8, 2021 between Fidus Investment Corporation and U.S. Bank National Association, as trustee (Filed as Exhibit 4.1 to the Registrant’s Current report on Form 8-K filed with the U.S. Securities and Exchange Commission on October 8, 2021 and incorporated herein by reference).
Form of Global Note with respect to the 3.50% Notes due 2026 (Filed as Exhibit 4.1 to the Registrant’s Current report on Form 8-K filed with the U.S. Securities and Exchange Commission on October 8, 2021 and incorporated herein by reference).
31.1
Chief Executive Officer Certification Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2
Chief Financial Officer Certification Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
Certification pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
*Filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 4, 2021
/s/ EDWARD H. ROSS
Edward H. Ross
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ SHELBY E. SHERARD
Shelby E. Sherard
Chief Financial Officer
(Principal Financial and Accounting Officer)