UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2016

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number: 814-00866

  

MONROE CAPITAL CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

Maryland 27-4895840

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

   

311 South Wacker Drive, Suite 6400

Chicago, Illinois

60606
(Address of Principal Executive Office) (Zip Code)

 

(312) 258-8300

(Registrant’s Telephone Number, Including Area Code)

  

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   x     No   ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes   x     No   ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):

 

Large accelerated filer     ¨ Accelerated filer      x
       
Non-accelerated filer      ¨   (Do not check if a smaller reporting company)      Smaller reporting company      ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   ¨     No   x

 

As of November 4, 2016, the registrant had 16,577,500 shares of common stock, $0.001 par value, outstanding.

 

 

 

  

TABLE OF CONTENTS

 

    Page
PART I. FINANCIAL INFORMATION 3
     
Item 1. Consolidated Financial Statements 3
     
  Consolidated Statements of Assets and Liabilities as of September 30, 2016 (unaudited) and December 31, 2015 3
     
  Consolidated Statements of Operations for the three and nine months ended September 30, 2016 (unaudited) and 2015 (unaudited) 4
     
  Consolidated Statements of Changes in Net Assets for the nine months ended September 30, 2016 (unaudited) and 2015 (unaudited) 5
     
  Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 (unaudited) and 2015 (unaudited) 6
     
  Consolidated Schedules of Investments as of September 30, 2016 (unaudited) and December 31, 2015 7
     
  Notes to Consolidated Financial Statements (unaudited) 11
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 29
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 41
     
Item 4. Controls and Procedures 42
     
PART II. OTHER INFORMATION 43
     
Item 1. Legal Proceedings 43
     
Item 1A. Risk Factors 43
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 43
     
Item 3. Defaults Upon Senior Securities 43
     
Item 4. Mine Safety Disclosures 43
     
Item 5. Other Information 43
     
Item 6. Exhibits 44
     
Signatures   45

    

 2 

 

  

Part I. Financial Information

Item 1. Consolidated Financial Statements

 

MONROE CAPITAL CORPORATION

 

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

 

(in thousands, except per share data)

 

   September 30, 2016   December 31, 2015 
   (unaudited)     
         
ASSETS          
Investments, at fair value:          
Non-controlled/non-affiliate company investments  $327,984   $295,819 
Non-controlled affiliate company investments   42,423    38,747 
Controlled affiliate company investments   6,249    6,525 
Total investments, at fair value (cost of: $379,150 and $342,738, respectively)   376,656    341,091 
Cash   5,974    5,278 
Restricted cash   2,241    8,588 
Interest receivable   2,121    1,606 
Other assets   418    747 
Total assets   387,410    357,310 
           
LIABILITIES          
Debt:          
Revolving credit facility   104,500    123,700 
SBA debentures payable   40,000    40,000 
Total debt   144,500    163,700 
Less:  Unamortized deferred financing costs   (3,883)   (3,569)
Total debt less unamortized deferred financing costs   140,617    160,131 
Secured borrowings, at fair value (proceeds of: $1,633 and $2,535, respectively)   1,610    2,476 
Payable for open trades   604    5,297 
Interest payable   208    577 
Management fees payable   1,594    1,503 
Incentive fees payable   1,360    1,251 
Accounts payable and accrued expenses   2,293    1,466 
Directors fees payable   37    74 
Total liabilities   148,323    172,775 
Net assets  $239,087   $184,535 
           
Commitments and contingencies (See Note 10)          
           
ANALYSIS OF NET ASSETS          
Common stock, $0.001 par value, 100,000 shares authorized, 16,578 and 13,008 shares issued and outstanding, respectively  $17   $13 
Capital in excess of par value   237,040    184,419 
Undistributed net investment income (accumulated distributions in excess of net investment income)   4,502    1,692 
Accumulated net unrealized appreciation (depreciation) on investments and secured borrowings   (2,472)   (1,589)
Total net assets  $239,087   $184,535 
           
Net asset value per share  $14.42   $14.19 

 

See Notes to Consolidated Financial Statements.

 

 3 

 

 

MONROE CAPITAL CORPORATION

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

(in thousands, except per share data)

 

   Three months ended September 30,   Nine months ended September 30, 
   2016   2015   2016   2015 
Investment income:                    
Interest income:                    
Non-controlled/non-affiliate company investments  $8,607   $7,733   $26,176   $23,437 
Non-controlled affiliate company investments   1,117    1,069    3,282    2,521 
Controlled affiliate company investments   20    295    30    739 
Total interest income   9,744    9,097    29,488    26,697 
Dividend income:                    
Non-controlled/non-affiliate company investments   251    75    751    75 
Non-controlled affiliate company investments   1,133    -    3,546    - 
Total dividend income   1,384    75    4,297    75 
Total investment income   11,128    9,172    33,785    26,772 
                     
Operating expenses:                    
Interest and other debt financing expenses   1,523    1,434    4,987    3,788 
Base management fees   1,594    1,370    4,598    3,626 
Incentive fees   1,223    1,124    4,282    3,434 
Professional fees   237    226    682    657 
Administrative service fees   324    279    956    828 
General and administrative expenses   265    206    611    591 
Excise taxes   342    -    429    3 
Directors fees   37    35    111    109 
Total expenses   5,545    4,674    16,656    13,036 
Net investment income   5,583    4,498    17,129    13,736 
                     
Net gain (loss) on investments and secured borrowings:                    
Net realized gain (loss) on investments:                    
Non-controlled/non-affiliate company investments   -    167    587    167 
Net realized gain (loss) on investments   -    167    587    167 
                     
Net change in unrealized appreciation (depreciation) on investments:                    
Non-controlled/non-affiliate company investments   200    (511)   (920)   (474)
Non-controlled affiliate company investments   618    1,904    3,814    2,885 
Controlled affiliate company investments   (2,666)   (1,275)   (3,741)   (2,599)
Net change in unrealized appreciation (depreciation) on investments   (1,848)   118    (847)   (188)
                     
Net change in unrealized (appreciation) depreciation on secured borrowings   (123)   (43)   (36)   (35)
                     
Net gain (loss) on investments and secured borrowings   (1,971)   242    (296)   (56)
                     
Net increase (decrease) in net assets resulting from operations  $3,612   $4,740   $16,833   $13,680 
                     
Per common share data:                    
Net investment income per share - basic and diluted  $0.36   $0.36   $1.24   $1.22 
Net increase in net assets resulting from operations per share - basic and diluted  $0.23   $0.38   $1.21   $1.21 
Weighted average common shares outstanding - basic and diluted   15,559    12,545    13,864    11,286 

 

See Notes to Consolidated Financial Statements.

 

 4 

 

  

MONROE CAPITAL CORPORATION

 

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(unaudited)

 

(in thousands)

 

   Common Stock   Capital in   Undistributed net
investment income
(accumulated distributions
   Accumulated net   Accumulated net
unrealized appreciation
(depreciation) on
     
   Number of
shares
   Par value   excess of par
value
   in excess of net investment
income)
   realized gain (loss)
on investments
   investments and secured
borrowings
   Total
net assets
 
Balances at December 31, 2014   9,518   $10   $134,803   $(639)  $-   $(436)  $133,738 
Net increase (decrease) in net assets resulting from operations   -    -    -    13,736    167    (223)   13,680 
Issuance of common stock, net of offering and underwriting costs   3,143    3    44,607    -    -    -    44,610 
Stockholder distributions paid   -    -    -    (11,993)   (167)   -    (12,160)
Balances at September 30, 2015   12,661   $13   $179,410   $1,104   $-   $(659)  $179,868 
                                    
Balances at December 31, 2015   13,008   $13   $184,419   $1,692   $-   $(1,589)  $184,535 
Net increase (decrease) in net assets resulting from operations   -    -    -    17,129    587    (883)   16,833 
Issuance of common stock, net of offering and underwriting costs   3,566    4    52,551    -    -    -    52,555 
Stockholder distributions paid, including stock issued in connection with dividend reinvestment plan   4    -    70    (14,319)   (587)   -    (14,836)
Balances at September 30, 2016   16,578   $17   $237,040   $4,502   $-   $(2,472)  $239,087 

 

See Notes to Consolidated Financial Statements.

 

 5 

 

  

MONROE CAPITAL CORPORATION

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

(in thousands)

 

   Nine months ended September 30, 
   2016   2015 
         
Cash flows from operating activities:          
Net increase (decrease) in net assets resulting from operations  $16,833   $13,680 
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities:          
Net change in unrealized (appreciation) depreciation on investments   847    188 
Net change in unrealized appreciation (depreciation) on secured borrowings   36    35 
Net realized (gain) loss on investments   (587)   (167)
Payment-in-kind interest income   (1,430)   (1,494)
Net accretion of discounts and amortization of premiums   (1,137)   (787)
Proceeds from principal payments and sales of investments   62,459    68,790 
Purchases of investments   (95,717)   (162,726)
Amortization of deferred financing costs   603    553 
Changes in operating assets and liabilities:          
Interest receivable   (515)   (628)
Other assets   329    401 
Payable for open trades   (4,693)   - 
Interest payable   (369)   142 
Management fees payable   91    321 
Incentive fees payable   109    (16)
Accounts payable and accrued expenses   827    572 
Directors fees payable   (37)   35 
Net cash provided by (used in) operating activities   (22,351)   (81,101)
           
Cash flows from investing activities:          
Net change in restricted cash   6,347    (3,268)
Net cash provided by (used in) investing activities   6,347    (3,268)
           
Cash flows from financing activities:          
Borrowings on revolving credit facility   64,000    120,400 
Repayments of revolving credit facility   (83,200)   (86,500)
SBA debentures borrowings   -    20,000 
Payments of deferred financing costs   (917)   (677)
Repayments on secured borrowings   (902)   (1,200)
Proceeds from shares sold, net of offering and underwriting costs   52,555    44,610 
Stockholder distributions paid (net of stock issued under dividend reinvestment plan of $70 and $0, respectively)   (14,836)   (12,160)
Net cash provided by (used in) financing activities   16,700    84,473 
           
Net increase (decrease) in cash   696    104 
Cash, beginning of period   5,278    4,561 
Cash, end of period  $5,974   $4,665 
           
Supplemental disclosure of cash flow information:          
Cash interest paid during the period  $4,545   $2,879 
Cash paid for excise taxes during the period  $284   $- 

 

See Notes to Consolidated Financial Statements.

 

 6 

 

  

MONROE CAPITAL CORPORATION

 

CONSOLIDATED SCHEDULE OF INVESTMENTS

(unaudited)

 

September 30, 2016

 

(in thousands, except for units)

 

Portfolio Company (a)   Industry   Spread
Above
Index(b)
  Interest Rate (b)   Maturity   Principal     Amortized Cost     Fair
Value(c)
    % of
Net
Assets(d)
 
Senior Secured Loans                                                
360 Holdings III Corp.   Consumer Goods: Non-Durable   L+9.00%   10.00 % 10/1/2021     5,940     $ 5,725     $ 5,732       2.4 %
American Community Homes, Inc. (e)   Banking, Finance, Insurance & Real Estate   L+8.00%   9.50 % 7/22/2019     7,667       7,539       7,713       3.2 %
American Community Homes, Inc. (e)   Banking, Finance, Insurance & Real Estate   L+12.50%   9.50% Cash/4.50% PIK   7/22/2019     4,169       4,106       4,253       1.8 %
American Community Homes, Inc. (e)   Banking, Finance, Insurance & Real Estate   L+12.50%   9.50% Cash/4.50% PIK   n/a (x)   512       502       512       0.2 %
Answers Corporation   High Tech Industries   P + 6.25%   9.75 % 10/1/2021     2,903       2,815       1,568       0.7 %
BC Equity Ventures LLC   Hotels, Gaming & Leisure   L+6.50%   7.50 % 8/31/2022     2,618       2,566       2,579       1.1 %
BC Equity Ventures LLC   Hotels, Gaming & Leisure   L+6.50%   7.50 % 8/31/2022     375       371       373       0.2 %
BCC Software, LLC (f)   High Tech Industries   L+8.00%   9.00 % 6/20/2019     2,375       2,354       2,355       1.0 %
BCC Software, LLC (Revolver) (g)   High Tech Industries   L+8.00%   9.00 % 6/20/2019     469       -       -       0.0 %
Beaver-Visitec International Holdings, Inc.   Healthcare & Pharmaceuticals   L+5.00%   6.00 % 8/19/2023     5,000       4,950       4,988       2.1 %
Bluestem Brands, Inc.   Consumer Goods: Non-Durable   L+7.50%   8.50 % 11/6/2020     2,799       2,775       2,452       1.0 %
Cali Bamboo, LLC   Construction & Building   L+8.50%   9.03 % 7/10/2020     5,437       5,359       5,518       2.3 %
Cali Bamboo, LLC (Revolver) (g)   Construction & Building   L+8.50%   9.03 % 7/10/2020     1,624       411       411       0.2 %
California Pizza Kitchen, Inc.   Beverage, Food & Tobacco   L+6.00%   7.00 % 8/23/2022     7,000       6,930       6,980       2.9 %
Cornerstone Detention Products, Inc. (h)   Construction & Building   L+10.50%   10.50% Cash/1.00% PIK   4/8/2019     3,893       3,850       3,683       1.5 %
Cornerstone Detention Products, Inc. (Revolver) (g)   Construction & Building   L+9.50%   10.50 % 4/8/2019     400       -       -       0.0 %
CRCI Holdings, Inc.   Utilities: Electric   L+5.50%   6.50 % 8/31/2023     3,000       2,970       2,996       1.3 %
Cyalume Technologies Holdings, Inc. (f)   Aerospace & Defense   L+9.00%   10.00 % 5/18/2020     4,641       4,542       4,774       2.0 %
Cyalume Technologies Holdings, Inc. (Delayed Draw)   Aerospace & Defense   L+9.00%   10.00 % 5/18/2020     418       418       430       0.2 %
Cyalume Technologies Holdings, Inc. (Revolver) (g)   Aerospace & Defense   L+9.00%   10.00 % 5/18/2020     1,528       -       -       0.0 %
Diesel Direct Holdings, Inc. (f)   Energy: Oil & Gas   L+7.00%   7.53 % 2/17/2020     5,259       5,237       5,288       2.2 %
EB Employee Solutions, LLC (f)   Services: Business   L+8.50%   10.00 % 2/28/2019     3,395       3,345       3,304       1.4 %
Familia Dental Group Holdings, LLC (f)   Healthcare & Pharmaceuticals   L+8.00%   8.53 % 4/8/2021     5,431       5,361       5,472       2.3 %
Familia Dental Group Holdings, LLC (Delayed Draw) (i)   Healthcare & Pharmaceuticals   L+8.00%   8.53 % 4/8/2021     519       519       522       0.2 %
Familia Dental Group Holdings, LLC (Revolver) (g)   Healthcare & Pharmaceuticals   L+8.00%   8.53 % 4/8/2021     573       115       115       0.0 %
G&M Opco LLC (f)   Construction & Building   L+7.50%   8.03 % 6/23/2020     3,047       2,987       3,105       1.3 %
InMobi Pte, Ltd. (Delayed Draw) (g) (i) (j)   Media: Advertising, Printing & Publishing   L+10.17%   10.98 % 9/1/2018     10,000       6,667       6,617       2.8 %
Inteva Products, LLC   Automotive   L+8.50%   9.75 % 9/8/2021     2,000       1,989       2,020       0.8 %
Jerry Lee Radio, LLC   Media: Broadcasting & Subscription   L+9.50%   10.03 % 12/17/2020     13,800       13,497       14,076       5.9 %
Landpoint, LLC   Energy: Oil & Gas   L+12.75%   12.00% Cash/2.25% PIK (q) 12/20/2019     2,922       2,884       2,772       1.2 %
Landpoint, LLC (Revolver) (g)   Energy: Oil & Gas   L+10.50%   12.00 % 12/20/2019     313       -       -       0.0 %
L.A.R.K. Industries, Inc.   Construction & Building   L+7.00%   8.00 % 9/3/2019     6,430       6,332       6,433       2.7 %
Luxury Optical Holdings Co.   Retail   L+11.50%   9.00% Cash/3.50% PIK   9/12/2019     3,977       3,926       3,981       1.7 %
Luxury Optical Holdings Co. (Revolver) (g)   Retail   L+11.50%   9.00% Cash/3.50% PIK   9/12/2019     273       -       -       0.0 %
Miles Media Group LLC   Hotels, Gaming & Leisure   L+11.00%   10.00% Cash/2.00% PIK   3/24/2021     6,110       6,046       6,070       2.5 %
Miles Media Group LLC (Delayed Draw) (g) (i)   Hotels, Gaming & Leisure   L+11.00%   10.00% Cash/2.00% PIK   3/24/2021     1,455       -       -       0.0 %
Miles Media Group LLC (Revolver) (g)   Hotels, Gaming & Leisure   L+11.00%   10.00% Cash/2.00% PIK   3/24/2021     320       -       -       0.0 %
O'Brien Industrial Holdings, LLC   Metals & Mining   L+7.75%   8.75 % 5/13/2019     5,286       5,212       5,366       2.2 %
PD Products, LLC   Consumer Goods: Non-Durable   L+10.50%   12.00 % 10/4/2018     12,174       12,094       12,241       5.1 %
PD Products, LLC (Revolver) (g)   Consumer Goods: Non-Durable   L+10.50%   12.00 % 10/4/2018     2,500       25       25       0.0 %
PeopleConnect Intermediate, LLC (formerly Intelius, Inc.)   Services: Consumer   L+5.50%   6.50 % 7/1/2020     4,698       4,614       4,690       2.0 %
PeopleConnect Intermediate, LLC (formerly Intelius, Inc.)   Services: Consumer   L+11.50%   12.50 % 7/1/2020     4,849       4,760       4,805       2.0 %
PeopleConnect Intermediate, LLC (formerly Intelius, Inc.) (Revolver) (g)   Services: Consumer   L+8.50%   9.50 % 8/1/2017     236       -       -       0.0 %
Precision Toxicology, LLC (f)   Healthcare & Pharmaceuticals   L+11.50%   10.03% Cash/2.00% PIK   3/24/2020     4,289       4,228       4,289       1.8 %
Repay Holdings, LLC   Banking, Finance, Insurance & Real Estate   L+9.00%   9.53 % 9/1/2021     12,000       11,792       11,790       4.9 %
Repay Holdings, LLC (Revolver) (g)   Banking, Finance, Insurance & Real Estate   L+9.00%   9.53 %  9/1/2021     1,200       -       -       0.0 %
Rockdale Blackhawk, LLC (e)   Healthcare & Pharmaceuticals   L+11.00%   12.00 %  3/31/2020     11,244       10,406       11,283       4.7 %
Rockdale Blackhawk, LLC (Revolver) (e) (g)   Healthcare & Pharmaceuticals   L+11.00%   12.00 %  3/31/2020     1,849       -       -       0.0 %
Rockdale Blackhawk, LLC (Capex) (e)   Healthcare & Pharmaceuticals   L+11.00%   12.00 %  3/31/2020     581       581       583       0.2 %
Rocket Dog Brands, LLC (e)   Consumer Goods: Non-Durable   n/a   10.00% PIK   8/29/2019     1,086       1,086       568       0.2 %
Rocket Dog Brands, LLC (e)   Consumer Goods: Non-Durable   n/a   15.00% PIK   8/29/2019     392       387       373       0.2 %
Rocket Dog Brands, LLC (e)   Consumer Goods: Non-Durable   n/a   17.00% PIK   3/31/2017     216       212       216       0.1 %
SHI Holdings, Inc. (f)   Healthcare & Pharmaceuticals   L+9.25%   9.78 % 7/10/2019     2,625       2,588       2,431       1.0 %
SHI Holdings, Inc. (Revolver) (g)   Healthcare & Pharmaceuticals   L+9.25%   9.78 %  7/10/2019     1,009       985       912       0.4 %
Shields Land Company of Georgia, LLC   Banking, Finance, Insurance & Real Estate   L+9.50%   10.02 %  12/28/2017     2,450       2,419       2,413       1.0 %
SNI Companies (k)   Services: Business   L+8.00%   9.00 %  12/31/2018     5,590       5,522       5,590       2.3 %
SNI Companies (Revolver) (g)   Services: Business   L+8.00%   9.00 %  12/31/2018     1,250       250       250       0.1 %
Summit Container Corporation (e) (f)   Containers, Packaging & Glass   L+12.00%   12.00% Cash/2.00% PIK   1/6/2019     3,658       3,602       3,581       1.5 %
Synergy Environmental Corporation (Solterra) (f)   Environmental Industries   L+8.00%   8.53 % 4/29/2021     3,150       3,087       3,164       1.3 %
Synergy Environmental Corporation (Solterra) (f)   Environmental Industries   L+8.00%   8.53 % 4/29/2021     527       516       529       0.2 %
Synergy Environmental Corporation (Solterra) (Delayed Draw) (g) (i)   Environmental Industries   L+8.00%   8.53 % 4/29/2018     1,342       -       -       0.0 %
Synergy Environmental Corporation (Solterra) (Revolver) (g)   Environmental Industries   L+8.00%   8.53 % 4/29/2021     671       94       94       0.0 %
Tectum Holdings, Inc.   Automotive   L+4.75%   5.75 % 8/24/2023     2,000       1,980       2,005       0.8 %
The Worth Collection, Ltd.   Retail   L+8.50%   9.53 % 9/29/2021     11,000       10,780       10,780       4.5 %
TPP Acquisition, Inc. (l)   Retail   L+11.00%   12.50% PIK (r)  12/17/2017     6,835       6,769       1,381       0.6 %
TPP Acquisition, Inc. (Revolver) (l)   Retail   L+11.00%   12.50% PIK (r) 12/17/2017     2,035       2,035       2,035       0.9 %
TPP Acquisition, Inc. (l)   Retail   L+11.00%   12.50% PIK (r)  12/17/2017     1,660       1,660       335       0.1 %
TPP Acquisition, Inc. (Delayed Draw) (l)   Retail   L+11.00%   12.50% PIK (r)  12/17/2017     3,429       3,429       693       0.3 %
TPP Acquisition, Inc. (g)(i)(l)   Retail   L+6.00%   7.50 %(r)  12/31/2016     3,324       1,805       1,805       0.8 %
TRG, LLC   Hotels, Gaming & Leisure   L+13.04%   8.02% Cash/5.54% PIK (s)  3/31/2021     11,817       11,774       11,947       5.0 %
TRG, LLC (Revolver)   Hotels, Gaming & Leisure   L+9.50%   10.02 % 3/31/2021     131       131       131       0.1 %
TRG, LLC (CapEx) (g)   Hotels, Gaming & Leisure   L+9.50%   8.02% Cash/2.00% PIK   3/31/2021     1,605       802       808       0.3 %
Vacation Innovations, LLC (m)   Hotels, Gaming & Leisure   L+9.40%   7.53% Cash/2.40% PIK (t)  8/20/2020     10,651       10,467       10,651       4.5 %
Vacation Innovations, LLC (Revolver) (g)   Hotels, Gaming & Leisure   L+8.50%   7.53% Cash/1.50% PIK   8/20/2020     342       -       -       0.0 %
Vacation Innovations, LLC (Delayed Draw) (g) (i)   Hotels, Gaming & Leisure   L+8.50%   7.53% Cash/1.50% PIK   8/20/2020     2,037       -       -       0.0 %
Yandy Holding, LLC   Retail   L+9.00%   10.00 % 9/30/2019     5,759       5,701       5,664       2.4 %
Yandy Holding, LLC (Revolver) (g)   Retail   L+9.00%   10.00 % 9/30/2019     907       -       -       0.0 %
Total Senior Secured Loans                     276,996       248,881       240,520       100.6 %
                                                 
Unitranche Loans                                                
Collaborative Neuroscience Network, LLC (n)   Healthcare & Pharmaceuticals   L+11.50%   13.00 % 12/27/2017     6,433       6,364       5,075       2.1 %
Collaborative Neuroscience Network, LLC   Healthcare & Pharmaceuticals   n/a   12.00% Cash/3.00% PIK   10/31/2016     284       284       284       0.2 %
Fabco Automotive Corporation   Automotive   L+11.25%   8.00% Cash/4.25% PIK   4/3/2019     8,496       8,459       4,129       1.7 %
Gracelock Industries, LLC   Wholesale   L+13.74%   11.00% Cash/4.24% PIK (u)  5/7/2019     4,968       4,887       4,585       2.0 %
Incipio Technologies, Inc. (o)   Consumer Goods: Non-Durable   L+6.00%   7.00 % 12/26/2019     14,478       14,211       14,420       6.0 %
MooreCo, Inc.   Consumer Goods: Durable   L+14.50%   13.50% Cash/2.50% PIK   12/27/2017     3,660       3,636       3,660       1.5 %
Output Services Group, Inc.   Services: Business   L+9.00%   9.50% Cash/1.00% PIK   12/17/2020     6,528       6,452       6,548       2.7 %
Output Services Group, Inc.   Services: Business   L+9.00%   9.50% Cash/1.00% PIK   12/17/2020     8,332       8,212       8,373       3.5 %
Playtime, LLC   Hotels, Gaming & Leisure   L+8.50%   9.00% Cash/1.00% PIK   12/31/2021     5,402       5,372       4,784       2.0 %
Total Unitranche Loans                     58,581       57,877       51,858       21.7 %
                                                 
Junior Secured Loans                                                
AIM Aerospace, Inc.   Aerospace & Defense   L+9.00%   10.00 % 8/2/2022     5,000       4,931       5,073       2.2 %
Confie Seguros Holdings II Co.   Banking, Finance, Insurance & Real Estate   L+9.00%   10.25 % 5/8/2019     8,594       8,181       8,680       3.6 %
CSM Bakery Supplies LLC   Beverage, Food & Tobacco   L+7.75%   8.75 % 7/3/2021     5,792       5,792       5,329       2.2 %
Education Corporation of America   Services: Consumer   L+11.00%   11.85 % 12/31/2018     4,583       4,500       4,597       2.0 %
Hyland Software Inc.   High Tech Industries   L+7.25%   8.25 % 7/1/2023     5,000       4,826       5,044       2.1 %
Mergermarket USA, Inc.   Media: Broadcasting & Subscription   L+6.50%   7.50 % 12/19/2021     4,500       4,396       4,320       1.8 %
Micro Holdings Corp.   High Tech Industries   L+7.50%   8.50 % 7/8/2022     5,590       5,469       5,527       2.3 %
Mud Pie, LLC   Consumer Goods: Non-Durable   n/a   10.00% Cash/1.50% PIK   11/4/2020     5,201       5,121       5,305       2.2 %
New NSI Holdings, Inc.   Chemicals, Plastics & Rubber   L+8.25%   9.25 % 7/28/2022     4,000       3,947       4,040       1.7 %
Pre-Paid Legal Services, Inc. (Legal Shield)   Services: Consumer   L+9.00%   10.25 % 7/1/2020     3,000       2,996       2,985       1.2 %
Rocket Dog Brands, LLC (e)   Consumer Goods: Non-Durable   n/a   15.00% PIK   5/1/2020     1,868       1,869       -       0.0 %
Sterling Merger Sub Corp.   Services: Business   L+7.75%   8.75 % 6/19/2023     5,000       4,956       4,838       2.0 %
SCP TPZ Acquisition, Inc.   Media: Diversified & Production   L+8.25%   9.25 % 5/29/2022     5,000       4,935       4,956       2.1 %
Total Junior Secured Loans                     63,128       61,919       60,694       25.4 %

 

 7 

 

 

Equity Securities                                                
American Community Homes, Inc. (warrant to purchase up to 9.0% of the equity) (e)   Banking, Finance, Insurance & Real Estate   -   - (v)  10/9/2024     -       -       944       0.4 %
BookIt Operating LLC (warrant to purchase up to 3.0% of the equity) (p)   Hotels, Gaming & Leisure   -   - (v)  12/21/2023     -       -       587       0.3 %
Collaborative Neuroscience Network, LLC (warrant to purchase up to 4 LLC units) (p)   Healthcare & Pharmaceuticals   -   - (v)  12/27/2022     -       -       -       0.0 %
Cyalume Technologies Holdings, Inc. - Series D Preferred Stock (3.06 shares) (p)   Aerospace & Defense   -   - (v) -     -       -       559       0.2 %
Education Corporation of America - Series G Preferred Stock (8,333 shares) (p)   Services: Consumer    n/a   12.00 -     -       8,125       8,150       3.4 %
Fabco Automotive Corporation (warrant to purchase up to 1.87% of the equity) (p)   Automotive   -   - (v)  -     -       -       -       0.0 %
InMobi Pte, Ltd. (represents the right to purchase 0.42% of the equity) (j) (p)   Media: Advertising, Printing & Publishing   -   - (v) 9/18/2025     -       -       107       0.0 %
O'Brien Industrial Holdings, LLC (warrants to purchase up to 2.44% of certain affiliated entities of the company) (p)   Metals & Mining   -   -  (v) 5/13/2024     -       -       -       0.0 %
Output Services Group, Inc. (warrant to purchase up to 3.89% of the common stock) (p)   Services: Business   -   - (v)  12/17/2022     -       -       747       0.3 %
Playtime, LLC - Preferred Units (8,665 units) (p)   Hotels, Gaming & Leisure   -   - (v)  -     -       200       4       0.0 %
Rocket Dog Brands, LLC - Common Units (75,502 units) (e)   Consumer Goods: Non-Durable   -   - (v)  -     -       -       -       0.0 %
Rocket Dog Brands, LLC - Preferred Units (10 units) (e)   Consumer Goods: Non-Durable   -   15.00% PIK (w)  -     -       967       -       0.0 %
Rockdale Blackhawk, LLC - LLC Units (11.56% of the LLC interest) (e)   Healthcare & Pharmaceuticals   -   - (v)  -     -       1,093       12,397       5.2 %
Summit Container Corporation (warrant to purchase up to 19.50% of the equity) (e)   Containers, Packaging & Glass   -   - (v)  1/6/2024     -       -       -       0.0 %
The Tie Bar Operating Company, LLC - Class A Preferred Units (1,275 units) (p)   Retail   -   - (v)  -     -       87       89       0.0 %
The Tie Bar Operating Company, LLC - Class B Preferred Units (1,275 units) (p)   Retail   -   - (v)  -     -       1       -       0.0 %
TPP Acquisition, Inc. (829 shares of common stock) (l)   Retail   -   - (v)  -     -       -       -       0.0 %
Total Equity Securities                             10,473       23,584       9.8 %
TOTAL INVESTMENTS                           $ 379,150     $ 376,656       157.5 %

 

 

(a)All of our investments are issued by eligible U.S. portfolio companies, as defined in the Investment Company Act of 1940 (the “1940 Act”) except for InMobi Pte, Ltd. which is an international company headquartered in California. All investments are non-controlled/non-affiliate company investments, unless otherwise noted.
(b)The majority of the investments bear interest at a rate that may be determined by reference to London Interbank Offered Rate (“LIBOR” or “L”) or Prime Rate (“Prime” or “P”) which reset daily, monthly, quarterly, or semiannually. For each such investment, the Company has provided the spread over LIBOR or Prime and the current contractual interest rate in effect at September 30, 2016. Certain investments are subject to a LIBOR or Prime interest rate floor.
(c)Because there is no readily available market value for these investments, the fair value of these investments is determined in good faith by our board of directors as required by the Investment Company Act of 1940. (See Note 4 in the accompanying notes to the consolidated financial statements.)
(d)Percentages are based on net assets of $239,087 as of September 30, 2016.
(e)As defined in the 1940 Act, the Company is deemed to be an “Affiliated Person” of the portfolio company as it owns five percent or more of the portfolio company's voting securities. See Note 5 in the accompanying notes to the consolidated financial statements for additional information on transactions in which the issuer was an Affiliated Person (but not a portfolio company that the Company is deemed to control).
(f)All of this loan is held in the Company’s wholly-owned subsidiary, Monroe Capital Corporation SBIC, LP and is therefore not collateral to the Company’s revolving credit facility.
(g)All or a portion of this commitment was unfunded at September 30, 2016. As such, interest is earned only on the funded portion of this commitment.
(h)A portion of this loan (principal of $2,336) is held in the Company’s wholly-owned subsidiary, Monroe Capital Corporation SBIC, LP and is therefore not collateral to the Company’s revolving credit facility.
(i)This delayed draw loan requires that certain financial covenants be met by the portfolio company prior to any fundings.
(j)This investment is treated as a non-qualifying investment under Section 55(a) of the 1940 Act. Under the 1940 Act, the Company may not acquire any non-qualifying asset unless, at the time the acquisition is made, qualifying assets represent at least 70% of the Company's total assets. As of September 30, 2016, non-qualifying assets totaled 1.74% of the Company's total assets.
(k)A portion of this loan (principal of $3,585) is held in the Company’s wholly-owned subsidiary, Monroe Capital Corporation SBIC, LP and is therefore not collateral to the Company’s revolving credit facility.
(l)As defined in the 1940 Act, the Company is deemed to be both an “Affiliated Person” of and to “Control” this portfolio company as it owns more than 25% in company's voting securities. See Note 5 in the accompanying notes to the consolidated financial statements for additional information on transactions in which the issuer was both an Affiliated Person and a portfolio company that the Company is deemed to Control.
(m)A portion of this loan (principal of $4,703) is held in the Company’s wholly-owned subsidiary, Monroe Capital Corporation SBIC, LP and is therefore not collateral to the Company’s revolving credit facility.
(n)The sale of a portion of this loan does not qualify for sale accounting under ASC Topic 860 — Transfers and Servicing, and therefore, the entire unitranche loan asset remains in the Consolidated Schedule of Investments.
(o)A portion of this loan (principal of $5,309) is held in the Company’s wholly-owned subsidiary, Monroe Capital Corporation SBIC, LP and is therefore not collateral to the Company’s revolving credit facility.
(p)Represents less than 5% ownership of the portfolio company's voting securities.
(q)The PIK portion of the interest rate for Landpoint, LLC is structured as a guaranteed fee paid upon the termination of the commitment. The fee accrues at 2.25% per annum and is subject to a minimum payment upon termination of $338.
(r)This position is currently on non-accrual status.
(s)A portion of the PIK interest rate for TRG, LLC is structured as a guaranteed fee paid upon the termination of the commitment. The fee currently accrues at 3.54% per annum and is subject to an estimated minimum payment upon termination of $2,155.
(t)The PIK portion of the interest rate for Vacation Innovations, LLC is structured as a fee paid upon the termination of the commitment. The fee currently accrues at 0.90% per annum.
(u)The PIK portion of the interest rate for Gracelock Industries, LLC is structured as a fee paid upon the termination of the commitment. The fee currently accrues at 4.24% per annum.
(v)Represents a non-income producing security.
(w)This position includes a PIK dividend and is currently on non-accrual status.
(x)This is a demand note with no stated maturity.

n/a - not applicable

 

See Notes to Consolidated Financial Statements.

 

 8 

 

 

MONROE CAPITAL CORPORATION

 

CONSOLIDATED SCHEDULE OF INVESTMENTS

 

December 31, 2015

 

(in thousands, except for units)

 

Portfolio Company (a)   Industry   Spread Above Index (b)   Interest Rate (b)   Maturity   Principal     Amortized Cost     Fair
Value (c)
    % of
Net
Assets(d)
 
Senior Secured Loans                                                
360 Holdings III Corp.   Consumer Goods: Non-Durable   L+9.00%   10.00 % 10/1/2021     5,985     $ 5,746     $ 5,746       3.1 %
Alora Pharmaceuticals, LLC (e)   Healthcare & Pharmaceuticals   L+7.50%   8.50 % 9/13/2018     11,338       11,229       11,253       6.1 %
Alora Pharmaceuticals, LLC (Revolver) (f)   Healthcare & Pharmaceuticals   L+7.50%   8.50 % 9/13/2018     1,336       -       -       0.0 %
American Community Homes, Inc. (g)   Banking, Finance, Insurance & Real Estate   L+8.00%   9.50 % 7/22/2019     7,667       7,511       7,398       4.0 %
American Community Homes, Inc. (g)   Banking, Finance, Insurance & Real Estate   L+12.50%   9.50% Cash/4.50% PIK   7/22/2019     4,029       3,951       3,941       2.1 %
Answers Corporation   High Tech Industries   L+5.25%   6.25 % 10/1/2021     2,918       2,818       1,984       1.1 %
BCC Software, LLC (h)   High Tech Industries   L+8.00%   9.00 % 6/20/2019     2,817       2,785       2,776       1.5 %
BCC Software, LLC (Revolver) (f)   High Tech Industries   L+8.00%   9.00 % 6/20/2019     469       -       -       0.0 %
Bluestem Brands, Inc.   Consumer Goods: Non-Durable   L+7.50%   8.50 % 11/6/2020     2,919       2,892       2,737       1.4 %
Cali Bamboo, LLC   Construction & Building   L+8.50%   9.00 % 7/10/2020     4,179       4,101       4,093       2.2 %
Cali Bamboo, LLC (Revolver) (f)   Construction & Building   L+8.50%   9.00 % 7/10/2020     1,624       1,039       1,039       0.6 %
Cornerstone Detention Products, Inc. (i)   Construction & Building   L+10.50%   10.50% Cash/1.00% PIK   4/8/2019     4,221       4,161       3,969       2.2 %
Cornerstone Detention Products, Inc. (Revolver) (f)   Construction & Building   L+9.50%   10.50 % 4/8/2019     400       -       -       0.0 %
Cyalume Technologies Holdings, Inc. (h)   Aerospace & Defense   L+9.00%   10.00 % 5/18/2020     5,236       5,106       5,278       2.9 %
Cyalume Technologies Holdings, Inc. (Delayed Draw)   Aerospace & Defense   L+9.00%   10.00 % 5/18/2020     453       453       456       0.2 %
Cyalume Technologies Holdings, Inc. (Revolver) (f)   Aerospace & Defense   L+9.00%   10.00 % 5/18/2020     1,528       306       306       0.2 %
Diesel Direct Holdings, Inc. (h)   Energy: Oil & Gas   L+9.00%   10.00 % 2/17/2020     5,363       5,299       5,443       2.9 %
EB Employee Solutions, LLC (h)   Services: Business   L+8.50%   10.00 % 2/28/2019     3,470       3,406       3,399       1.8 %
G&M Opco LLC (h)   Construction & Building   L+7.50%   8.00 % 6/23/2020     3,169       3,096       3,109       1.7 %
InMobi Pte, Ltd. (Delayed Draw) (f) (j) (k)   Media: Advertising, Printing & Publishing   L+10.17%   10.50 % 9/1/2018     10,000       5,842       5,772       3.1 %
Jerry Lee Radio, LLC   Media: Broadcasting & Subscription   L+9.50%   10.00 % 12/17/2020     15,000       14,627       14,625       7.9 %
Landpoint, LLC   Energy: Oil & Gas   L+12.75%   12.00% Cash/2.25% PIK (q) 12/20/2018     3,750       3,688       3,634       2.0 %
Landpoint, LLC (Revolver) (f)   Energy: Oil & Gas   L+10.50%   12.00 % 12/20/2018     313       -       -       0.0 %
L.A.R.K. Industries, Inc.   Construction & Building   L+7.00%   8.00 % 9/3/2019     6,690       6,562       6,657       3.6 %
Luxury Optical Holdings Co.   Retail   L+9.00%   9.00% Cash/1.00% PIK   9/12/2019     4,035       3,972       3,986       2.2 %
Luxury Optical Holdings Co. (Revolver) (f)   Retail   L+8.00%   9.00 % 9/12/2019     273       -       -       0.0 %
Miles Media Group LLC   Hotels, Gaming & Leisure   L+8.50%   9.50 % 9/12/2019     3,875       3,814       3,864       2.1 %
Miles Media Group LLC (Delayed Draw) (f) (j)   Hotels, Gaming & Leisure   L+8.50%   9.50 % 9/12/2019     1,600       -       -       0.0 %
Miles Media Group LLC (Revolver) (f)   Hotels, Gaming & Leisure   L+8.50%   9.50 % 9/12/2019     320       -       -       0.0 %
O'Brien Industrial Holdings, LLC   Metals & Mining   L+11.50%   11.00% Cash/2.00% PIK   5/13/2019     6,326       6,213       6,177       3.4 %
O'Brien Industrial Holdings, LLC (Revolver) (f)   Metals & Mining   L+9.50%   11.00 % 5/13/2019     2,844       1,219       1,219       0.7 %
PD Products, LLC   Consumer Goods: Non-Durable   L+10.50%   12.00 % 10/4/2018     12,698       12,589       12,679       6.9 %
PD Products, LLC (Revolver) (f)   Consumer Goods: Non-Durable   L+10.50%   12.00 % 10/4/2018     2,500       1,025       1,024       0.6 %
PeopleConnect Intermediate, LLC (formerly Intelius, Inc.)   Services: Consumer   L+5.50%   6.50 % 7/1/2020     4,958       4,855       4,993       2.7 %
PeopleConnect Intermediate, LLC (formerly Intelius, Inc.)   Services: Consumer   L+11.50%   12.50 % 7/1/2020     4,979       4,874       4,964       2.7 %
PeopleConnect Intermediate, LLC (formerly Intelius, Inc.) (Revolver) (f)   Services: Consumer   L+8.50%   9.50 % 7/1/2020     354       -       -       0.0 %
Precision Toxicology, LLC (h)   Healthcare & Pharmaceuticals   L+8.00%   8.00% Cash/1.00% PIK   3/24/2020     5,440       5,345       5,358       2.9 %
Precision Toxicology, LLC (Revolver) (f)   Healthcare & Pharmaceuticals   L+8.00%   8.00% Cash/1.00% PIK   3/24/2020     635       -       -       0.0 %
Rockdale Blackhawk, LLC (g)   Healthcare & Pharmaceuticals   L+11.00%   12.00 % 3/31/2020     12,207       11,155       12,299       6.7 %
Rockdale Blackhawk, LLC (Revolver) (f) (g)   Healthcare & Pharmaceuticals   L+11.00%   12.00 % 3/31/2020     1,849       789       786       0.4 %
Rockdale Blackhawk, LLC (Capex) (f) (g)   Healthcare & Pharmaceuticals   L+11.00%   12.00 % 3/31/2020     2,288       629       634       0.3 %
Rocket Dog Brands, LLC (g)   Consumer Goods: Non-Durable   n/a   10.00 % 8/29/2019     1,032       1,032       1,032       0.6 %
Rocket Dog Brands, LLC (Delayed Draw) (f) (g) (j)   Consumer Goods: Non-Durable   n/a   15.00 % 8/29/2019     350       150       150       0.1 %
SHI Holdings, Inc. (h)   Healthcare & Pharmaceuticals   L+9.25%   9.67 % 7/10/2019     2,737       2,688       2,710       1.5 %
SHI Holdings, Inc. (Revolver) (f)   Healthcare & Pharmaceuticals   L+9.25%   9.67 % 7/10/2019     818       573       573       0.3 %
SNI Companies (l)   Services: Business   L+10.00%   11.00 % 12/31/2018     6,852       6,743       6,842       3.7 %
SNI Companies (Revolver) (f)   Services: Business   L+10.00%   11.00 % 12/31/2018     1,250       125       125       0.1 %
Summit Container Corporation (g) (h)   Containers, Packaging & Glass   L+9.00%   11.00 % 1/6/2019     3,600       3,537       3,400       1.8 %
The Sandbox Group LLC (h)   Media: Advertising, Printing & Publishing   L+10.00%   9.00% Cash/2.00% PIK   2/23/2020     5,388       5,274       5,329       2.9 %
The Sandbox Group LLC (Revolver) (f)   Media: Advertising, Printing & Publishing   L+10.00%   9.00% Cash/2.00% PIK   2/23/2020     1,250       1,243       1,243       0.7 %
TRG, LLC   Hotels, Gaming & Leisure   L+17.92%   11.00% Cash/7.92% PIK (r) 12/23/2019     3,068       3,017       3,040       1.6 %
TRG, LLC (Revolver) (f)   Hotels, Gaming & Leisure   L+12.00%   13.00 % 12/23/2019     131       -       -       0.0 %
TRG, LLC (CapEx) (f)   Hotels, Gaming & Leisure   L+12.00%   11.00% Cash/2.00% PIK   12/23/2019     919       653       649       0.3 %
TTM Technologies, Inc.   High Tech Industries   L+5.00%   6.00 % 5/31/2021     1,330       1,287       1,207       0.6 %
Vacation Innovations, LLC   Hotels, Gaming & Leisure   L+9.00%   9.50 % 8/20/2020     6,211       6,093       6,236       3.4 %
Vacation Innovations, LLC (Revolver) (f)   Hotels, Gaming & Leisure   L+9.00%   9.50 % 8/20/2020     342       -       -       0.0 %
Yandy Holding, LLC   Retail   L+9.00%   10.00 % 9/30/2019     6,419       6,342       6,425       3.5 %
Yandy Holding, LLC (Revolver) (f)   Retail   L+9.00%   10.00 % 9/30/2019     907       -       -       0.0 %
Total Senior Secured Loans                     214,659       189,854       190,559       103.3 %
                                                 
Unitranche Loans                                                
Accutest Corporation   Services: Business   L+9.50%   11.00 % 6/5/2018     6,586       6,440       6,586       3.6 %
Collaborative Neuroscience Network, LLC (m)   Healthcare & Pharmaceuticals   L+11.50%   13.00 % 12/27/2017     7,058       6,968       6,733       3.6 %
Fabco Automotive Corporation   Automotive   L+9.25%   10.25 % 4/3/2017     8,437       8,393       5,358       2.9 %
Gracelock Industries, LLC   Wholesale   L+12.05%   11.00% Cash/2.55% PIK (s) 5/7/2019     5,207       5,101       4,730       2.6 %
Incipio Technologies, Inc. (n)   Consumer Goods: Non-Durable   L+6.00%   7.00 % 12/26/2019     15,000       14,669       15,008       8.1 %
MooreCo, Inc.   Consumer Goods: Durable   L+13.50%   12.50% Cash/2.50% PIK   12/27/2017     4,223       4,177       4,223       2.3 %
Output Services Group, Inc.   Services: Business   L+9.00%   9.50% Cash/1.00% PIK   12/17/2018     6,655       6,555       6,562       3.6 %
Output Services Group, Inc.   Services: Business   L+9.00%   9.50% Cash/1.00% PIK   12/17/2018     7,429       7,301       7,295       3.9 %
Playtime, LLC (m)   Hotels, Gaming & Leisure   L+7.50%   9.00 % 12/4/2017     5,677       5,627       5,070       2.8 %
TPP Acquisition, Inc. (o)   Retail   L+11.00%   10.50% Cash/2.00% PIK   12/17/2017     6,835       6,769       2,990       1.6 %
TPP Acquisition, Inc. (Revolver) (o)   Retail   L+11.00%   4.50% Cash/8.00% PIK   12/17/2017     2,035       2,035       2,035       1.1 %
TPP Acquisition, Inc. (Delayed Draw) (o)   Retail   L+11.00%   10.50% Cash/2.00% PIK   12/17/2017     3,429       3,429       1,500       0.8 %
Total Unitranche Loans                     78,571       77,464       68,090       36.9 %
                                                 
Junior Secured Loans                                                
Confie Seguros Holdings II Co.   Banking, Finance, Insurance & Real Estate   L+9.00%   10.25 % 5/8/2019     5,594       5,555       5,538       3.0 %
CSM Bakery Supplies LLC   Beverage, Food & Tobacco   L+7.75%   8.75 % 7/3/2021     5,792       5,691       5,532       3.0 %
Education Corporation of America   Services: Consumer   L+11.00%   11.60 % 12/31/2018     5,833       5,698       5,854       3.2 %
Hyland Software Inc.   High Tech Industries   L+7.25%   8.25 % 7/1/2023     5,000       4,810       4,700       2.5 %
Mergermarket USA, Inc.   Media: Broadcasting & Subscription   L+6.50%   7.50 % 12/19/2021     4,500       4,384       4,016       2.2 %
Micro Holdings Corp.   High Tech Industries   L+7.50%   8.50 % 7/8/2022     5,590       5,455       5,339       2.9 %
Mud Pie, LLC   Consumer Goods: Non-Durable   n/a   10.00% Cash/1.50% PIK   11/4/2020     10,101       9,919       10,060       5.4 %
New NSI Holdings, Inc.   Chemicals, Plastics & Rubber   L+8.25%   9.25 % 7/28/2022     4,000       3,942       3,948       2.1 %
Pre-Paid Legal Services, Inc. (Legal Shield)   Services: Consumer   L+9.00%   10.25 % 7/1/2020     3,000       2,988       2,950       1.6 %
Physiotherapy Corporation   Healthcare & Pharmaceuticals   L+8.50%   9.50 % 6/3/2022     5,000       4,953       5,000       2.7 %
Rocket Dog Brands, LLC (g)   Consumer Goods: Non-Durable   n/a   15.00% PIK   5/1/2020     1,673       1,673       570       0.3 %
Sterling Infosystems, Inc.   Services: Business   L+7.75%   8.75 % 6/19/2023     5,000       4,952       4,956       2.7 %
SCP TPZ Acquisition, Inc.   Media: Diversified & Production   L+8.25%   9.25 % 5/29/2022     5,000       4,928       4,925       2.7 %
Total Junior Secured Loans                     66,083       64,948       63,388       34.3 %

 

 9 

 

 

Equity Securities                                                
American Community Homes, Inc. (warrant to purchase up to 9.0% of the equity) (p)   Banking, Finance, Insurance & Real Estate   -   - (t) 10/9/2024     -       -       353       0.2 %
BookIt Operating LLC (warrant to purchase up to 3.0% of the equity) (p)   Hotels, Gaming & Leisure   -   - (t) 12/21/2023     -       -       587       0.3 %
Collaborative Neuroscience Network, LLC (warrant to purchase up to 1.67 LLC units) (p)   Healthcare & Pharmaceuticals   -   - (t) 12/27/2022     -       -       147       0.1 %
Cyalume Technologies Holdings, Inc. - Series D Preferred Stock (3.06 shares) (p)   Aerospace & Defense   -   - (t) -     -       -       449       0.2 %
Education Corporation of America - Series G Preferred Stock (8,333 shares) (p)   Services: Consumer   n/a   12.00 % -     -       8,125       8,345       4.5 %
InMobi Pte, Ltd. (represents the right to purchase 0.42% of the equity) (k) (p)   Media: Advertising, Printing & Publishing   -   - (t) 9/18/2025     -       -       108       0.1 %
O'Brien Industrial Holdings, LLC (warrants to purchase up to 2.44% of certain affiliated entities of the company) (p)   Metals & Mining   -   - (t) 5/13/2024     -       -       -       0.0 %
Output Services Group, Inc. (warrant to purchase up to 3.89% of the common stock) (p)   Services: Business   -   - (t) 12/17/2022     -       -       450       0.2 %
Playtime, LLC - Preferred Units (8,665 units) (p)   Hotels, Gaming & Leisure   -   - (t) -     -       200       64       0.0 %
Rocket Dog Brands, LLC - Common Units (75,502 units) (g)   Consumer Goods: Non-Durable   -   - (t) -     -       -       -       0.0 %
Rocket Dog Brands, LLC - Preferred Units (10 units) (g)   Consumer Goods: Non-Durable   -   15.00% PIK (u) -     -       967       -       0.0 %
Rockdale Blackhawk, LLC - LLC Units (11.56% of the LLC interest) (g)   Healthcare & Pharmaceuticals   -   - (t) -     -       1,093       8,184       4.4 %
Summit Container Corporation (warrant to purchase up to 19.50% of the equity) (g)   Containers, Packaging & Glass   -   - (t) 1/6/2024     -       -       -       0.0 %
The Sandbox Group LLC (warrant to purchase up to 1.0% of the equity) (p)   Media: Advertising, Printing & Publishing   -   - (t) -     -       -       277       0.2 %
The Tie Bar Operating Company, LLC - Class A Preferred Units (1,275 units) (p)   Retail   -   - (t) -     -       86       90       0.1 %
The Tie Bar Operating Company, LLC - Class B Preferred Units (1,275 units) (p)   Retail   -   - (t) -     -       1       -       0.0 %
TPP Acquisition, Inc. (829 shares of common stock) (o)   Retail   -   - (t) -     -       -       -       0.0 %
Total Equity Securities                             10,472       19,054       10.3 %
TOTAL INVESTMENTS                           $ 342,738     $ 341,091       184.8 %

 

 

(a)All of our investments are issued by eligible U.S. portfolio companies, as defined in the Investment Company Act of 1940 (the “1940 Act”) except for InMobi Pte, Ltd. which is an international company headquartered in California.  All investments are non-controlled/non-affiliate company investments, unless otherwise noted.
(b)The majority of the investments bear interest at a rate that may be determined by reference to London Interbank Offered Rate (“LIBOR” or “L”) or Prime Rate (“Prime” or “P”) which reset daily, monthly, quarterly, or semiannually. For each such investment the Company has provided the spread over LIBOR or Prime and the current contractual interest rate in effect at December 31, 2015. Certain investments are subject to a LIBOR or Prime interest rate floor.
(c)Because there is no readily available market value for these investments, the fair value of these investments is determined in good faith by our board of directors as required by the Investment Company Act of 1940. (See Note 4 in the accompanying notes to the consolidated financial statements.)
(d)Percentages are based on net assets of $184,535 as of December 31, 2015.
(e)A portion of this loan (principal of $4,679) is held in the Company’s wholly-owned subsidiary, Monroe Capital Corporation SBIC, LP and is therefore not collateral to the Company’s revolving credit facility.
(f)All or a portion of this commitment was unfunded at December 31, 2015. As such, interest is earned only on the funded portion of this commitment.
(g)As defined in the 1940 Act, the Company is deemed to be an “Affiliated Person” of the portfolio company as it owns five percent or more of the portfolio company's voting securities. See Note 5 in the accompanying notes to the consolidated financial statements for additional information on transactions in which the issuer was an Affiliated Person (but not a portfolio company that the Company is deemed to control).
(h)All of this loan is held in the Company’s wholly-owned subsidiary, Monroe Capital Corporation SBIC, LP and is therefore not collateral to the Company’s revolving credit facility.
(i)A portion of this loan (principal of $2,532) is held in the Company’s wholly-owned subsidiary, Monroe Capital Corporation SBIC, LP and is therefore not collateral to the Company’s revolving credit facility.
(j)This delayed draw loan requires that certain financial covenants be met by the portfolio company prior to any fundings.
(k)This investment is treated as a non-qualifying investment under Section 55(a) of the 1940 Act. Under the 1940 Act, the Company may not acquire any non-qualifying asset unless, at the time the acquisition is made, qualifying assets represent at least 70% of the Company’s total assets. As of December 31, 2015, non-qualifying assets totaled 1.60% of the Company’s total assets.
(l)A portion of this loan (principal of $4,394) is held in the Company’s wholly-owned subsidiary, Monroe Capital Corporation SBIC, LP and is therefore not collateral to the Company’s revolving credit facility.
(m)The sale of a portion of this loan does not qualify for sale accounting under ASC Topic 860 — Transfers and Servicing, and therefore, the entire unitranche loan asset remains in the Consolidated Schedule of Investments.
(n)A portion of this loan (principal of $5,500) is held in the Company’s wholly-owned subsidiary, Monroe Capital Corporation SBIC, LP and is therefore not collateral to the Company’s revolving credit facility.
(o)As defined in the 1940 Act, the Company is deemed to be both an “Affiliated Person” of and to “Control” this portfolio company as it owns more than 25% percent of the portfolio company’s voting securities. See Note 5 in the accompanying notes to the consolidated financial statements for additional information on transactions in which the issuer was both an Affiliated Person and a portfolio company that the Company is deemed to Control.
(p)Represents less than 5% ownership of the portfolio company’s voting securities.
(q)The PIK portion of the interest rate for Landpoint, LLC is structured as a guaranteed fee paid upon the termination of the commitment. The fee accrues at 2.25% per annum and is subject to a minimum payment upon termination of $338.
(r)A portion of the PIK interest rate for TRG, LLC is structured as a guaranteed fee paid upon the termination of the commitment. The fee accrues at 5.92% per annum and is subject to an estimated minimum payment upon termination of $891.
(s)The PIK portion of the interest rate for Gracelock Industries, LLC is structured as a fee paid upon the termination of the commitment. The fee accrues at 2.55% per annum.
(t)Represents a non-income producing security.
(u)This position includes a PIK dividend and is currently on non-accrual status.

n/a - not applicable

  

See Notes to Consolidated Financial Statements.

 

 10 

 

  

MONROE CAPITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(in thousands, except share and per share data)

 

Note 1. Organization and Principal Business

 

Monroe Capital Corporation (“Monroe Capital” and together with its subsidiaries, the “Company”) was formed in February 2011 to act as an externally managed non-diversified, closed-end management investment company and has elected to be treated as a business development company under the Investment Company Act of 1940, as amended (the “1940 Act”). The Company had no substantive operating activities prior to October 24, 2012, the date of its initial public offering. Monroe Capital’s investment objective is to maximize the total return to its stockholders in the form of current income and capital appreciation through investment in senior secured, junior secured and unitranche (a combination of senior secured and junior secured debt in the same facility) debt and, to a lesser extent, unsecured subordinated debt and equity investments. Monroe Capital is managed by Monroe Capital BDC Advisors, LLC (“MC Advisors”), a registered investment adviser under the Investment Advisers Act of 1940, as amended. In addition, for U.S. federal income tax purposes, Monroe Capital has elected to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).

 

On February 28, 2014, the Company’s wholly-owned subsidiary, Monroe Capital Corporation SBIC, LP (“MRCC SBIC”), a Delaware limited partnership, received a license from the Small Business Administration (“SBA”) to operate as a Small Business Investment Company (“SBIC”) under Section 301(c) of the Small Business Investment Act of 1958, as amended. MRCC SBIC commenced operations on September 16, 2013. As of September 30, 2016, MRCC SBIC had $60,000 in regulatory capital, $20,000 in leveragable capital and $40,000 in SBA-guaranteed debentures outstanding. On April 13, 2016, MRCC SBIC was approved by the SBA for an additional $75,000 in SBA-guaranteed debentures. See Note 7 for additional information.

 

On July 25, 2016, the Company closed a public offering of 3,100,000 shares of its common stock at a public offering price of $15.50 per share, raising approximately $48,050 in gross proceeds. On August 3, 2016, the Company sold an additional 465,000 shares of its common stock, at a public offering price of $15.50 per share, raising approximately $7,208 in gross proceeds pursuant to the underwriters’ exercise of the over-allotment option. Aggregate underwriters’ discounts and commissions were $2,210 and offering costs were $493, resulting in net proceeds of $52,555.

 

Note 2. Summary of 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”). The accompanying consolidated financial statements of the Company and related financial information have been prepared pursuant to the requirements for reporting on Form 10-Q and Articles 6 or 10 of Regulation S-X. The Company has determined it meets the definition of an investment company and follows the accounting and reporting guidance in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946 — Financial Services — Investment Companies (“ASC Topic 946”). Certain prior period amounts have been reclassified to conform to the current period presentation.

 

Use of Estimates

 

The preparation of the consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

Consolidation

 

As permitted under Regulation S-X and ASC Topic 946, the Company will generally not consolidate its investment in a portfolio company other than an investment company subsidiary or a controlled operating company whose business consists of providing services to the Company. Accordingly, the Company consolidated the results of the Company’s wholly-owned subsidiaries in its consolidated financial statements. All intercompany balances and transactions have been eliminated.

 

Fair Value of Financial Instruments

 

The Company applies fair value 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.

 

 11 

 

  

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, receivables and payables approximate the fair value of such items due to the short maturity of such instruments.

 

Revenue Recognition

 

The Company’s revenue recognition policies are as follows:

 

Investments and related investment income: Interest and dividend income is recorded on the accrual basis to the extent that the Company expects to collect such amounts. Interest income is accrued based upon the outstanding principal amount and contractual terms of debt and preferred equity investments. Interest is accrued on a daily basis. All other income is recorded into income when earned. The Company records prepayment fees and amendment fees on loans as interest income in the period earned. For the three and nine months ended September 30, 2016, interest income included $220 and $1,067 of prepayment and amendment fees, respectively. For the three and nine months ended September 30, 2015, interest income included $117 and $1,242 of prepayment and amendment fees, respectively.

 

Dividend income on preferred equity securities is recorded as dividend income on an accrual basis to the extent that such amounts are payable by the portfolio company and are expected to be collected. Dividend income on common equity securities is recorded on the record date for private portfolio companies. Each distribution received from limited liability company (“LLC”) and limited partnership (“LP”) investments is evaluated to determine if the distribution should be recorded as dividend income or a return of capital. Generally, the Company will not record distributions from equity investments in LLCs and LPs as dividend income unless there are sufficient accumulated tax-basis earnings and profits in the LLC or LP prior to the distribution. Distributions that are classified as a return of capital are recorded as a reduction in the cost basis of the investment. For the three and nine months ended September 30, 2016, the Company recorded dividend income of $1,384 and $4,297, respectively. For both the three and nine months ended September 30, 2015, the Company recorded dividend income of $75.

 

Loan origination fees, original issue discount and market discount or premiums are capitalized, and the Company then amortizes such amounts using the effective interest method as interest income over the life of the investment. Unamortized discounts and loan origination fees totaled $5,955 and $6,340 as of September 30, 2016 and December 31, 2015, respectively. Upfront loan origination and closing fees received for the three and nine months ended September 30, 2016 totaled $694 and $2,190, respectively. For the three and nine months ended September 30, 2015, upfront loan origination and closing fees received totaled $1,102 and $2,650, respectively. For the three and nine months ended September 30, 2016, interest income included $383 and $1,137 of accretion of loan origination fees, original issue discounts and market discounts or premiums, respectively. For the three and nine months ended September 30, 2015, interest income included $308 and $787 of accretion of loan origination fees, original issue discounts and market discounts or premiums, respectively. Upon the prepayment of a loan or debt security, any unamortized premium or discount or loan origination fees are recorded as interest income. For the three and nine months ended September 30, 2016, interest income included $227 and $836 of unamortized discount or loan origination fees recorded as interest income upon prepayment of a loan or debt security, respectively. For the three and nine months ended September 30, 2015, interest income included $159 and $930 of unamortized discount or loan origination fees recorded as interest income upon prepayment of a loan or debt security, respectively.

 

The Company has certain investments in its portfolio that contain a payment-in-kind (“PIK”) interest provision, which represents contractual interest or dividends that are added to the principal balance and recorded as income. For the three and nine months ended September 30, 2016, interest income included $600 and $1,430 of PIK interest, respectively. For the three and nine months ended September 30, 2015, interest income included $453 and $1,494 of PIK interest, respectively. The Company stops accruing PIK interest when it is determined that PIK interest is no longer collectible. To maintain RIC tax treatment, and to avoid corporate tax, substantially all of this income must be paid out to stockholders in the form of distributions, even though the Company has not yet collected the cash.

 

Investment transactions are recorded on a trade-date basis. Realized gains or losses on portfolio investments are calculated based upon the difference between the net proceeds from the disposition and the amortized cost basis of the investment, without regard to unrealized gains and losses previously recognized. Realized gains and losses are recorded within net realized gain (loss) on investments in the consolidated statements of operations. Changes in the fair value of investments from the prior period, as determined by the Company’s board of directors (the “Board”) through the application of the Company’s valuation policy, are included within net change in unrealized appreciation (depreciation) on investments in the consolidated statements of operations.

 

Non-accrual: Loans or preferred equity securities 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 payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment. Non-accrual loans are restored to accrual status when past due principal, interest or dividends are paid and, in management’s judgment, are likely to remain current. On January 1, 2016, the Company placed its loan investments in TPP Acquisition, Inc. on non-accrual status. During the three and nine months ended September 30, 2016, the Company received interest payments from TPP Acquisition, Inc. totaling $20 and $30, respectively, which were recognized as interest income. Prior to placing TPP Acquisition Inc. on non-accrual status there were no other loan investments on non-accrual status. The Company’s preferred unit investment in Rocket Dog Brands LLC, which has a stated PIK interest rate, continues to remain on non-accrual status, and no dividend income was recorded related to this investment for the three and nine months ended September 30, 2016 and 2015. The fair value of the Company’s investments on non-accrual status totaled $6,249 and zero at September 30, 2016 and December 31, 2015, respectively.

 

 12 

 

  

Partial loan sales: The Company follows the guidance in ASC Topic 860 — Transfers and Servicing (“ASC Topic 860”), when accounting for loan participations and other partial loan sales. Such guidance requires a participation or other partial loan sale to meet the definition of a “participating interest,” as defined in the guidance, in order for sale treatment to be allowed. Participations or other partial loan sales which do not meet the definition of a participating interest remain on the Company’s consolidated statements of assets and liabilities and the proceeds are 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 other debt financing expenses” in the accompanying consolidated statements of operations. Changes in the fair value of secured borrowings from the prior period, as determined by the Board through the application of the Company’s valuation policy, are included as changes in unrealized appreciation (depreciation) on secured borrowings in the consolidated statements of operations. See Note 7 “Secured Borrowings” for additional information.

  

Distributions

 

Distributions to common stockholders are recorded on the record date. The amount, if any, to be distributed is determined by the Board each quarter and is generally based upon the earnings estimated by management. Net realized capital gains, if any, are generally 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, based upon its taxable income for the full year and distributions paid 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 attributes for distributions will generally include 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 three 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 8 regarding distributions for additional information.

 

Earnings per Share

 

In accordance with the provisions of ASC Topic 260 — Earnings per Share (“ASC Topic 260”), basic earnings per share is computed by dividing earnings available to common stockholders by the weighted average number of shares outstanding during the period. The weighted average shares outstanding utilized in the calculation of earnings per share take into account share issues on the issuance date and the Company’s repurchases of its common stock on the repurchase date. See Note 9 for additional information on the Company’s share issuances and repurchases. For the periods presented in these consolidated financial statements, there were no potentially dilutive common shares issued.

 

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

 

The Company deposits its cash in a financial institution and, at times, such balances may be in excess of the Federal Deposit Insurance Corporation insurance limits.

 

Restricted Cash

 

Restricted cash includes amounts held within MRCC SBIC. Cash held within an SBIC is generally restricted to the originations of new loans from the SBIC and the payment of SBA debentures and related interest expense.

 

Unamortized Deferred Financing Costs

 

Deferred financing costs represent fees and other direct incremental costs incurred in connection with the Company’s borrowings. As of September 30, 2016 and December 31, 2015, the Company had unamortized deferred financing costs of $3,883 and $3,569, respectively, presented as a direct reduction of the carrying amount of debt on the consolidated statements of assets and liabilities. These amounts are amortized and included in interest expense in the consolidated statements of operations over the estimated average life of the borrowings. Amortization of deferred financing costs for the three and nine months ended September 30, 2016 was $222 and $603, respectively. Amortization of deferred financing costs for the three and nine months ended September 30, 2015 was $185 and $553, respectively.

 

 13 

 

  

Offering Costs

 

Offering costs include, among other things, fees paid in relation to legal, accounting, regulatory and printing work completed in preparation of equity offerings. Offering costs are charged against the proceeds from equity offerings within the consolidated statements of changes in net assets. As of September 30, 2016 and December 31, 2015, other assets on the consolidated statements of assets and liabilities included $270 and $358, respectively, of deferred offering costs which will be charged against the proceeds from further equity offerings when received.

 

Income Taxes

 

The Company has elected to be treated as a RIC under Subchapter M of the Code and operates in a manner so as to qualify for the tax treatment available to RICs. To maintain qualification as a RIC, the Company must, among other things, meet certain source-of-income and asset diversification requirements and distribute to stockholders, for each taxable year, at least 90% of the Company’s “investment company taxable income,” which is generally the Company’s net ordinary income plus the excess, if any, of realized net short-term capital gains over realized net long-term capital losses. If the Company qualifies as a RIC and satisfies the annual distribution requirement, the Company will not have to pay corporate-level federal income taxes on any income that the Company distributes to its stockholders. The Company intends to make distributions in an amount sufficient to maintain RIC status each year and to avoid any federal income taxes on income. The Company will also be subject to nondeductible federal excise taxes if the Company does not distribute at least 98% of net ordinary income, 98.2% of any capital gain net income, if any, and any recognized and undistributed income from prior years for which it paid no federal income taxes. To the extent that the Company determines that its estimated current year annual taxable income may exceed estimated current year dividend distributions, the Company accrues excise tax, if any, calculated as 4% of the estimated excess taxable income as taxable income is earned. For the three and nine months ended September 30, 2016, $342 and $429, respectively, were recorded on the consolidated statements of operations for U.S. federal excise taxes, respectively. For the three and nine months ended September 30, 2015, zero and $3 was recorded for U.S. federal excise taxes, respectively. As of September 30, 2016 and December 31, 2015, payables for excise taxes of $225 and $80, respectively, were included in accounts payable and accrued expenses on the consolidated statements of assets and liabilities.

 

The Company accounts for income taxes in conformity with ASC Topic 740 — Income Taxes (“ASC Topic 740”). ASC Topic 740 provides guidelines 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 sustained by the applicable tax authority. 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 in income tax expense. There were no material uncertain income tax positions through September 30, 2016. The 2012 through 2015 tax years remain subject to examination by U.S. federal and state tax authorities.

 

Subsequent Events

 

The Company has evaluated the need for disclosures and/or adjustments resulting from subsequent events through the date the consolidated financial statements were issued. There have been no subsequent events that occurred during such period that would require disclosure in this Form 10-Q or would be required to be recognized in the consolidated financial statements as of and for the nine months ended September 30, 2016.

 

Recent Accounting Pronouncements

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (ASC Topic 606) (“ASU 2014-09”). The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: Step 1: Identify the contract(s) with a customer. Step 2: Identify the performance obligations in the contract. Step 3: Determine the transaction price. Step 4: Allocate the transaction price to the performance obligations in the contract. Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

 

ASU 2014-09 also specified the accounting for some costs to obtain or fulfill a contract with a customer. In addition, ASU 2014-09 requires that an entity disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The initial effective date of ASU 2014-09 was for fiscal periods beginning after December 15, 2016. However, in August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (ASC Topic 606): Deferral of the Effective Date, which deferred the effective date to fiscal periods beginning after December 15, 2017. Management is currently evaluating the impact these changes will have on the Company’s consolidated financial statements and disclosures.

 

In February 2015, the FASB issued ASU 2015-02, Consolidation (ASC Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02 significantly changes the consolidation analysis required under GAAP and ends the deferral granted to investment companies from applying the variable interest entity guidance. ASU 2015-02 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2015 and early adoption is permitted. The Company has adopted ASU 2015-02 and the adoption did not have a material impact on the Company’s consolidated financial statements and disclosures.

 

In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the statements of assets and liabilities as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. ASU 2015-03 is effective for fiscal years that begin after December 15, 2015 and early adoption is permitted. The Company has adopted ASU 2015-03 and the revised presentation is reflected in the Company’s consolidated financial statements for the periods presented.

 

 14 

 

  

In January 2016, the FASB issued ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 retains many current requirements for the classification and measurement of financial instruments; however, it significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. ASU 2016-01 also amends certain disclosure requirements associated with the fair value of financial instruments. This guidance is effective for annual and interim periods beginning after December 15, 2017, and early adoption is not permitted for public business entities. Management is currently evaluating the impact these changes will have on the Company’s consolidated financial statements and disclosures.

 

Note 3. Investments

 

The following tables show the composition of the investment portfolio, at amortized cost and fair value (with corresponding percentage of total portfolio investments):

 

   September 30, 2016   December 31, 2015 
Amortized Cost:                    
Senior secured loans  $248,881    65.6%  $189,854    55.4%
Unitranche loans   57,877    15.3    77,464    22.6 
Junior secured loans   61,919    16.3    64,948    19.0 
Equity securities   10,473    2.8    10,472    3.0 
Total  $379,150    100.0%  $342,738    100.0%

 

   September 30, 2016   December 31, 2015 
Fair Value:                    
Senior secured loans  $240,520    63.9%  $190,559    55.9%
Unitranche loans   51,858    13.8    68,090    20.0 
Junior secured loans   60,694    16.1    63,388    18.6 
Equity securities   23,584    6.2    19,054    5.5 
Total  $376,656    100.0%  $341,091    100.0%

 

The following tables show the composition of the investment portfolio by geographic region, at amortized cost and fair value (with corresponding percentage of total portfolio 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:

 

   September 30, 2016   December 31, 2015 
Amortized Cost:                    
International  $6,667    1.8%  $5,842    1.7%
Mid-Atlantic           6,440    1.9 
Midwest   56,306    14.9    46,557    13.6 
Northeast   76,758    20.2    63,131    18.4 
South   17,181    4.5         
Southeast   51,745    13.6    64,282    18.7 
Southwest   39,462    10.4    38,325    11.2 
West   131,031    34.6    118,161    34.5 
Total  $379,150    100.0%  $342,738    100.0%

  

   September 30, 2016   December 31, 2015 
Fair Value:                    
International  $6,724    1.8%  $5,880    1.7%
Mid-Atlantic           6,586    1.9 
Midwest   56,801    15.1    46,103    13.5 
Northeast   78,400    20.8    63,396    18.6 
South   17,199    4.6         
Southeast   52,907    14.0    65,823    19.3 
Southwest   42,266    11.2    40,913    12.0 
West   122,359    32.5    112,390    33.0 
Total  $376,656    100.0%  $341,091    100.0%

 

 15 

 

  

The following tables show the composition of the investment portfolio by industry, at amortized cost and fair value (with corresponding percentage of total portfolio investments):

 

   September 30, 2016   December 31, 2015 
Amortized Cost:                    
Aerospace & Defense  $9,891    2.6%  $5,865    1.7%
Automotive   12,428    3.3    8,393    2.4 
Banking, Finance, Insurance & Real Estate   34,539    9.1    17,017    5.0 
Beverage, Food & Tobacco   12,722    3.4    5,691    1.7 
Chemicals, Plastics & Rubber   3,947    1.0    3,942    1.2 
Construction & Building   18,939    5.0    18,959    5.5 
Consumer Goods: Durable   3,636    1.0    4,177    1.2 
Consumer Goods: Non-Durable   44,472    11.7    50,662    14.8 
Containers, Packaging & Glass   3,602    0.9    3,537    1.0 
Energy: Oil & Gas   8,121    2.1    8,987    2.6 
Environmental Industries   3,697    1.0         
Healthcare & Pharmaceuticals   37,474    9.9    45,422    13.3 
High Tech Industries   15,464    4.1    17,155    5.0 
Hotels, Gaming & Leisure   37,729    9.9    19,404    5.7 
Media: Advertising, Printing & Publishing   6,667    1.8    12,359    3.6 
Media: Broadcasting & Subscription   17,893    4.7    19,011    5.5 
Media: Diversified & Production   4,935    1.3    4,928    1.4 
Metals & Mining   5,212    1.4    7,432    2.2 
Retail   36,193    9.5    22,634    6.6 
Services: Business   28,737    7.6    35,522    10.4 
Services: Consumer   24,995    6.6    26,540    7.7 
Utilities: Electric   2,970    0.8         
Wholesale   4,887    1.3    5,101    1.5 
 Total  $379,150    100.0%  $342,738    100.0%

 

   September 30, 2016   December 31, 2015 
Fair Value:                    
Aerospace & Defense  $10,836    2.9%  $6,489    1.9%
Automotive   8,154    2.2    5,358    1.6 
Banking, Finance, Insurance & Real Estate   36,305    9.6    17,230    5.1 
Beverage, Food & Tobacco   12,309    3.3    5,532    1.6 
Chemicals, Plastics & Rubber   4,040    1.1    3,948    1.2 
Construction & Building   19,150    5.1    18,867    5.5 
Consumer Goods: Durable   3,660    1.0    4,223    1.2 
Consumer Goods: Non-Durable   41,332    11.0    49,006    14.4 
Containers, Packaging & Glass   3,581    0.9    3,400    1.0 
Energy: Oil & Gas   8,060    2.1    9,077    2.7 
Environmental Industries   3,787    1.0         
Healthcare & Pharmaceuticals   48,351    12.8    53,677    15.7 
High Tech Industries   14,494    3.8    16,006    4.7 
Hotels, Gaming & Leisure   37,934    10.1    19,510    5.7 
Media: Advertising, Printing & Publishing   6,724    1.8    12,729    3.7 
Media: Broadcasting & Subscription   18,396    4.9    18,641    5.5 
Media: Diversified & Production   4,956    1.3    4,925    1.4 
Metals & Mining   5,366    1.4    7,396    2.2 
Retail   26,763    7.1    17,026    5.0 
Services: Business   29,650    7.9    36,215    10.6 
Services: Consumer   25,227    6.7    27,106    7.9 
Utilities: Electric   2,996    0.8         
Wholesale   4,585    1.2    4,730    1.4 
Total  $376,656    100.0%  $341,091    100.0%

 

Note 4. Fair Value Measurements

 

Investments

 

The Company values all investments in accordance with ASC Topic 820. ASC Topic 820 requires enhanced disclosures about assets and liabilities that are measured and reported at fair value. As defined in ASC Topic 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

 

ASC Topic 820 establishes a hierarchal disclosure framework which prioritizes and ranks the level of market price observability of inputs used in measuring investments at fair value. Market price observability is affected by a number of factors, including the type of investment and the characteristics specific to the investment. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.

 

 16 

 

  

Based on the observability of the inputs used in the valuation techniques, the Company is required to provide disclosures on fair value measurements according to the fair value hierarchy. The fair value hierarchy ranks the observability of the inputs used to determine fair values. Investments carried at fair value are classified and disclosed in one of the following three categories:

 

  · Level 1 — Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

 

  · Level 2 — Valuations based on inputs other than quoted prices in active markets, which are either directly or indirectly observable.

 

  · Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The inputs into the determination of fair value may require significant management judgment or estimation. Such information may be the result of consensus pricing information or broker quotes which include a disclaimer that the broker would not be held to such a price in an actual transaction. The non-binding nature of consensus pricing and/or quotes accompanied by disclaimer would result in classification as Level 3 information, assuming no additional corroborating evidence.

 

With respect to investments for which market quotations are not readily available, the Company’s Board undertakes a multi-step valuation process each quarter, as described below:

 

  · the quarterly valuation process begins with each portfolio company or investment being initially evaluated and rated by the investment professionals of MC Advisors responsible for the portfolio investment;
     
  · preliminary valuation conclusions are then documented and discussed with the investment committee of the Company;
     
  · the Board also engages one or more independent valuation firm(s) to conduct independent appraisals of a selection of investments for which market quotations are not readily available. The Company will consult with independent valuation firm(s) relative to each portfolio company at least once in every calendar year, but are generally received quarterly;
     
  · the audit committee of the Board reviews the preliminary valuations of MC Advisors and of the independent valuation firm(s) and responds and supplements the valuation recommendations to reflect any comments; and
     
  · the Board discusses these valuations and determines the fair value of each investment in the portfolio in good faith, based on the input of MC Advisors, the independent valuation firm(s) and the audit committee.

 

The availability of valuation techniques and observable inputs can vary from investment to investment and is affected by a wide variety of factors including the type of investment, whether the investment is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Those estimated values do not necessarily represent the amounts that may be ultimately realized due to the occurrence of future circumstances that cannot be reasonably determined. Because of the inherent uncertainty of valuation, those estimated values may be materially higher or lower than the values that would have been used had a ready market for the securities existed. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for securities categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement.

 

Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, assumptions utilized in the valuation are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. The Company uses prices and inputs that are current as of the measurement date, including periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many securities. This condition could cause an investment to be reclassified to a lower level within the fair value hierarchy.

 

The accompanying consolidated schedules of investments held by the Company consist primarily of private debt instruments (“Level 3 debt”). Management generally uses the yield approach to determine fair value, as long as it is appropriate. If there is deterioration in credit quality or a debt investment is in workout status, the Company may consider other factors 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 considers its Level 3 debt to be performing loans if the borrower is not in default, the borrower is remitting payments in a timely manner; the loan is in covenant compliance or is otherwise not deemed to be impaired. In determining the fair value of the performing Level 3 debt, the Company considers fluctuations in current interest rates, the trends in yields of debt instruments with similar credit ratings, financial condition of the borrower, economic conditions and other relevant factors, both qualitative and quantitative. In the event that a Level 3 debt instrument is not performing, as defined above, the Company will evaluate the value of the collateral utilizing the same framework described above for a performing loan to determine the value of the Level 3 debt instrument.

 

 17 

 

  

Senior, unitranche and junior secured loans are collateralized by tangible and intangible assets of the borrowers. These investments include loans to entities that have some level of challenge in obtaining financing from other, more conventional institutions, such as a bank. Interest rates on these loans are either fixed or floating, and are based on current market conditions and credit ratings of the borrower. The contractual interest rates on the loans ranged between 5.75% and 17.00% at September 30, 2016 and 6.00% and 18.92% at December 31, 2015. The maturity dates on the loans outstanding at September 30, 2016 range between October 2016 and August 2023. Management evaluates the collectability of the loans on an ongoing basis based upon various factors including, but not limited to, the credit history of the borrower, its financial status and its available collateral.

 

Under the yield approach, the Company uses discounted cash flow models to determine the present value of the future cash flow streams of its debt investments, based on future interest and principal payments as set forth in the associated loan agreements. In determining fair value under the yield approach, the Company also considers the following factors: applicable market yields and leverage levels, credit quality, prepayment penalties, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, and changes in the interest rate environment and the credit markets that generally may affect the price at which similar investments may be made. This evaluation will be updated quarterly for Level 3 debt instruments that are performing and are not performing, respectively, and more frequently for time periods where there are significant changes in the investor base or significant changes in the perceived value of the underlying collateral. The collateral value will be analyzed on an ongoing basis using internal metrics, appraisals, third-party valuation agents and other data as may be acquired and analyzed by the Company.

 

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. 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. Typically, the enterprise values of private companies are based on multiples of earnings before interest, income taxes, depreciation and amortization (“EBITDA”), cash flows, net income, revenues, or in limited cases, book value.

 

Under the income approach, the Company prepares and analyzes discounted cash flow models based on projections of the future free cash flows (or earnings) of the portfolio company. In determining the fair value under the income approach, 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.

 

Secured Borrowings

 

The Company has elected the fair value option under ASC Topic 825 — Financial Instruments (“ASC Topic 825”) relating to accounting for debt obligations at their fair value for its secured borrowings which arose due to partial loan sales which did not meet the criteria for sale treatment under ASC Topic 860. The Company reports changes in the fair value of its secured borrowings within net change in unrealized (appreciation) depreciation on secured borrowings in the consolidated statements of operations. The net gain or loss reflects the difference between the fair value and the principal amount due on maturity.

 

Due to the absence of a liquid trading market for these secured borrowings, they are valued by calculating the net present value of the future expected cash flow streams using an appropriate risk-adjusted discount rate model. The discount rate considers projected performance of the related loan investment, applicable market yields and leverage levels, credit quality, prepayment penalties and comparable company analysis. The Company consults with an independent valuation firm relative to the fair value of its secured borrowings at least once in every calendar year.

 

Fair Value Disclosures

 

The following table presents fair value measurements of investments and secured borrowings, by major class, as of September 30, 2016, according to the fair value hierarchy:

 

    Fair Value Measurements  
    Level 1     Level 2     Level 3     Total  
Investments:                                
Senior secured loans   $     $     $ 240,520     $ 240,520  
Unitranche loans                 51,858       51,858  
Junior secured loans                 60,694       60,694  
Equity securities                 23,584       23,584  
Total Investments   $     $     $ 376,656     $ 376,656  
                                 
Secured borrowings   $     $     $ 1,610     $ 1,610  

 

The following table presents fair value measurements of investments and secured borrowings, by major class, as of December 31, 2015, according to the fair value hierarchy:

 

    Fair Value Measurements  
    Level 1     Level 2     Level 3     Total  
Investments:                                
Senior secured loans   $     $     $ 190,559     $ 190,559  
Unitranche loans                 68,090       68,090  
Junior secured loans                 63,388       63,388  
Equity securities                 19,054       19,054  
Total Investments   $     $     $ 341,091     $ 341,091  
                                 
Secured borrowings   $     $     $ 2,476     $ 2,476  

 

 18 

 

  

The following tables provide a reconciliation of the beginning and ending balances for investments and secured borrowings that use Level 3 inputs for the three and nine months ended September 30, 2016:

 

   Investments     
   Senior
secured loans
  

Unitranche

loans

  

Junior

secured loans

  

Equity

securities

  

Total

investments

  

Secured

borrowings

 
Balance as of June 30, 2016  $201,002   $53,920   $64,955   $22,931   $342,808   $2,112 
Reclassifications                        
Net change in unrealized appreciation (depreciation) on investments   (2,739)   (635)   873    653    (1,848)    
Net realized gain (loss) on investments                        
Purchases of investments and other adjustments to cost (1)   50,384    197    191        50,772     
Proceeds from principal payments and sales on investments  (2)   (8,127)   (1,624)   (5,325)       (15,076)    
Net change in unrealized appreciation (depreciation) on secured borrowings                       123 
Proceeds from secured borrowings                        
Repayments on secured borrowings                       (625)
Balance as of September 30, 2016  $240,520   $51,858   $60,694   $23,584   $376,656   $1,610 

 

   Investments     
   Senior
secured loans
  

Unitranche

loans

  

Junior

secured loans

  

Equity

securities

  

Total

investments

  

Secured

borrowings

 
Balance as of December 31, 2015  $190,559   $68,090   $63,388   $19,054   $341,091   $2,476 
Reclassifications   6,525    (6,525)                
Net change in unrealized appreciation (depreciation) on investments   (3,360)   (2,349)   332    4,530    (847)    
Net realized gain (loss) on investments               587    587     
Purchases of investments and other adjustments to cost (1)   88,497    1,719    8,068        98,284     
Proceeds from principal payments and sales on investments  (2)   (41,701)   (9,077)   (11,094)   (587)   (62,459)    
Net change in unrealized appreciation (depreciation) on secured borrowings                       36 
Proceeds from secured borrowings                        
Repayments on secured borrowings                       (902)
Balance as of September 30, 2016  $240,520   $51,858   $60,694   $23,584   $376,656   $1,610 

  

 

(1) Includes purchases of new investments, effects of refinancing and restructurings, premium and discount accretion and amortization and PIK interest.
(2) Represents net proceeds from investments sold and principal paydowns received.

 

 19 

 

 

The following tables provide a reconciliation of the beginning and ending balances for investments and secured borrowings that use Level 3 inputs for the three and nine months ended September 30, 2015:

 

   Investments     
   Senior
secured loans
  

Unitranche

loans

  

Junior

secured loans

  

Equity

securities

  

Total

investments

  

Secured

borrowings

 
Balance as of June 30, 2015  $163,434   $65,207   $49,841   $4,031   $282,513   $3,450 
Net change in unrealized appreciation (depreciation) on investments   (373)   (1,590)   (300)   2,381    118     
Net realized gain (loss) on investments               167    167     
Purchases of investments and other adjustments to cost (1)   30,484    7,412    10,592    8,123    56,611     
Proceeds from principal payments and sales on investments  (2)   (8,109)   (922)   (406)   (241)   (9,678)    
Net change in unrealized appreciation (depreciation) on secured borrowings                       43 
Proceeds from secured borrowings                        
Repayments on secured borrowings                       (650)
Balance as of September 30, 2015  $185,436   $70,107   $59,727   $14,461   $329,731   $2,843 

 

   Investments     
   Senior
secured loans
  

Unitranche

loans

  

Junior

secured loans

  

Equity

securities

  

Total

investments

  

Secured

borrowings

 
Balance as of December 31, 2014  $124,161   $96,635   $10,803   $1,936   $233,535   $4,008 
Net change in unrealized appreciation (depreciation) on investments   65    (3,634)   (1)   3,382    (188)    
Net realized gain (loss) on investments               167    167     
Purchases of investments and other adjustments to cost (1)   90,182    16,277    49,331    9,217    165,007     
Proceeds from principal payments and sales on investments  (2)   (28,972)   (39,171)   (406)   (241)   (68,790)    
Net change in unrealized appreciation (depreciation) on secured borrowings                       35 
Proceeds from secured borrowings                        
Repayments on secured borrowings                       (1,200)
Balance as of September 30, 2015  $185,436   $70,107   $59,727   $14,461   $329,731   $2,843 

  

 

(1) Includes purchases of new investments, effects of refinancing and restructurings, premium and discount accretion and amortization and PIK interest.
(2) Represents net proceeds from investments sold and principal paydowns received.

 

 20 

 

 

The total change in unrealized appreciation (depreciation) included in the consolidated statements of operations within net change in unrealized appreciation (depreciation) on investments for the three and nine months ended September 30, 2016, attributable to Level 3 investments still held at September 30, 2016, was ($1,821) and ($377), respectively. The total change in unrealized appreciation (depreciation) included in the consolidated statements of operations within net change in unrealized appreciation (depreciation) on investments for the three and nine months ended September 30, 2015, attributable to Level 3 investments still held at September 30, 2015, was $118 and $560, respectively. The total change in unrealized (appreciation) depreciation included in the consolidated statements of operations within net change in unrealized (appreciation) depreciation on secured borrowings for the three and nine months ended September 30, 2016, attributable to Level 3 investments still held at September 30, 2016, was ($123) and ($36), respectively. The total change in unrealized (appreciation) depreciation included in the consolidated statements of operations within net change in unrealized (appreciation) depreciation on secured borrowings for the three and nine months ended September 30, 2015, attributable to Level 3 investments still held at September 30, 2015, was ($43) and ($35), respectively. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in or out of Level 3 as of the beginning of the period which the reclassifications occur. There were no transfers among Levels 1, 2 and 3 during the three and nine months ended September 30, 2016 and 2015.

 

Significant Unobservable Inputs

 

ASC Topic 820 requires disclosure of quantitative information about the significant unobservable inputs used in the valuation of assets and liabilities classified as Level 3 within the fair value hierarchy. Disclosure of this information is not required in circumstances where a valuation (unadjusted) is obtained from a third-party pricing service and the information regarding the unobservable inputs is not reasonably available to the Company and as such, the disclosures provided below exclude those investments valued in that manner. The tables below are not intended to be all-inclusive, but rather to provide information on significant unobservable inputs and valuation techniques used by the Company.

 

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets and liabilities as of September 30, 2016 were as follows:

  

                 Range 
   Fair Value   Valuation Technique  Unobservable Input  Weighted Mean   Minimum   Maximum 
Assets:                          
Senior secured loans  $199,008   Discounted cash flow  EBITDA multiples   6.3x   2.3x   11.0x
           Market yields   11.6%   6.5%   22.5%
Senior secured loans   1,157   Enterprise value  Revenue multiples   0.5x   0.5x   0.5x
Senior secured loans   6,249   Enterprise value  EBITDA multiples   3.8x   3.3x   4.3x
Unitranche loans   42,370   Discounted cash flow  EBITDA multiples   6.0x   4.5x   8.0x
           Market yields   12.0%   9.0%   19.3%
Unitranche loans   5,359   Enterprise value  EBITDA multiples   6.0x   5.5x   6.5x
Unitranche loans   4,129   Combination of discounted cash flow and enterprise value  EBITDA multiples   5.5x   5.0x   6.0x
           Market yields   33.1%   29.5%   36.7%
Junior secured loans   19,016   Discounted cash flow  EBITDA multiples   7.1x   2.5x   9.5x
           Market yields   10.3%   8.3%   13.0%
Junior secured loans   -   Enterprise value  Revenue multiples   0.5x   0.5x   0.5x
Equity securities   8,150   Discounted cash flow  EBITDA multiples   2.8x   2.5x   3.0x
           Market yields   16.0%   15.0%   17.0%
Equity securities   15,434   Enterprise value  EBITDA multiples   2.9x   0.5x   9.5x
Total Level 3 Assets  $300,872(1)                     
                           
Liabilities:                          
Secured Borrowings  $1,610   Discounted cash flow  Market yields   8.5%   7.8%   9.1%

  

 

(1)Excludes loans of $75,784 at fair value where valuation (unadjusted) is obtained from a third-party pricing service for which such disclosure is not required.

 

 21 

 

 

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets as of December 31, 2015 were as follows:

 

                        Range  
    Fair Value     Valuation Technique   Unobservable Input   Weighted Average     Minimum     Maximum  
Assets:                                        
Senior secured loans   $ 163,078     Discounted cash flow   EBITDA multiples     6.2 x     2.3 x     11.0 x
                Market yields     12.3 %     6.5 %     21.0 %
Senior secured loans     1,182     Enterprise value   Revenue multiples     0.5 x     0.5 x     0.5 x
Unitranche loans     49,620     Discounted cash flow   EBITDA multiples     6.1 x     4.8 x     7.3 x
                Market yields     13.6 %     9.0 %     19.6 %
Unitranche loans     5,358     Combination of discounted cash flow and enterprise value   EBITDA multiples     4.3 x     4.0 x     4.5 x
                Market yields     29.7 %     26.7 %     32.6 %
Unitranche loans     6,526     Enterprise value   EBITDA multiples     3.5 x     3.0 x     4.0 x
Junior secured loans     19,862     Discounted cash flow   EBITDA multiples     6.8 x     3.5 x     9.5 x
                Market yields     12.2 %     10.5 %     13.0 %
Junior secured loans     570     Enterprise value   Revenue multiples     0.5 x     0.5 x     0.5 x
Equity securities     8,345     Discounted cash flow   EBITDA multiples     3.8 x     3.5 x     4.0 x
                Market yields     15.0 %     14.5 %     15.5 %
Equity securities     10,709     Enterprise value   EBITDA multiples     3.3 x     2.3 x     9.5 x
Total Level 3 Assets   $ 265,250 (1)                                
                                         
Liabilities:                                        
Secured borrowings   $ 2,476     Discounted cash flow   Market yields     9.0 %     3.6 %     10.4 %

 

 

(1)Excludes loans of $75,841 at fair value where valuation (unadjusted) is obtained from a third-party pricing service for which such disclosure is not required.

 

The significant unobservable inputs used in the market approach of fair value measurement of the Company’s investments are the market multiples of EBITDA or revenue of the comparable guideline public companies. The Company selects a population of public companies for each investment with similar operations and attributes of the portfolio company. Using these guideline public companies’ data, a range of multiples of enterprise value to EBITDA is calculated. The Company selects percentages from the range of multiples for purposes of determining the portfolio company’s estimated enterprise value based on said multiple and generally the latest twelve months EBITDA of the portfolio company (or other meaningful measure). Significant increases (decreases) in the multiple will result in an increase (decrease) in enterprise value, resulting in an increase (decrease) in the fair value estimate of the investment.

 

The significant unobservable input used in the income approach of fair value measurement of the Company’s investments is the discount rate used to discount the estimated future cash flows expected to be received from the underlying investment, which include both future principal and interest payments. Significant increases (decreases) in the discount rate would result in a decrease (increase) in the fair value estimate of the investment. Included in the consideration and selection of discount rates are the following factors: risk of default, rating of the investment and comparable investments, and call provisions.

 

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, receivables and payables approximate the fair value of such items due to the short maturity of such instruments. Fair value of the Company’s revolving credit facility is estimated by discounting remaining payments using applicable market rates or market quotes for similar instruments at the measurement date, if applicable. The Company believes that the carrying value of its revolving credit facility approximates fair value. SBA-guaranteed debentures are carried at cost and with their longer maturity dates, fair value is estimated by discounting remaining payments using current market rates for similar instruments and considering such factors as the legal maturity date and the ability of market participants to prepay the debentures. As of September 30, 2016 and December 31, 2015, the fair value of the Company’s SBA debentures using Level 3 inputs is estimated at $40,000 and $40,000, respectively, which is the same as the Company’s carrying value of the SBA debentures.

 

 22 

 

  

Note 5. Transactions with Affiliated Companies

 

An affiliated company is a company in which the Company has ownership of 5% or more of its voting securities. A controlled affiliate company is a company in which the Company has ownership of more than 25% of its voting securities. Transactions related to the Company’s investments with affiliates for the nine months ended September 30, 2016 and 2015 were as follows:

 

Portfolio Company  

Fair

value
at
December
31, 2015

    Purchases
(cost)
   

Sales

and
paydowns
(cost)

    PIK
interest
(cost)
    Discount
accretion
    Net
realized
gains/
(losses)
    Net
unrealized
gains/
(losses)
    Fair
value
at
September
30,

2016
    Interest
income
    Dividend
income
 
Non-controlled affiliate company investments (1) :                                                                                
American Community Homes, Inc.   $ 11,692     $ 488     $     $ 153     $ 44     $     $ 1,045     $ 13,422     $ 1,073     $  
Rockdale Blackhawk LLC     21,903       462       (2,187 )           140             3,945       24,263       1,373       3,546  
Rocket Dog Brands LLC     1,752       384       (12     319       7             (1,293 )     1,157       351        
Summit Container Corporation     3,400       137       (141 )     48       20             117       3,581       485        
Total non-controlled affiliate company investments   $ 38,747     $ 1,471     $ (2,340 )   $ 520     $ 211     $     $ 3,814     $ 42,423     $ 3,282     $ 3,546  
Controlled affiliate company investments (1) :                                                                                
TPP Acquisition, Inc.   $ 6,525     $ 4,769