10-Q 1 f10q1220_phenixfincorp.htm QUARTERLY REPORT

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

Form 10-Q

 

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

 

For the Quarterly Period Ended December 31, 2020

 

or

 

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

 

For the transition period from               to              

 

Commission file number: 1-35040

 

PHENIXFIN CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

Delaware   27-4576073
(State or Other Jurisdiction of   (I.R.S. Employer
Incorporation or Organization)   Identification No.)

 

445 Park Avenue, 9th Floor, New York, NY   10022
(Address of Principal Executive Offices)   (Zip Code)

 

(212) 859-0390

(Registrant’s Telephone Number, Including Area Code)

 

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, par value $0.001 per share   PFX   The NASDAQ Global Market
6.125% Notes due 2023   PFXNL   The NASDAQ Global Market

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

 

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

 

Large accelerated filer   Accelerated filer ☐   Non-accelerated filer ☒   Smaller reporting company   Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes No

 

The Registrant had 2,723,709 shares of common stock, $0.001 par value, outstanding as of February 16, 2021.

 

 

 

 

 

PHENIXFIN CORPORATION
(f/k/a Medley Capital Corporation)

 

TABLE OF CONTENTS

 

Part I. Financial Information  
   
Item 1. Financial Statements  
   
Consolidated Statements of Assets and Liabilities as of December 31, 2020 (unaudited) and September 30, 2020 1
   
Consolidated Statements of Operations for the three months ended December 31, 2020 and 2019 (unaudited) 2
   
Consolidated Statements of Changes in Net Assets for the three months ended December 31, 2020 and 2019 (unaudited) 3
   
Consolidated Statements of Cash Flows for the three months ended December 31, 2020 and 2019 (unaudited) 4
   
Consolidated Schedules of Investments as of December 31, 2020 (unaudited) and September 30, 2020 5
   
Notes to Consolidated Financial Statements (unaudited) 14
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 49
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk 66
   
Item 4. Controls and Procedures 66
   
Part II. Other Information  
   
Item 1. Legal Proceedings 67
   
Item 1A. Risk Factors 68
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 72
   
Item 3. Defaults Upon Senior Securities 72
   
Item 4. Mine Safety Disclosures 72
   
Item 5. Other Information 72
   
Item 6. Exhibits 73
   
SIGNATURES 77

 

i

 

 

PHENIXFIN CORPORATION (f/k/a Medley Capital Corporation)

Consolidated Statements of Assets and Liabilities

 

   December 31,
2020
(Unaudited)
   September 30,
2020
 
Assets:        
Investments at fair value        
Non-controlled, non-affiliated investments (amortized cost of $90,542,838 and $117,360,954, respectively)  $83,446,768   $114,321,948 
Affiliated investments (amortized cost of $80,340,191 and $92,898,755, respectively)   70,196,136    84,873,023 
Controlled investments (amortized cost of $37,987,321 and $117,874,821, respectively)   5,898,013    47,548,578 
Total Investments at fair value   159,540,917    246,743,549 
Cash and cash equivalents   62,414,223    56,522,148 
Receivables:          
Interest receivable   238,814    624,524 
Fees receivable   106,528    119,028 
Other assets   1,675,933    2,093,559 
Total Assets  $223,976,415   $306,102,808 
           
Liabilities:          
Notes payable (net of debt issuance costs of $619,167 and $905,624, respectively)  $77,227,633   $150,960,662 
Interest and fees payable   -    801,805 
Due to affiliates   -    53,083 
Management and incentive fees payable (see Note 6)   1,146,403    1,392,022 
Administrator expenses payable (see Note 6)   484,412    156,965 
Accounts payable and accrued expenses   900,851    2,108,225 
Deferred revenue   35,450    10,529 
Total Liabilities   79,794,749    155,483,291 
           
Guarantees and Commitments (see Note 8)          
           
Net Assets:          
Common Shares, $0.001 par value; 5,000,000 shares authorized; 2,723,709 and 2,723,709          
common shares issued and outstanding, respectively   2,724    2,724 
Capital in excess of par value   672,381,617    672,381,617 
Total distributable earnings/(loss)   (528,202,675)   (521,764,824)
Total Net Assets  144,181,666   150,619,517 
Total Liabilities and Net Assets  $223,976,415   $306,102,808 
           
Net Asset Value Per Common Share  $52.94   $55.30 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

1

 

 

PHENIXFIN CORPORATION (f/k/a Medley Capital Corporation)

Consolidated Statements of Operations

(Unaudited)

 

   For the Three Months Ended 
   December 31,
2020
   December 31,
2019
 
Interest Income:        
Interest from investments        
Non-controlled, non-affiliated investments:        
Cash  $1,671,813   $3,217,709 
Payment in-kind   170,029    199,012 
Affiliated investments:          
Cash   352,291    209,248 
Payment in-kind   -    947,473 
Controlled investments:          
Cash   1,190    83,208 
Payment in-kind   -    495,382 
Total interest income   2,195,323    5,152,032 
Dividend income   10,263,501    1,837,500 
Interest from cash and cash equivalents   940    218,138 
Fee income (see Note 9)   341,464    283,540 
Total Investment Income   12,801,228    7,491,210 
           
Expenses:          
Base management fees (see Note 6)   1,146,403    2,008,234 
Incentive fees (see Note 6)   -    - 
Interest and financing expenses   2,017,641    5,143,929 
General and administrative expenses   377,934    516,842 
Administrator expenses (see Note 6)   484,412    551,522 
Insurance expenses   485,012    297,998 
Directors fees   475,717    316,000 
Professional fees, net (see Note 8)   (515,622)   (4,416,075)
Total expenses net of expense support reimbursement   4,471,497    4,418,450 
Net Investment Income   8,329,731    3,072,760 
           
Realized and unrealized gains (losses) on investments          
Net realized gains/(losses):          
Non-controlled, non-affiliated investments   3,893,722    (57,799)
Affiliated investments   (10,452,928)   - 
Controlled investments   (40,147,570)   (1,686,837)
Total net realized gains/(losses)   (46,706,776)   (1,744,636)
Net change in unrealized gains/(losses):          
Non-controlled, non-affiliated investments   (4,057,063)   3,747,374 
Affiliated investments   (2,118,324)   9,440,599 
Controlled investments   38,236,935    (9,457,114)
Total net change in unrealized gains/(losses)   32,061,548    3,730,859 
Loss on extinguishment of debt (see Note 5)   (122,354)   (889,150)
Total realized and unrealized gains/(losses)   (14,767,582)   1,097,073 
           
Net Increase/(Decrease) in Net Assets Resulting from Operations  $(6,437,851)  $4,169,833 
           
Weighted Average Basic and diluted earnings per common share  $(2.36)  $1.53 
Weighted Average Basic and diluted net investment income/(loss) per common share  $3.06   $1.13 
Weighted Average Common Shares Outstanding - Basic and Diluted (see Note 11)   2,723,709    2,723,709(1)

 

(1)Basic and diluted shares has been adjusted for 2019 to reflect the one-for-twenty reverse stock split effected on July 24, 2020 on a retroactive basis, as described in Note 1.

 

The accompanying notes are an integral part of these consolidated financial statements.

 

2

 

 

PHENIXFIN CORPORATION (f/k/a Medley Capital Corporation)

Consolidated Statements of Changes in Net Assets

(Unaudited)

 

   Common Stock         
   Shares   Par Amount   Capital in
Excess of
Par Value
   Total
Distributable
Earnings/(Loss)
   Total Net Assets 
Balance at September 30, 2020   2,723,709   $2,724   $672,381,617   $(521,764,824)  $150,619,517 
                          
OPERATIONS                         
Net investment income (loss)   -    -    -    8,329,731    8,329,731 
Net realized gains (losses) on investments   -    -    -    (46,706,776)   (46,706,776)
Net change in unrealized appreciation (depreciation) on investments   -    -    -    32,061,548    32,061,548 
Net loss on extinguishment of debt   -    -    -    (122,354)   (122,354)
Total Increase (Decrease) in Net Assets   -    -    -    (6,437,851)   (6,437,851)
                          
Balance at December 31, 2020   2,723,709   $2,724   $672,381,617   $(528,202,675)  $144,181,666 

 

   Common Stock         
           Capital in
Excess of
   Total
Distributable
   Total Net 
   Shares(1)   Par Amount   Par Value   Earnings/(Loss)   Assets 
                     
Balance at September 30, 2019   2,723,709   $54,474   $673,532,717   $(457,154,661)  $216,432,530 
                          
OPERATIONS                         
Net investment income/(loss)               3,072,760    3,072,760 
Net realized gain/(loss) from investments               (1,744,636)   (1,744,636)
Net unrealized appreciation/(depreciation) on investments               3,730,859    3,730,859 
Net loss on extinguishment of debt               (889,150)   (889,150)
Total increase/(decrease) in net assets               4,169,833    4,169,833 
                          
Balance at December 31, 2019   2,723,709   $54,474   $673,532,717   $(452,984,828)  $220,602,363 

 

(1)Shares of Common Stock have been adjusted for the periods shown to reflect the one-for-twenty reverse stock split effected on July 24, 2020 on a retroactive basis, as described in Note 1.

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3

 

 

PHENIXFIN CORPORATION (f/k/a Medley Capital Corporation)

Consolidated Statements of Cash Flows

(Unaudited)

 

   For the Three Months Ended 
   December 31,
2020
   December 31,
2019
 
         
Cash Flows from Operating Activities:        
Net increase/(decrease) in net assets resulting from operations  $(6,437,851)  $4,169,833 
Adjustments to reconcile net increase/(decrease) in net assets resulting from operations to net cash provided by/(used in) operating activities:          
Investment increases due to payment-in-kind interest   (170,029)   (564,730)
Net amortization of premium/(discount) on investments   -    (31,158)
Amortization of debt issuance cost   157,441    1,249,907 
Net realized (gains)/losses on investments   46,706,776    1,744,636 
Net unrealized (gains)/losses on investments   (32,061,548)   (3,730,859)
Proceeds from sale and settlements of investments   74,062,744    64,999,855 
Purchases, originations and participations   (1,335,311)   (7,532,846)
Loss on extinguishment of debt   122,354    889,150 
(Increase)/decrease in operating assets:          
Other assets   417,626    (3,163,613)
Interest receivable   385,710    371,543 
Receivable for dispositions and investments sold   -    (212,517)
Fees receivable   12,500    56,543 
Increase/(decrease) in operating liabilities:          
Accounts payable and accrued expenses   (1,207,374)   (8,890,759)
Interest and fees payable   (801,805)   (2,102,943)
Management and incentive fees payable, net   (245,619)   (222,941)
Administrator expenses payable   327,447    (310,263)
Deferred revenue   24,921    (25,593)
Due to affiliate   (53,083)   167,743 
Net cash provided by/(used in) operating activities   79,904,899    46,860,988 
Cash Flows from Financing Activities:          
Paydowns on debt   (74,151,822)   (49,407,674)
Debt issuance costs paid   138,998    - 
Net cash provided by/(used in) financing activities   (74,012,824)   (49,407,674)
Net increase/(decrease) in cash and cash equivalents   5,892,075    (2,546,686)
Cash and cash equivalents, beginning of period   56,522,148    84,283,903 
Cash and cash equivalents, end of period  $62,414,223   $81,737,217 
           
Supplemental information:          
Interest paid during the period  $2,819,446   $5,996,965 
           
Supplemental non-cash information:          
Payment-in-kind interest income  $170,029   $1,641,867 

  

The accompanying notes are an integral part of these consolidated financial statements.

  

4

 

 

PHENIXFIN CORPORATION (f/k/a Medley Capital Corporation)

Consolidated Schedule of Investments

As of December 31, 2020

(Unaudited)

 

Company(1)  Industry  Type of Investment  Maturity  Par
Amount(2)
   Cost(3)   Fair
Value(4)
   % of
Net Assets(5)
 
                          
Non-Controlled/Non-Affiliated Investments:                   
                          
Alpine SG, LLC  High Tech Industries  Senior Secured First Lien Term Loan (LIBOR + 5.75% Cash, 1.00% LIBOR Floor)(13)  11/16/2022  $4,715,809   $4,715,808   $4,680,440    3.25%
      Senior Secured Incremental First Lien Term Loan (LIBOR + 8.50% Cash, 1.00% LIBOR Floor)(13)  11/16/2022   472,087    472,087    472,086    0.33%
      Senior Secured First Lien Delayed Draw Term Loan (LIBOR + 5.75% Cash, 1.00% LIBOR Floor)(13)  11/16/2022   2,277,293    2,277,293    2,260,212    1.57%
      Revolving Credit Facility (LIBOR + 5.75% Cash, 1.00% LIBOR Floor)(13)(15)  11/15/2022   1,000,000    1,000,000    992,500    0.69%
             8,465,189    8,465,188    8,405,238    5.83%
                              
American Dental Partners, Inc.  Healthcare & Pharmaceuticals  Senior Secured Second Lien Term Loan (LIBOR + 8.50% Cash, 1.00% LIBOR Floor)(13)  9/25/2023   4,387,500    4,387,500    4,212,000    2.92%
             4,387,500    4,387,500    4,212,000    2.92%
                              
Autosplice, Inc.  High Tech Industries  Senior Secured First Lien Term Loan (LIBOR + 8.00% Cash, 1.00% LIBOR Floor)(13)  12/17/2021   12,409,903    12,409,903    10,151,301    7.04%
             12,409,903    12,409,903    10,151,301    7.04%
                              
Avantor, Inc.(11)  Wholesale  Equity - 545,931 Common Units(16)      13,695    239,663    385,514    0.27%
             13,695    239,663    385,514    0.27%
                              
Be Green Packaging, LLC  Containers, Packaging & Glass  Equity - 417 Common Units      1    416,250    -    0.00%
             1    416,250    -    0.00%
                              
CM Finance SPV, LLC  Banking, Finance, Insurance & Real Estate  Unsecured Debt      101,463    101,463    -    0.00%
             101,463    101,463    -    0.00%
                              
CPI International, Inc.  Aerospace & Defense  Senior Secured Second Lien Term Loan (LIBOR + 7.25% Cash, 1.00% LIBOR Floor)(12)  7/28/2025   2,607,062    2,598,252    2,447,510    1.70%
             2,607,062    2,598,252    2,447,510    1.70%
                              
Crow Precision Components, LLC  Aerospace & Defense  Equity - 350 Common Units      350    700,000    370,941    0.26%
             350    700,000    370,941    0.26%
                              
DataOnline Corp.(8)  High Tech Industries  Senior Secured First Lien Term Loan (LIBOR + 6.25% Cash, 1.00% LIBOR Floor)(13)  11/13/2025   4,950,000    4,950,000    4,801,500    3.33%
      Revolving Credit Facility  (LIBOR + 6.25% Cash, 1.00% LIBOR Floor)(13)(15)  11/13/2025   607,143    607,143    501,325    0.35%
             5,557,143    5,557,143    5,302,825    3.68%
                              
Dream Finders Homes, LLC(11)  Construction & Building  Preferred Equity  (8.00% PIK)      4,622,101    4,622,101    4,252,333    2.95%
             4,622,101    4,622,101    4,252,333    2.95%
                              
Footprint Acquisition, LLC  Services: Business  Preferred Equity  (8.75% PIK)(10)      4,049,398    4,049,398    2,024,699    1.40%
      Equity - 150 Common Units      150    -    -    0.00%
             4,049,548    4,049,398    2,024,699    1.40%
                              
Global Accessories Group, LLC  Consumer goods: Non-durable  Equity - 3.8% Membership Interest(12)      380    151,337    -    0.00%
             380    151,337    -    0.00%

5

 

 

Company(1)  Industry  Type of Investment  Maturity  Par
Amount(2)
   Cost(3)   Fair
Value(4)
   % of
Net Assets(5)
 
Impact Group, LLC  Services: Business  Senior Secured First Lien Term Loan (LIBOR + 7.37% Cash, 1.00% LIBOR Floor)(13)  6/27/2023   3,211,299    3,211,299    3,118,171    2.16%
      Senior Secured First Lien Delayed Draw Term Loan  (LIBOR + 7.37% Cash, 1.00%
LIBOR Floor)(13)
  6/27/2023   9,305,067    9,305,067    9,035,220    6.27%
             12,516,366    12,516,366    12,153,391    8.43%
                              
InterFlex Acquisition Company, LLC  Containers, Packaging & Glass  Senior Secured First Lien Term Loan (LIBOR + 9.00% Cash, 1.00% LIBOR Floor)(12)  8/18/2022   11,910,906    11,910,906    11,910,906    8.26%
             11,910,906    11,910,906    11,910,906    8.26%
                              
Lighting Science Group Corporation  Containers, Packaging & Glass  Warrants - 0.62% of Outstanding Equity      5,000,000    955,680    -    0.00%
             5,000,000    955,680    -    0.00%
                              
Point.360  Services: Business  Senior Secured First Lien Term Loan (LIBOR + 6.00% PIK)(10)(14)(20)  7/8/2020   2,777,366    2,103,712    -    0.00%
             2,777,366    2,103,712    -    0.00%
                              
RateGain Technologies, Inc.  Hotel, Gaming & Leisure  Unsecured Debt(10)(19)  12/31/2021   704,106    704,106    -    0.00%
      Unsecured Debt(10)(19)  6/30/2022   761,905    761,905    -    0.00%
             1,466,011    1,466,011    -    0.00%
                              
Redwood Services Group, LLC(8)  Services: Business  Revolving Credit Facility  (LIBOR + 6.00% Cash, 1.00%
LIBOR Floor)(15)
  6/6/2023   175,000    175,000    169,750    0.12%
             175,000    175,000    169,750    0.12%
                              
Sendero Drilling Company, LLC  Energy: Oil & Gas  Unsecured Debt  (8.00% Cash)(10)  8/31/2021   403,750    384,394    -    0.00%
             403,750    384,394    -    0.00%
                              
Seotowncenter, Inc.  Services: Business  Equity - 3,434,169.6 Common Units      3,434,170    566,475    -    0.00%
             3,434,170    566,475    -    0.00%
                              
SFP Holding, Inc.  Construction & Building  Senior Secured First Lien Term Loan (LIBOR + 6.25% Cash, 1.00% LIBOR Floor)(13)  9/1/2022   4,766,041    4,766,041    4,718,381    3.27%
      Senior Secured First Lien Delayed Draw Term Loan  (LIBOR + 6.25% Cash, 1.00%
LIBOR Floor)(13)
  9/1/2022   1,847,843    1,847,843    1,829,365    1.27%
      Equity - 101,165.93 Common Units in CI (Summit) Investment Holdings LLC      101,166    1,067,547    708,264    0.49%
             6,715,050    7,681,431    7,256,010    5.03%
                              
SMART Financial Operations, LLC  Retail  Equity - 700,000 Class A Preferred Units      700,000    700,000    -    0.00%
             700,000    700,000    -    0.00%
                              
Stancor, Inc.  Services: Business  Equity - 263,814.43 Class A Units      263,814    263,814    168,703    0.12%
             263,814    263,814    168,703    0.12%
                              
Starfish Holdco, LLC  High Tech Industries  Senior Secured Second Lien Term Loan (LIBOR + 9.00% Cash, 1.00% LIBOR Floor)(12)(17)  8/18/2025   1,000,000    989,936    926,500    0.64%
             1,000,000    989,936    926,500    0.64%
                              
                              
Velocity Pooling Vehicle, LLC  Automotive  Senior Secured First Lien Term Loan (LIBOR + 11.00% PIK, 1.00% LIBOR Floor)(13)  4/28/2023   1,014,440    951,629    1,014,440    0.70%
      Equity - 5,441 Class A Units      5,441    302,464    21,262    0.01%
      Warrants - 0.65% of Outstanding Equity   3/30/2028   6,506    361,667    25,423    0.02%
             1,026,387    1,615,760    1,061,125    0.74%
                              
Walker Edison Furniture Company LLC  Consumer goods: Durable  Senior Secured First Lien Term Loan (LIBOR + 6.25% Cash, 1.00% LIBOR Floor)(13)  9/26/2024   3,496,872    3,496,872    3,496,872    2.43%
      Equity - 1,500 Common Units      1,500    1,500,000    8,751,150    6.07%
             3,498,372    4,996,872    12,248,022    8.49%
                              
Watermill-QMC Midco, Inc.  Automotive  Equity - 1.3% Partnership Interest(9)      518,283    518,283    -    0.00%
             518,283    518,283    -    0.00%
                              
Subtotal Non-Controlled/Non-Affiliated Investments           $93,619,810   $90,542,838   $83,446,768    57.88%

 

6

 

 

Company(1)  Industry  Type of Investment  Maturity  Par
Amount(2)
   Cost(3)   Fair
Value(4)
   % of
Net Assets(5)
 
Affiliated Investments:(6)                      
                          
1888 Industrial Services, LLC(8)  Energy: Oil & Gas  Senior Secured First Lien Term Loan A  (LIBOR + 5.00% PIK, 1.00% LIBOR Floor)(10)(13)  9/30/2021   9,946,740    9,473,066    -    0.00%
      Senior Secured First Lien Term Loan B (LIBOR + 8.00% PIK, 1.00% LIBOR Floor)(10)(13)  9/30/2021   25,937,520    19,468,870    -    0.00%
      Senior Secured First Lien Term Loan C (LIBOR + 5.00%, 1.00% LIBOR Floor)(10)(13)  9/30/2021   1,231,932    1,191,257    1,231,932    0.85%
      Revolving Credit Facility  (LIBOR +5.00% PIK, 1.00% LIBOR Floor)(13)(15)  9/30/2021   3,554,069    3,554,069    3,554,069    2.46%
      Equity - 17,493.63 Class A Units      21,562    -    -    0.00%
             40,691,823    33,687,262    4,786,001    3.32%
                              
Black Angus Steakhouses, LLC(8)  Hotel, Gaming & Leisure  Senior Secured First Lien Delayed Draw Term Loan (LIBOR + 9.00% Cash, 1.00% LIBOR Floor)(12)  6/30/2022   758,929    758,929    758,929    0.53%
      Senior Secured First Lien Term Loan (LIBOR + 9.00% PIK, 1.00%
LIBOR Floor)(10)(12)
  6/30/2022   8,412,596    7,767,533    2,355,527    1.63%
      Senior Secured First Lien Super Priority DDTL (LIBOR + 9.00% Cash, 1.00%
LIBOR Floor)(10)(12)(15)
  6/30/2022   1,222,222    1,222,222    1,222,222    0.85%
             10,393,747    9,748,684    4,336,678    3.01%
                              
Caddo Investors Holdings 1 LLC(11)  Forest Products & Paper  Equity - 6.15% Membership Interest(18)      2,528,826    2,528,826    3,197,865    2.22%
             2,528,826    2,528,826    3,197,865    2.22%
                              
Dynamic Energy Services International LLC  Energy: Oil & Gas  Senior Secured First Lien Term Loan (LIBOR + 13.50% PIK)(10)(14)  12/31/2021   12,930,235    7,824,975    129,302    0.09%
      Equity - 12,350,000 Class A Units      12,350,000    -    -    0.00%
             25,280,235    7,824,975    129,302    0.09%
                              
JFL-NGS Partners, LLC  Construction & Building  Equity - 57,300 Class B Units      57,300    57,300    34,311,462    23.80%
             57,300    57,300    34,311,462    23.80%
                              
JFL-WCS Partners, LLC  Environmental Industries  Preferred Equity - Class A Preferred (6.00% PIK)      1,310,649    1,310,649    1,290,857    0.90%
      Equity - 129,588 Class B Units      129,588    129,588    5,308,937    3.68%
             1,440,237    1,440,237    6,599,794    4.58%
                              
Kemmerer Operations, LLC(8)  Metals & Mining  Senior Secured First Lien Term Loan (15.00% PIK)  6/21/2023   2,051,705    2,051,705    2,051,705    1.42%
      Senior Secured First Lien Delayed Draw Term Loan (15.00% PIK)(15)  6/21/2023   380,106    380,106    380,106    0.26%
      Equity - 6.7797 Common Units      7    962,717    26,465    0.02%
             2,431,818    3,394,528    2,458,276    1.70%
                              
Path Medical, LLC  Healthcare & Pharmaceuticals  Senior Secured First Lien Term Loan A  (LIBOR + 9.50% Cash, 1.00% LIBOR Floor)(12)  10/11/2021   5,905,080    5,905,080    5,792,883    4.02%
      Senior Secured First Lien Term Loan B  (LIBOR + 13% PIK, 1.00% LIBOR Floor)(10)(12)  10/11/2021   7,783,840    6,599,918    2,319,584    1.61%
      Warrants - 7.68% of Outstanding Equity      123,867    499,751    -    0.00%
             13,812,787    13,004,749    8,112,467    5.63%
                              
URT Acquisition Holdings Corporation  Services: Business  Unsecured Debt  (10.00% PIK) Warrants  12/4/2024   2,109,589    2,109,589    2,119,627    1.47%
            28,912    -    -    0.00%
             2,138,501    2,109,589    2,119,627    1.47%
                              
US Multifamily, LLC   Banking, Finance, Insurance & Real Estate  Senior Secured First Lien Term Loan (10.00% Cash)  6/17/2021   3,214,041    3,214,041    3,214,041    2.23%
      Equity - 33,300 Preferred Units(11)      33,300    3,330,000    930,623    0.65%
             3,247,341    6,544,041    4,144,664    2.87%
                              
Subtotal Affiliated Investments           $102,022,615   $80,340,191   $70,196,136    48.69%

 

7

 

 

Company(1)  Industry  Type of Investment  Maturity  Par
Amount(2)
   Cost(3)   Fair
Value(4)
   % of
Net Assets(5)
 
Controlled Investments:(7)                      
                          
NVTN LLC(8)  Hotel, Gaming & Leisure  Senior Secured First Lien Delayed Draw Term Loan  (LIBOR + 4.00%Cash, 1.00%
LIBOR Floor)(10)(12)(15)
  11/9/2021   6,565,875    6,565,875    4,038,013    2.80%
      Senior Secured First Lien Super Priority DDTL (LIBOR + 4.00% Cash, 1.00%
LIBOR Floor)(12)(15)
  12/31/2024   2,000,000    1,995,374    1,860,000    1.29%
      Senior Secured First Lien Term Loan B  (LIBOR + 9.25% PIK, 1.00% LIBOR Floor)(10)(12)  11/9/2021   14,963,195    12,305,096    -    0.00%
      Senior Secured First Lien Term Loan C (LIBOR + 12.00% PIK, 1.00% LIBOR Floor)(10)(12)  11/9/2021   10,014,223    7,570,054    -    0.00%
      Equity - 787.4 Class A Units      9,550,922    9,550,922    -    0.00%
             43,094,215    37,987,321    5,898,013    4.09%
Subtotal Control Investments           $43,094,215   $37,987,321   $5,898,013    4.09%
                              
   Total Investments, December 31, 2020        $238,736,640   $208,870,350   $159,540,917    110.65%

 

(1)All of our investments are domiciled in the United States. Certain investments also have international operations.
(2)Par amount includes accumulated payment-in-kind (“PIK”) interest, as applicable, and is net of repayments.
(3)Gross unrealized appreciation, gross unrealized depreciation, and net unrealized depreciation for U.S. federal income tax purposes totaled $47,613,076, $96,942,509, and $49,329,433, respectively.

The tax cost basis of investments is $208,870,350 as of December 31, 2020.

(4)Unless otherwise indicated, all securities are valued using significant unobservable inputs, which are categorized as Level 3 assets under the definition of ASC 820 fair value hierarchy (see Note 4).
(5)Percentage is based on net assets of $144,181,666 as of December 31, 2020.
(6)Affiliated Investments are defined by the 1940 Act as investments in companies in which the Company owns between 5% and 25% outstanding voting securities or is under common control with such portfolio company.
(7)Control Investments are defined by the Investment Company Act of 1940, as amended (the “1940 Act”), as investments in companies in which the Company owns more than 25% of the voting securities or maintains greater than 50% of the board representation.
(8)The investment has an unfunded commitment as of December 31, 2020 (see Note 8), and includes an analysis of the value of any unfunded commitments.
(9)Represents 1.3% partnership interest in Watermill-QMC Partners, LP and Watermill-EMI Partners, LP.
(10)The investment was on non-accrual status as of December 31, 2020.
(11)The investment is not a qualifying asset as defined under Section 55(a) of 1940 Act, in a whole, or in part. As of December 31, 2020, 5.49% of the Company’s portfolio investments were non-qualifying assets.
(12)The interest rate on these loans is subject to the greater of a London Interbank Offering Rate (“LIBOR”) floor, or 1 month LIBOR plus a base rate. The 1 month LIBOR as of December 31, 2020 was 0.14%.
(13)The interest rate on these loans is subject to the greater of a LIBOR floor, or 3 month LIBOR plus a base rate. The 3 month LIBOR as of December 31, 2020 was 0.24%.
(14)The interest rate on these loans is subject to 3 month LIBOR plus a base rate. The 3 month LIBOR as of December 31, 2020 was 0.24%.
(15)This investment earns 0.50% commitment fee on all unused commitment as of December 31, 2020, and is recorded as a component of interest income on the Consolidated Statements of Operations.
(16)This investment represents a Level 1 security in the ASC 820 table as of December 31, 2020 (see Note 4).
(17)This investment represents a Level 2 security in the ASC 820 table as of December 31, 2020 (see Note 4).
(18)As a practical expedient, the Company uses net asset value (“NAV”) to determine the fair value of this investment.
(19)Security is non-income producing.
(20)The investment was past due as of December 31, 2020.

 

The accompanying notes are an integral part of these consolidated financial statements.

 

8

 

 

PHENIXFIN CORPORATION (f/k/a Medley Capital Corporation)

Consolidated Schedule of Investments

September 30, 2020

 

Company(1)  Industry  Type of Investment  Maturity  Par Amount(2)   Cost(3)   Fair Value(6)   % of
Net Assets(4)
 
                          
Non-Controlled/Non-Affiliated Investments:                   
                          
Alpine SG, LLC  High Tech Industries  Senior Secured First Lien Term Loan (LIBOR + 5.75% Cash, 1.00% LIBOR Floor)(13)  11/16/2022   4,715,809    4,715,809    4,466,815    3.0%
      Senior Secured Incremental First Lien Term Loan (LIBOR + 8.50% Cash, 1.00% LIBOR Floor)(13)  11/16/2022   472,087    472,087    472,087    0.3%
      Senior Secured First Lien Delayed Draw Term Loan (LIBOR + 5.75% Cash, 1.00% LIBOR Floor)(13)  11/16/2022   2,277,293    2,277,293    2,157,052    1.4%
      Revolving Credit Facility (LIBOR + 5.75% Cash, 1.00% LIBOR Floor)(13)(15)  11/16/2022   1,000,000    1,000,000    947,200    0.6%
             8,465,189    8,465,189    8,043,154      
                              
American Dental Partners, Inc.  Healthcare & Pharmaceuticals  Senior Secured Second Lien Term Loan (LIBOR + 8.50% Cash, 1.00% LIBOR Floor)(13)  9/25/2023   4,387,500    4,387,500    3,948,750    2.6%
             4,387,500    4,387,500    3,948,750      
                              
Autosplice, Inc.  High Tech Industries  Senior Secured First Lien Term Loan (LIBOR + 8.00% Cash, 1.00% LIBOR Floor)(13)  12/17/2021   12,780,349    12,780,349    11,898,505    7.9%
             12,780,349    12,780,349    11,898,505      
                              
Avantor, Inc.(10)  Wholesale  Equity - 545,931 Common Units(16)          9,553,793    12,277,988    8.2%
                 9,553,793    12,277,988      
                              
Be Green Packaging, LLC  Containers, Packaging & Glass  Equity - 417 Common Units          416,250        0.0%
                 416,250          
                              
CM Finance SPV, LLC  Banking, Finance, Insurance & Real Estate  Unsecured Debt  6/24/2021   101,463    101,463    101,463    0.1%
             101,463    101,463    101,463      
                              
CPI International, Inc.  Aerospace & Defense  Senior Secured Second Lien Term Loan (LIBOR + 7.25% Cash, 1.00% LIBOR Floor)(12)  7/28/2025   2,607,062    2,598,252    2,219,392    1.5%
             2,607,062    2,598,252    2,219,392      
                              
Crow Precision Components, LLC  Aerospace & Defense  Equity - 350 Common Units          700,000    723,131    0.5%
                 700,000    723,131      
                              
CT Technologies Intermediate Holdings, Inc.(11)  Healthcare & Pharmaceuticals  Senior Secured Second Lien Term Loan (LIBOR + 9.00% Cash, 1.00% LIBOR Floor)(13)  12/1/2022   7,500,000    7,500,000    6,832,500    4.5%
             7,500,000    7,500,000    6,832,500      
                              
DataOnline Corp.(7)  High Tech Industries  Senior Secured First Lien Term Loan (LIBOR + 6.25% Cash, 1.00% LIBOR Floor)(13)  11/13/2025   4,962,500    4,962,500    4,786,331    3.2%
      Revolving Credit Facility (LIBOR + 6.25% Cash, 1.00% LIBOR Floor)(13)(15)  11/13/2025   535,714    535,714    510,357    0.3%
             5,498,214    5,498,214    5,296,688      
                              
Dream Finders Homes, LLC  Construction & Building  Preferred Equity (8.00% PIK)      4,531,472    4,531,472    3,928,786    2.6%
             4,531,472    4,531,472    3,928,786      

 

9

 

 

Company(1)  Industry  Type of Investment  Maturity  Par Amount(2)   Cost(3)   Fair Value(6)   % of
Net Assets(4)
 
                          
Footprint Acquisition, LLC  Services: Business  Preferred Equity (8.75% PIK)      3,969,998    3,969,998    3,969,998    2.6%
      Equity - 150 Common Units              1,960,830    1.3%
             3,969,998    3,969,998    5,930,828      
                              
Global Accessories Group, LLC(11)  Consumer goods: Non-durable  Equity - 3.8% Membership Interest          151,337        0.0%
                 151,337          
                              
Impact Group, LLC  Services: Business  Senior Secured First Lien Term Loan (LIBOR + 7.37% Cash, 1.00% LIBOR Floor)(13)  6/27/2023   3,219,964    3,219,964    2,994,565    2.0%
      Senior Secured First Lien Delayed Draw Term Loan (LIBOR + 7.37% Cash, 1.00% LIBOR Floor)(13)  6/27/2023   9,330,056    9,330,056    8,676,952    5.8%
             12,550,020    12,550,020    11,671,517     
                              
InterFlex Acquisition Company, LLC  Containers, Packaging & Glass  Senior Secured First Lien Term Loan (LIBOR + 9.00% Cash, 1.00% LIBOR Floor)(12)  8/18/2022   12,098,406    12,098,406    11,987,100    8.0%
             12,098,406    12,098,406    11,987,100      
                              
Lighting Science Group Corporation  Containers, Packaging & Glass  Warrants - 0.62% of Outstanding Equity(17)  2/19/2024       955,680        0.0%
                 955,680          
                              
Manna Pro Products, LLC  Consumer goods: Non-durable  Senior Secured First Lien Term Loan (LIBOR + 6.00% Cash, 1.00% LIBOR Floor)(12)  12/8/2023   5,343,674    5,343,674    5,123,515    3.4%
      Senior Secured First Lien Delayed Draw Term Loan (LIBOR + 6.00% Cash, 1.00% LIBOR Floor)(12)  12/8/2023   1,085,219    1,085,219    1,040,508    0.7%
             6,428,893    6,428,893    6,164,023      
                              
Point.360  Services: Business  Senior Secured First Lien Term Loan (LIBOR + 6.00% PIK)(9) (14)(21)  7/8/2020   2,777,366    2,103,712    186,083    0.1%
             2,777,366    2,103,712    186,083      
                              
RateGain Technologies, Inc.  Hotel, Gaming & Leisure  Unsecured Debt(18)  7/31/2020   704,106    704,106        0.0%
      Unsecured Debt(18)  7/31/2021   761,905    761,905        0.0%
             1,466,011    1,466,011          
                              
Redwood Services Group, LLC(7)  Services: Business  Revolving Credit Facility (LIBOR + 6.00% Cash, 1.00% LIBOR Floor)(12 )(15)  6/6/2023   700,000    700,000    647,500    0.4%
             700,000    700,000    647,500      
                              
Sendero Drilling Company, LLC  Energy: Oil & Gas  Unsecured Debt (8.00% Cash)(9)  8/31/2021   488,750    465,319        0.0%
             488,750    465,319          
                              
Seotowncenter, Inc.  Services: Business  Equity - 3,434,169.6 Common Units          566,475    686,834    0.5%
                 566,475    686,834      
                              
SFP Holding, Inc.  Construction & Building  Senior Secured First Lien Term Loan (LIBOR + 6.25% Cash, 1.00% LIBOR Floor)(13)  9/1/2022   4,776,955    4,776,955    4,733,962    3.1%
      Senior Secured First Lien Delayed Draw Term Loan (LIBOR + 6.25% Cash, 1.00% LIBOR Floor)(13)  9/1/2022   1,852,522    1,852,522    1,835,850    1.2%
      Equity - 101,165.93 Common Units in CI (Summit) Investment Holdings LLC          1,067,546    657,578    0.4%
             6,629,477    7,697,023    7,227,390      

 

10

 

 

Company(1)  Industry  Type of Investment  Maturity  Par Amount(2)   Cost(3)   Fair Value(6)   % of
Net Assets(4)
 
                          
SMART Financial Operations, LLC  Retail  Equity - 700,000 Class A Preferred Units          700,000    343,000    0.2%
                 700,000    343,000      
                              
Stancor, Inc.  Services: Business  Equity - 263,814.43 Class A Units          263,814    150,374    0.1%
                 263,814    150,374      
                              
Starfish Holdco, LLC  High Tech Industries  Senior Secured Second Lien Term Loan (LIBOR + 9.00% Cash, 1.00% LIBOR Floor)(12)  8/18/2025   1,000,000    989,935    926,500    0.6%
             1,000,000    989,935    926,500     
                              
URT Acquisition Holdings Corporation  Services: Business  Unsecured Debt (10.00% PIK)  6/23/2021   2,567,929    2,567,929    2,567,929    1.7%
             2,567,929    2,567,929    2,567,929      
                              
Velocity Pooling Vehicle, LLC  Automotive  Senior Secured First Lien Term Loan (LIBOR + 11.00% PIK, 1.00% LIBOR Floor)(13)  4/28/2023   1,014,440    951,628    1,014,440    0.7%
      Equity - 5,441 Class A Units          302,464    12,841    0.0%
      Warrants - 0.65% of Outstanding Equity  3/30/2028       361,667    15,354    0.0%
             1,014,440    1,615,759    1,042,635      
                              
Walker Edison Furniture Company LLC  Consumer goods: Durable  Senior Secured First Lien Term Loan (LIBOR + 6.25% Cash, 1.00% LIBOR Floor)(13)  9/26/2024   3,519,878    3,519,878    3,519,878    2.3%
      Equity - 1,500 Common Units          1,500,000    6,000,000    4.0%
             3,519,878    5,019,878    9,519,878      
                              
Watermill-QMC Midco, Inc.  Automotive  Equity - 1.3% Partnership Interest(8)          518,283        0.0%
                 518,283          
                              
Subtotal Non-Controlled/Non-Affiliated Investments  $101,082,417   $117,360,954   $114,321,948      
                              
Affiliated Investments:(20)                       
                              
1888 Industrial Services, LLC(7)  Energy: Oil & Gas  Senior Secured First Lien Term Loan A (LIBOR + 5.00% PIK, 1.00% LIBOR Floor)(9)(13)  9/30/2021   9,946,741    9,473,067        0.0%
      Senior Secured First Lien Term Loan B (LIBOR + 8.00% PIK, 1.00% LIBOR Floor)(9)(13)  9/30/2021   25,937,520    19,468,870        0.0%
      Senior Secured First Lien Term Loan C (LIBOR + 5.00%, 1.00% LIBOR Floor)(9)(13)  9/30/2021   1,231,932    1,191,257    1,166,763    0.8%
      Revolving Credit Facility (LIBOR + 5.00% PIK, 1.00% LIBOR Floor)(13)(15)  9/30/2021   3,554,069    3,554,069    3,554,069    2.4%
      Equity - 17,493.63 Class A Units                  0.0%
             40,670,262    33,687,263    4,720,832      
                              
Access Media Holdings, LLC  Media: Broadcasting & Subscription  Senior Secured First Lien Term Loan (10.00% PIK)(9)(21)  7/22/2020   11,105,630    8,446,385    1,110,563    0.7%
      Preferred Equity Series A      1,600,000    1,600,000        0.0%
      Preferred Equity Series AA      800,000    800,000        0.0%
      Preferred Equity Series AAA      971,200    971,200        0.0%
      Equity - 16 Common Units                  0.0%
             14,476,830    11,817,585    1,110,563      

11

 

 

Company(1)  Industry  Type of Investment  Maturity  Par Amount(2)   Cost(3)   Fair Value(6)   % of
Net Assets(4)
 
                          
Black Angus Steakhouses, LLC  Hotel, Gaming & Leisure  Senior Secured First Lien Delayed Draw Term Loan (LIBOR + 9.00% Cash, 1.00% LIBOR Floor)(12)  12/31/2020   758,929    758,929    758,929    0.5%
      Senior Secured First Lien Term Loan (LIBOR + 9.00% PIK, 1.00% LIBOR Floor)(9)(12)  12/31/2020   8,412,596    7,767,532    5,047,557    3.4%
                          
      Equity - 17.9% Membership Interest                  0.0%
             9,171,525    8,526,461    5,806,486      
                              
Caddo Investors Holdings 1 LLC(10)  Forest Products & Paper  Equity - 6.15% Membership Interest(19)          2,528,826    2,990,776    2.0%
                 2,528,826    2,990,776     
                              
Dynamic Energy Services International LLC  Energy: Oil & Gas  Senior Secured First Lien Term Loan (LIBOR + 13.50% PIK) (9)(14)  12/31/2021   12,930,235    7,824,974    905,116    0.6%
      Equity - 12,350,000 Class A Units                  0.0%
             12,930,235    7,824,974    905,116      
                              
JFL-NGS Partners, LLC  Construction & Building  Preferred Equity - A-2 Preferred (3.00% PIK)      1,795,034    1,795,034    1,795,034    1.2%
      Preferred Equity - A-1 Preferred (3.00% PIK)      232,292    232,292    232,292    0.2%
      Equity - 57,300 Class B Units          57,300    38,780,067    25.7%
             2,027,326    2,084,626    40,807,393     
                              
JFL-WCS Partners, LLC  Environmental Industries  Preferred Equity - Class A Preferred (6.00% PIK)      1,310,649    1,310,649    1,310,649    0.9%
      Equity - 129,588 Class B Units          129,588    4,535,580    3.0%
             1,310,649    1,440,237    5,846,229     
                              
Kemmerer Operations, LLC(7)  Metals & Mining  Senior Secured First Lien Term Loan (15.00% PIK)  6/21/2023   2,051,705    2,051,705    2,051,705    1.4%
      Senior Secured First Lien Delayed Draw Term Loan (15.00% PIK)  6/21/2023   515,699    515,699    515,699    0.4%
      Equity - 6.7797 Common Units          962,717    962,717    0.6%
             2,567,404    3,530,121    3,530,121      
                              
Path Medical, LLC  Healthcare & Pharmaceuticals  Senior Secured First Lien Term Loan A (LIBOR + 9.50% Cash, 1.00% LIBOR Floor)(12)  10/11/2021   5,905,080    5,905,080    5,905,080    3.9%
      Senior Secured First Lien Term Loan B (LIBOR + 13% PIK, 1.00% LIBOR Floor)(9)(12)  10/11/2021   7,783,840    6,599,918    6,794,514    4.5%
      Warrants - 7.68% of Outstanding Equity  1/9/2027       499,751        0.0%
             13,688,920    13,004,749    12,699,594      
                              
US Multifamily, LLC(10)  Banking, Finance, Insurance & Real Estate  Senior Secured First Lien Term Loan (10.00% Cash)  6/17/2021   5,123,913    5,123,913    5,123,913    3.4%
      Equity - 33,300 Preferred Units          3,330,000    1,332,000    0.9%
             5,123,913    8,453,913    6,455,913      
                              
Subtotal Affiliated Investments     $101,967,064   $92,898,755   $84,873,023      
                              
Controlled Investments:(5)                       
                              
MCC Senior Loan Strategy JV I LLC(10)  Multisector Holdings  Equity - 87.5% ownership of MCC Senior Loan Strategy JV I LLC          79,887,500    41,018,500    27.2%
                 79,887,500    41,018,500      

12

 

 

Company(1)  Industry  Type of Investment  Maturity  Par Amount(2)   Cost(3)   Fair Value(6)   % of
Net Assets(4)
 
                          
NVTN LLC(7)  Hotel, Gaming & Leisure  Senior Secured First Lien Delayed Draw Term Loan (LIBOR + 4.00% Cash, 1.00% LIBOR Floor)(9)(12)  12/31/2024   6,565,875    6,565,875    4,530,078    3.0%
      Senior Secured First Lien Super Priority DDTL (LIBOR + 4.00% Cash, 1.00% LIBOR Floor)(9)(12)  12/31/2024   2,000,000    1,995,374    2,000,000    1.3%
      Senior Secured First Lien Term Loan B (LIBOR + 9.25% PIK, 1.00% LIBOR Floor)(9)(12)  12/31/2024   14,963,195    12,305,096        0.0%
                          
      Senior Secured First Lien Term Loan C (LIBOR + 12.00% PIK, 1.00% LIBOR Floor)(9)(12)  12/31/2024   10,014,223    7,570,054        0.0%
      Equity - 787.4 Class A Units          9,550,922        0.0%
             33,543,293    37,987,321    6,530,078      
                              
Subtotal Control Investments  $33,543,293   $117,874,821   $47,548,578      
                              
Total Investments, September 30, 2020  $236,592,774   $328,134,530   $246,743,549    163.8%

 

(1)All of our investments are domiciled in the United States. Certain investments also have international operations.
(2)Par amount includes accumulated payment-in-kind (“PIK”) interest, as applicable, and is net of repayments.
(3)Gross unrealized appreciation, gross unrealized depreciation, and net unrealized depreciation for U.S. federal income tax purposes totaled $53,757,923, $134,877,746, and $81,119,823, respectively. The tax cost basis of investments is $327,863,372 as of September 30, 2020.
(4)Percentage is based on net assets of $150,619,517 as of September 30, 2020.
(5)Control Investments are defined by the Investment Company Act of 1940, as amended (the “1940 Act”), as investments in companies in which the Company owns more than 25% of the voting securities or maintains greater than 50% of the board representation.
(6)Unless otherwise indicated, all securities are valued using significant unobservable inputs, which are categorized as Level 3 assets under the definition of ASC 820 fair value hierarchy (see Note 4).
(7)The investment has an unfunded commitment as of September 30, 2020 (see Note 8), and includes an analysis of the value of any unfunded commitments.
(8)Represents 1.3% partnership interest in Watermill-QMC Partners, LP and Watermill-EMI Partners, LP.
(9)The investment was on non-accrual status as of September 30, 2020.
(10)The investment is not a qualifying asset as defined under Section 55(a) of 1940 Act, in a whole, or in part. As of September 30, 2020, 25.4% of the Company’s portfolio investments were non-qualifying assets.
(11)A portion of this investment was sold via a participation agreement. The amount stated is the portion retained by the Company (see Note 3).
(12)The interest rate on these loans is subject to the greater of a London Interbank Offering Rate (“LIBOR”) floor, or 1 month LIBOR plus a base rate. The 1 month LIBOR as of September 30, 2020 was 0.15%.
(13)The interest rate on these loans is subject to the greater of a LIBOR floor, or 3 month LIBOR plus a base rate. The 3 month LIBOR as of September 30, 2020 was 0.23%.
(14)The interest rate on these loans is subject to 3 month LIBOR plus a base rate. The 3 month LIBOR as of September 30, 2020 was 0.24%.
(15)This investment earns 0.50% commitment fee on all unused commitment as of September 30, 2020 and is recorded as a component of interest income on the Consolidated Statements of Operations.
(16)This investment represents a Level 1 security in the ASC 820 table as of September 30, 2020 (see Note 4).
(17)This investment represents a Level 2 security in the ASC 820 table as of September 30, 2020 (see Note 4).
(18)Security is non-income producing.
(19)As a practical expedient, the Company uses net asset value (“NAV”) to determine the fair value of this investment.
(20)Affiliated Investments are defined by the 1940 Act as investments in companies in which the Company owns between 5% and 25% outstanding voting securities or is under common control with such portfolio company.
(21)The investment was past due as of September 30, 2020.

 

See accompanying notes to consolidated financial statements.

 

13

 

 

PHENIXFIN CORPORATION
(f/k/a Medley Capital Corporation)

Notes to Consolidated Financial Statements

December 31, 2020

(unaudited)

 

Note 1. Organization

 

PhenixFIN Corporation (f/k/a Medley Capital Corporation) (“PhenixFIN”, the “Company,” “we” and “us”) is a non-diversified closed-end management investment company incorporated in Delaware that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). We completed our initial public offering (“IPO”) and commenced operations on January 20, 2011. The Company has elected, and intends to qualify annually, to be treated, for U.S. federal income tax purposes, as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). On November 18, 2020, the board of directors of the Company approved the adoption of an internalized management structure, effective January 1, 2021. Until close of business on December 31, 2020 we were externally managed and advised by MCC Advisors LLC (“MCC Advisors”), pursuant to an investment management agreement. MCC Advisors is a wholly owned subsidiary of Medley LLC, which is controlled by Medley Management Inc. (NYSE: MDLY), a publicly traded asset management firm (“MDLY”), which in turn is controlled by Medley Group LLC, an entity wholly owned by the senior professionals of Medley LLC. We use the term “Medley” to refer collectively to the activities and operations of Medley Capital LLC, Medley LLC, MDLY, Medley Group LLC, MCC Advisors, associated investment funds and their respective affiliates herein.

 

On March 26, 2013, our wholly owned subsidiary, Medley SBIC, LP (“SBIC LP”), a Delaware limited partnership that we own directly and through our wholly owned subsidiary, Medley SBIC GP, LLC, 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 Company Act of 1958, as amended. Effective July 1, 2019, SBIC LP surrendered its SBIC license and changed its name to Medley Small Business Fund, LP. In addition, Medley SBIC GP, LLC changed its name to Medley Small Business Fund GP, LLC. Medley Small Business Fund, LP and Medley Small Business Fund GP, LLC have since changed their names to PhenixFIN Small Business Fund, LP and PhenixFIN Small Business Fund GP, LLC, respectively.

 

The Company has formed and expects to continue to form certain taxable subsidiaries (the “Taxable Subsidiaries”), which are taxed as corporations for federal income tax purposes. These Taxable Subsidiaries allow us to hold equity securities of portfolio companies organized as pass-through entities while continuing to satisfy the requirements of a RIC under the Code.

 

The Company’s investment objective is to generate current income and capital appreciation primarily through loans to privately-held middle market companies. The portfolio generally consists of senior secured first lien term loans, senior secured second lien term loans, preferred equity and common equity. Occasionally, we will receive warrants or other equity participation features which we believe will have the potential to increase the total investment returns. These investments are primarily rated below investment grade or are unrated. Investments in below investment grade securities are considered predominantly speculative with respect to the issuer’s capacity to pay interest and repay principal when due.

 

Reverse Stock Split; Authorized Share Reduction

 

At the Company’s 2020 Annual Meeting of Stockholders held on June 30, 2020 (the “Annual Meeting”), stockholders approved a proposal to grant discretionary authority to the Company’s board of directors to amend the Company’s Certificate of Incorporation (the “Certificate of Incorporation”) to effect a reverse stock split of its common stock, of 1-20 (the “Reverse Stock Split”) and with the Reverse Stock Split to be effective at such time and date, if at all, as determined by the board of directors, but not later than 60 days after stockholder approval thereof and, if and when the reverse stock split is effected, reduce the number of authorized shares of common stock by the approved reverse stock split ratio (the “Authorized Share Reduction”).

 

Following the Annual Meeting, on July 7, 2020, the board of directors determined that it was in the best interests of the Company and its stockholders to implement the Reverse Stock Split and the Authorized Share Reduction. Accordingly, on July 13, 2020, the Company filed a Certificate of Amendment (the “Certificate of Amendment”) to the Certificate of Incorporation with the Secretary of State of the State of Delaware to effect the Reverse Stock Split and the Authorized Share Reduction.

 

14

 

 

Note 1. Organization (continued)

 

Pursuant to the Certificate of Amendment, effective as of 5:00 p.m., Eastern Time, on July 24, 2020 (the “Effective Time”), each twenty (20) shares of common stock issued and outstanding, immediately prior to the Effective Time, automatically and without any action on the part of the respective holders thereof, were combined and converted into one (1) share of common stock. In connection with the Reverse Stock Split, the Certificate of Amendment provided for a reduction in the number of authorized shares of common stock from 100,000,000 to 5,000,000 shares of common stock. No fractional shares were issued as a result of the Reverse Stock Split. Instead, any stockholder who would have been entitled to receive a fractional share as a result of the Reverse Stock Split received cash payments in lieu of such fractional shares (without interest and subject to backup withholding and applicable withholding taxes).

 

On December 21, 2020, the Company announced that it completed the application process for and was authorized to transfer the listing of its shares of common stock to the NASDAQ Global Market. The listing and trading of the common stock on the NYSE ceased at the close of trading on December 31, 2020. Effective January 4, 2021, the common stock trades on the NASDAQ Global Market under the trading symbol “PFX.” 

 

Sale of MCC JV

 

On October 8, 2020, the Company, Great American Life Insurance Company (“GALIC”), MCC Senior Loan Strategy JV I LLC (the “MCC JV”), and an affiliate of Golub Capital LLC (“Golub”) entered into a Membership Interest Purchase Agreement pursuant to which a fund affiliated with and managed by Golub concurrently purchased all of the Company’s interest in the MCC JV and all of GALIC’s interest in the MCC JV for a pre-adjusted gross purchase price of $156.4 million and an adjusted gross purchase price (which constitutes the aggregate consideration for the membership interests) of $145.3 million (giving effect to adjustments primarily for principal and interest payments from portfolio companies of MCC JV from July 1, 2020 through October 7, 2020), resulting in net proceeds (before transaction expenses) of $41.0 million and $6.6 million for the Company and GALIC, respectively, on the terms and subject to the conditions set forth in the Membership Interest Purchase Agreement, including the representations, warranties, covenants and indemnities contained therein. In connection with the closing of the transaction on October 8, 2020, MCC JV repaid in full all outstanding borrowings under, and terminated, its senior secured revolving credit facility, dated as of August 4, 2015, as amended, administered by Deutsche Bank AG, New York Branch.

 

COVID-19 Developments

 

The global outbreak of the COVID-19 pandemic continues to have adverse consequences on the U.S. and global economies, as well as on the Company (including certain portfolio companies) in particular. The ultimate economic fallout from the pandemic, and the long-term impact on economies, markets, industries and individual portfolio companies, remains uncertain. The Company’s performance (including that of certain of its portfolio companies) was negatively impacted during the pandemic. The longer-term impact of COVID-19 on the operations and the performance of the Company (including certain portfolio companies) is difficult to predict, but may continue to be adverse. The longer-term potential impact on such operations and performance could depend to a large extent on future developments and actions taken by authorities and other entities to contain COVID-19 and its economic impact. The impacts, as well as the uncertainty over impacts to come, of COVID-19 have adversely affected the performance of the Company (including certain portfolio companies) and may continue to do so in the future.

 

15

 

 

Note 2. Significant Accounting Policies 

 

Basis of Presentation

 

The Company is an investment company following the accounting and reporting guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946, Financial Services – Investment Companies. The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles (“GAAP”) and include the consolidated accounts of the Company and its wholly owned subsidiaries PhenixFIN Small Business Fund, LP (f/k/a Medley Small Business Fund, LP) (“PhenixFIN Small Business Fund”) and PhenixFIN SLF Funding I LLC (f/k/a Medley SLF Funding I LLC) (“PhenixFIN SLF”), and its wholly owned Taxable Subsidiaries. All references made to the “Company,” “we,” and “us” herein include PhenixFIN Corporation (f/k/a Medley Capital Corporation) and its consolidated subsidiaries, except as stated otherwise. Additionally, 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 Article 10 of Regulation S-X of the Securities Act of 1933. In the opinion of management, the consolidated financial statements reflect all adjustments and reclassifications, which are of a normal recurring nature, that are necessary for the fair presentation of financial results as of and for the periods presented. Therefore, this Form 10-Q should be read in conjunction with the Company’s annual report on Form 10-K for the year ended September 30, 2020. The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ending September 30, 2021.

 

Use of Estimates in the Preparation of Financial Statements

 

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

 

Cash and Cash Equivalents  

 

The Company considers cash equivalents to be highly liquid investments with original maturities of three months or less. Cash and cash equivalents include deposits in a money market account. The Company deposits its cash in financial institutions and, at times, such balances may be in excess of the Federal Deposit Insurance Corporation insurance limits.

 

Debt Issuance Costs

 

Debt issuance costs, incurred in connection with any credit facilities, unsecured notes and SBA-guaranteed debentures (“SBA Debentures”) (see Note 5) are deferred and amortized over the life of the respective credit facility or instrument.

 

Indemnification

 

In the normal course of business, the Company enters into contractual agreements that provide general indemnifications against losses, costs, claims and liabilities arising from the performance of individual obligations under such agreements. The Company has had no material claims or payments pursuant to such agreements. The Company’s individual maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. However, based on management’s experience, the Company expects the risk of loss to be remote.

 

Revenue Recognition

 

Interest income, adjusted for amortization of premiums and accretion of discounts, is recorded on an accrual basis. Dividend income, which represents dividends from equity investments and distributions from Taxable Subsidiaries, is recorded on the ex-dividend date and when the distribution is received, respectively.

 

The Company holds debt investments in its portfolio that contain a payment-in-kind (“PIK”) interest provision. PIK interest, which represents contractually deferred interest added to the investment balance that is generally due at maturity, is recorded on the accrual basis to the extent such amounts are expected to be collected. PIK interest is not accrued if the Company does not expect the issuer to be able to pay all principal and interest when due. For the three months ended December 31, 2020, the Company earned approximately $0.2 million in PIK interest. For the three months ended December 31, 2019, the Company earned approximately $1.6 million in PIK interest.

 

Origination/closing, amendment and transaction break-up fees associated with investments in portfolio companies are recognized as income when we become entitled to such fees. Prepayment penalties received by the Company for debt instruments paid back to the Company prior to the maturity date are recorded as income upon repayment of debt. Administrative agent fees received by the Company are capitalized as deferred revenue and recorded as fee income when the services are rendered. For the three months ended December 31, 2020 and 2019, fee income was approximately $0.3 million in each period (see Note 9).

 

Investment transactions are accounted for on a trade date basis. Realized gains or losses on investments are measured by the difference between the net proceeds from the disposition and the amortized cost basis of investment, without regard to unrealized gains or losses previously recognized. There were no realized gains or losses related to non-cash restructuring transactions during the three months ended December 31, 2020 and 2019. The Company reports changes in fair value of investments as a component of the net unrealized appreciation/(depreciation) on investments in the Consolidated Statements of Operations.

16

 

 

Note 2. Significant Accounting Policies (continued)

 

Revenue Recognition (continued)

 

Management reviews all loans that become 90 days or more past due on principal or interest or when there is reasonable doubt that principal or interest will be collected for possible placement on management’s designation of non-accrual status. Interest receivable is analyzed regularly and may be reserved against when deemed uncollectible. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment regarding collectability. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current, although we may make exceptions to this general rule if the loan has sufficient collateral value and is in the process of collection. At December 31, 2020, certain investments in nine portfolio companies held by the Company were on non-accrual status with a combined fair value of approximately $13.3 million, or 8.3% of the fair value of our portfolio. At September 30, 2020, certain investments in eight portfolio companies held by the Company were on non-accrual status with a combined fair value of approximately $21.7 million, or 8.8% of the fair value of our portfolio.

 

Investment Classification

 

The Company classifies its investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, we would be deemed to “control” a portfolio company if we owned more than 25% of its outstanding voting securities and/or had the power to exercise control over the management or policies of such portfolio company. We refer to such investments in portfolio companies that we “control” as “Control Investments.” Under the 1940 Act, we would be deemed to be an “Affiliated Person” of a portfolio company if we own between 5% and 25% of the portfolio company’s outstanding voting securities or we are under common control with such portfolio company. We refer to such investments in Affiliated Persons as “Affiliated Investments.”

 

Valuation of Investments

 

The Company applies fair value accounting to all of its financial instruments in accordance with the 1940 Act and ASC Topic 820 - Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework used to measure fair value and requires disclosures for fair value measurements. In accordance with ASC 820, the Company has categorized its financial instruments carried at fair value, based on the priority of the valuation technique, into a three-level fair value hierarchy as discussed in Note 4. Fair value is a market-based measure considered from the perspective of the market participant who holds the financial instrument rather than an entity specific measure. Therefore, when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that management believes market participants would use in pricing the financial instrument at the measurement date.

 

Investments for which market quotations are readily available are valued at such market quotations, which are generally obtained from an independent pricing service or multiple broker-dealers or market makers. We weight the use of third-party broker quotations, if any, in determining fair value based on our understanding of the level of actual transactions used by the broker to develop the quote and whether the quote was an indicative price or binding offer. However, debt investments with remaining maturities within 60 days that are not credit impaired are valued at cost plus accreted discount, or minus amortized premium, which approximates fair value. Investments for which market quotations are not readily available are valued at fair value as determined by the Company’s board of directors based upon input from management and third-party valuation firms. Because these investments are illiquid and because there may not be any directly comparable companies whose financial instruments have observable market values, these loans are valued using a fundamental valuation methodology, consistent with traditional asset pricing standards, that is objective and consistently applied across all loans and through time.

 

Investments in investment funds are valued at fair value. Fair values are generally determined utilizing the NAV supplied by, or on behalf of, management of each investment fund, which is net of management and incentive fees or allocations charged by the investment fund and is in accordance with the “practical expedient”, as defined by FASB Accounting Standards Update (“ASU”) 2009-12, Investments in Certain Entities that Calculate Net Asset Value per Share. NAVs received by, or on behalf of, management of each investment fund are based on the fair value of the investment funds’ underlying investments in accordance with policies established by management of each investment fund, as described in each of their financial statements and offering memorandum. If the Company is in the process of the sale of an investment fund, fair value will be determined by actual or estimated sale proceeds.

 

The methodologies utilized by the Company in estimating the fair value of its investments categorized as Level 3 generally fall into the following two categories:

 

The “Market Approach” uses prices and other relevant information generated by market transactions involving identical or comparable (that is, similar) assets, liabilities, or a group of assets and liabilities, such as a business.

 

The “Income Approach” converts future amounts (for example, cash flows or income and expenses) to a single current (that is, discounted) amount. When the Income Approach is used, the fair value measurement reflects current market expectations about those future amounts.

 

The Company has engaged third-party valuation firms (the “Valuation Firms”) to assist it and its board of directors in the valuation of its portfolio investments. The valuation reports generated by the Valuation Firms consider the evaluation of financing and sale transactions with third parties, expected cash flows and market-based information, including comparable transactions, performance multiples, and movement in yields of debt instruments, among other factors. The Company uses a market yield analysis under the Income Approach or an enterprise model of valuation under the Market Approach, or a combination thereof. In applying the market yield analysis, the value of the Company’s loans is determined based upon inputs such as the coupon rate, current market yield, interest rate spreads of similar securities, the stated value of the loan, and the length to maturity. In applying the enterprise model, the Company uses a waterfall analysis, which takes into account the specific capital structure of the borrower and the related seniority of the instruments within the borrower’s capital structure into consideration. To estimate the enterprise value of the portfolio company, we weigh some or all of the traditional market valuation methods and factors based on the individual circumstances of the portfolio company in order to estimate the enterprise value.

 

17

 

 

Note 2. Significant Accounting Policies (continued)

 

Valuation of Investments (continued)

 

The methodologies and information that the Company utilizes when applying the Market Approach for performing investments include, among other things:

 

valuations of comparable public companies (“Guideline Comparable Approach”);

 

recent sales of private and public comparable companies (“Guideline Comparable Approach”);

 

recent acquisition prices of the company, debt securities or equity securities (“Recent Arms-Length Transaction”);

 

external valuations of the portfolio company, offers from third parties to buy the company (“Estimated Sales Proceeds Approach”);

 

subsequent sales made by the company of its investments (“Expected Sales Proceeds Approach”); and

 

estimating the value to potential buyers.

 

The methodologies and information that the Company utilizes when applying the Income Approach for performing investments include:

 

discounting the forecasted cash flows of the portfolio company or securities (Discounted Cash Flow (“DCF”) Approach); and

 

Black-Scholes model or simulation models or a combination thereof (Income Approach - Option Model) with respect to the valuation of warrants.

 

For non-performing investments, we may estimate the liquidation or collateral value of the portfolio company’s assets and liabilities using an expected recovery model (Market Approach - Expected Recovery Analysis or Estimated Liquidation Proceeds).

 

We undertake a multi-step valuation process each quarter when valuing investments for which market quotations are not readily available, as described below:

 

our quarterly valuation process begins with each portfolio investment being initially valued by one or more Valuation Firms;

 

preliminary valuation conclusions will then be documented and discussed with senior management;

 

the audit committee of the board of directors reviews the preliminary valuations with management and the Valuation Firms; and

 

the board of directors discusses the valuations and determines the fair value of each investment in the Company’s portfolio in good faith based on the input of management, the respective Valuation Firms and the audit committee.

 

Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may differ from the values that would have been used had a readily available market value existed for such investments, and the differences could be material. In addition, changes in the market environment (including the impact of COVID-19 on financial markets), portfolio company performance, and other events may occur over the lives of the investments that may cause the gains or losses ultimately realized on these investments to be materially different than the valuations currently assigned.

 

Fair Value of Financial Instruments

 

The carrying amounts of certain of our financial instruments, including cash and cash equivalents, accounts payable and accrued expenses, approximate fair value due to their short-term nature. The carrying amounts and fair values of our long-term obligations are discussed in Note 5.

 

Recently Adopted Accounting Pronouncements 

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). The primary focus of ASU 2018-13 is to improve the effectiveness of the disclosure requirements for fair value measurements. The changes affect all companies that are required to include fair value measurement disclosures. In general, the amendments in ASU 2018-13 are effective for all entities for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019. After evaluating ASU 2018-13, the Company found no material changes to its fair value disclosures in the notes to the consolidated financial statements were necessary to comply with the pronouncement.

 

In March 2020, the FASB issued ASU 2020-04, “Reference rate reform (Topic 848)—Facilitation of the effects of reference rate reform on financial reporting.” The amendments in this update provide optional expedients and exceptions for applying U.S. GAAP to certain contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform and became effective upon issuance for all entities. The Company has agreements that have LIBOR as a reference rate with certain portfolio companies and also with certain lenders. Many of these agreements include language for choosing an alternative successor rate if LIBOR reference is no longer considered to be appropriate. Contract modifications are required to be evaluated in determining whether the modifications result in the establishment of new contracts or the continuation of existing contracts. The standard is effective as of March 12, 2020 through December 31, 2022 and the Company plans to apply the amendments in this update to account for contract modifications due to changes in reference rates. The Company does not believe that it will have a material impact on its consolidated financial statements and disclosures.

18

 

 

Note 2. Significant Accounting Policies (continued) 

 

Recently Adopted Accounting Pronouncements (continued)

 

In May 2020, the SEC adopted rule amendments that impacted the requirement of investment companies, including BDCs, to disclose the financial statements of certain of their portfolio companies or certain acquired funds (the “Final Rules”). The Final Rules adopted a new definition of “significant subsidiary” set forth in Rule 1-02(w)(2) of Regulation S-X under the Securities Act. Rules 3-09 and 4-08(g) of Regulation S-X require investment companies to include separate financial statements or summary financial information, respectively, in such investment company’s periodic reports for any portfolio company that meets the definition of “significant subsidiary.” The Final Rules adopt a new definition of “significant subsidiary” applicable only to investment companies that (i) modifies the investment test and the income test, and (ii) eliminates the asset test currently in the definition of “significant subsidiary” in Rule 1-02(w) of Regulation S-X. The new Rule 1-02(w)(2) of Regulation S-X is intended to more accurately capture those portfolio companies that are more likely to materially impact the financial condition of an investment company. The Final Rules became effective January 1, 2021. The Company evaluated the impact of the Final Rules and determined its impact not to be material, and began voluntary compliance with the Final Rules for the quarter ended June 30, 2020.

 

Federal Income Taxes

 

The Company has elected, and intends to qualify annually, to be treated as a RIC under Subchapter M of the Code. In order to continue to qualify as a RIC and be eligible for tax treatment under Subchapter M of the Code, among other things, the Company is required to meet certain source of income and asset diversification requirements and timely distribute to its stockholders at least 90% of the sum of investment company taxable income (“ICTI”), as defined by the Code, including PIK interest, and net tax exempt interest income (which is the excess of our gross tax exempt interest income over certain disallowed deductions) for each taxable year. Depending on the level of ICTI earned in a tax year, the Company may choose to carry forward ICTI in excess of current year dividend distributions into the next tax year. Any such carryover ICTI must be distributed before the end of that next tax year through a dividend declared prior to filing the final tax return related to the year which generated such ICTI.

 

The Company is subject to a nondeductible U.S. federal excise tax of 4% on undistributed income if it does not distribute at least 98% of its ordinary income in any calendar year and 98.2% of its capital gain net income for each one-year period ending on October 31 of such calendar year and any income realized, but not distributed, in preceding years and on which it did not pay federal income tax. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions for excise tax purposes, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned. There was no provision for federal excise tax at December 31, 2020 and December 31, 2019.

 

The Company’s Taxable Subsidiaries accrue income taxes payable based on the applicable corporate rates on the unrealized gains generated by the investments held by the Taxable Subsidiaries. As of December 31, 2020 and 2019, the Company did not record a deferred tax liability on the Consolidated Statements of Assets and Liabilities. The change in provision for deferred taxes is included as a component of net realized and unrealized gain/(loss) on investments in the Consolidated Statements of Operations. For the three months ended December 31, 2020 and 2019, the Company did not record a change in provision for deferred taxes on the unrealized (appreciation)/depreciation on investments.

 

As of December 31, 2020 and September 30, 2020, the Company had a deferred tax asset of $23.8 million and $22.8 million, respectively, consisting primarily of net operating losses and net unrealized losses on the investments held within its Taxable Subsidiaries. As of December 31, 2020 and September 30, 2020, the Company has booked a valuation allowance of $23.8 million and $22.8 million, respectively, against its deferred tax asset.

 

ICTI generally differs from net investment income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses. The Company may be required to recognize ICTI in certain circumstances in which it does not receive cash. For example, if the Company holds debt obligations that are treated under applicable tax rules as having original issue discount, the Company must include in ICTI each year a portion of the original issue discount that accrues over the life of the obligation, regardless of whether cash representing such income is received by the Company in the same taxable year. The Company may also have to include in ICTI other amounts that it has not yet received in cash, such as 1) PIK interest income and 2) interest income from investments that have been classified as non-accrual for financial reporting purposes. Interest income on non-accrual investments is not recognized for financial reporting purposes, but generally is recognized in ICTI. Because any original issue discount or other amounts accrued will be included in the Company’s ICTI for the year of accrual, the Company may be required to make a distribution to its stockholders in order to satisfy the minimum distribution requirements, even though the Company will not have received and may not ever receive any corresponding cash amount. ICTI also excludes net unrealized appreciation or depreciation, as investment gains or losses are not included in taxable income until they are realized.

 

The Company accounts for income taxes in conformity with ASC Topic 740 - Income Taxes (“ASC 740”). ASC 740 provides guidelines for how uncertain tax positions should be recognized, measured, presented and disclosed in financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions deemed to meet a “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current period. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the Consolidated Statements of Operations. There were no material uncertain income tax positions at December 31, 2020. Although we file federal and state tax returns, our major tax jurisdiction is federal. The Company’s federal and state tax returns for the prior three fiscal years remain open, subject to examination by the Internal Revenue Service and applicable state tax authorities.

 

19

 

 

Note 2. Significant Accounting Policies (continued)

 

Retroactive Adjustments for Reverse Stock Split and the Authorized Share Reduction

 

The per share amount of the common stock and the authorized shares of common stock in the unaudited financial statements and notes thereto have been retroactively adjusted for all periods presented to give effect to the Reverse Stock Split effected on July 24, 2020. See Note 1 for more information regarding the Reverse Stock Split and the Authorized Share Reduction.

 

Segments

 

The Company invests in various industries. The Company separately evaluates the performance of each of its investment relationships. However, because each of these investment relationships has similar business and economic characteristics, they have been aggregated into a single investment segment. All applicable segment disclosures are included in or can be derived from the Company’s financial statements. See Note 3 for further information.

 

Company Investment Risk, Concentration of Credit Risk, and Liquidity Risk

 

The Company has broad discretion in making investments. Investments generally consist of debt instruments that may be affected by business, financial market or legal uncertainties. Prices of investments may be volatile, and a variety of factors that are inherently difficult to predict, such as domestic or international economic and political developments, may significantly affect the results of the Company’s activities and the value of its investments. In addition, the value of the Company’s portfolio may fluctuate as the general level of interest rates fluctuate.

 

The value of the Company’s investments in loans may be detrimentally affected to the extent, among other things, that a borrower defaults on its obligations, there is insufficient collateral and/or there are extensive legal and other costs incurred in collecting on a defaulted loan, observable secondary or primary market yields for similar instruments issued by comparable companies increase materially or risk premiums required in the market between smaller companies, such as our borrowers, and those for which market yields are observable increase materially.

 

The Company’s assets may, at any time, include securities and other financial instruments or obligations that are illiquid or thinly traded, making purchase or sale of such securities and financial instruments at desired prices or in desired quantities difficult. Furthermore, the sale of any such investments may be possible only at substantial discounts, and it may be extremely difficult to value any such investments accurately.

 

Company performance (including that of certain of its portfolio companies) has been and may continue to be negatively impacted by the COVID-19 pandemic’s effects. The COVID-19 pandemic has adversely impacted economies and capital markets around the world in ways that will likely continue and may change in unforeseen ways for an indeterminate period. The pandemic has also adversely affected various businesses, including some in which we are invested. The COVID-19 pandemic may exacerbate pre-existing business performance, political, social and economic risks affecting certain companies and countries generally. The impacts, as well as the uncertainty over impacts to come, of COVID-19 have adversely affected the performance of the Company (including certain portfolio companies) and may continue to do so in the future.

 

Note 3. Investments

 

The composition of our investments as of December 31, 2020 as a percentage of our total portfolio, at amortized cost and fair value were as follows (dollars in thousands):

 

   Amortized Cost   Percentage   Fair Value   Percentage 
Senior Secured First Lien Term Loans  $162,049    77.6%  $88,061    55.2%
Senior Secured Second Lien Term Loans   7,976    3.8    7,586    4.8 
Unsecured Debt   4,061    1.9    2,120    1.3 
Equity/Warrants   34,784    16.7    61,774    38.7 
Total Investments  $208,870    100.0%  $159,541    100.0%

 

The composition of our investments as of September 30, 2020 as a percentage of our total portfolio, at amortized cost and fair value were as follows (dollars in thousands):

 

   Amortized Cost   Percentage   Fair Value   Percentage 
Senior Secured First Lien Term Loans  $178,843    54.5%  $106,463    43.2%
Senior Secured Second Lien Term Loans   15,476    4.7    13,927    5.6 
Unsecured Debt   4,601    1.4    2,669    1.1 
MCC Senior Loan Strategy JV I LLC   79,888    24.4    41,019    16.6 
Equity/Warrants   49,327    15.0    82,666    33.5 
Total  $328,135    100.0%  $246,744    100.0%

20

 

 

Note 3. Investments (continued)

 

In connection with certain of the Company’s investments, the Company receives warrants that are obtained for the objective of increasing the total investment returns and are not held for hedging purposes. At December 31, 2020 and September 30, 2020, the total fair value of warrants was $25,423 and $15,354, respectively, and were included in investments at fair value on the Consolidated Statements of Assets and Liabilities. During the three months ended December 31, 2020, the Company acquired warrants in one existing portfolio company. During the three months ended December 31, 2019, the Company had no warrant activity.

 

For the three months ended December 31, 2020, there was $10,069 of unrealized appreciation related to warrants, which was recorded on the Consolidated Statements of Operations as net unrealized appreciation/(depreciation) on investments. For the three months ended December 31, 2019, there was no unrealized appreciation or depreciation related to warrants. The warrants are received in connection with individual investments and are not subject to master netting arrangements.

 

The following table shows the portfolio composition by industry grouping at fair value at December 31, 2020 (dollars in thousands):

 

   Fair Value   Percentage 
         
Construction & Building  $45,820    28.7%
High Tech Industries   24,786    15.5 
Services: Business   16,636    10.4 
Healthcare & Pharmaceuticals   12,324    7.8 
Consumer goods: Durable   12,248    7.7 
Containers, Packaging & Glass   11,911    7.5 
Hotel, Gaming & Leisure   10,235    6.4 
Environmental Industries   6,600    4.1 
Energy: Oil & Gas   4,915    3.1 
Banking, Finance, Insurance & Real Estate   4,145    2.6 
Forest Products & Paper   3,198    2.0 
Aerospace & Defense   2,818    1.8 
Metals & Mining   2,458    1.5 
Automotive   1,061    0.7 
Wholesale   386    0.2 
Total  $159,541    100.0%

 

The following table shows the portfolio composition by industry grouping at fair value at September 30, 2020 (dollars in thousands):

 

   Fair Value   Percentage 
Construction & Building  $51,964    21.1%
Multisector Holdings   41,019    16.6 
High Tech Industries   26,165    10.6 
Healthcare & Pharmaceuticals   23,481    9.5 
Services: Business   21,841    8.9 
Hotel, Gaming & Leisure   12,337    5.0 
Wholesale   12,278    5.0 
Containers, Packaging & Glass   11,987    4.8 
Consumer goods: Durable   9,520    3.8 
Banking, Finance, Insurance & Real Estate   6,557    2.7 
Consumer goods: Non-durable   6,164    2.5 
Environmental Industries   5,846    2.4 
Energy: Oil & Gas   5,626    2.3 
Metals & Mining   3,530    1.4 
Forest Products & Paper   2,991    1.2 
Aerospace & Defense   2,942    1.2 
Media: Broadcasting & Subscription   1,110    0.5 
Automotive   1,043    0.4 
Retail   343    0.1 
Total  $246,744    100.0%

 

The Company invests in portfolio companies principally located in North America. 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.

 

21

 

 

Note 3. Investments (continued)

 

The following table shows the portfolio composition by geographic location at fair value at December 31, 2020 (dollars in thousands):

 

   Fair Value   Percentage 
         
West  $54,697    34.3%
Northeast   48,897    30.6 
Southeast   30,174    18.9 
Midwest   14,920    9.4 
Southwest   10,169    6.4 
Mid-Atlantic   684    0.4 
Total  $159,541    100.0%

 

The following table shows the portfolio composition by geographic location at fair value at September 30, 2020 (dollars in thousands):

 

   Fair Value   Percentage 
Northeast  $98,555    39.9%
West   55,400    22.5 
Southeast   42,321    17.1 
Midwest   27,574    11.2 
Mid-Atlantic   13,334    5.4 
Southwest   9,560    3.9 
Total  $246,744    100.0%

 

22

 

 

Note 3. Investments (continued)

 

Transactions With Affiliated/Controlled Companies

 

The Company had investments in portfolio companies designated as Affiliated Investments and Controlled Investments under the 1940 Act. Transactions with Affiliated Investments and Controlled Investments during the three months ended December 31, 2020 and 2019 were as follows:

 

Name of Investment(3)  Type of
Investment
  Fair Value at September 30, 2020   Purchases/
(Sales) of or
Advances/
(Distributions)
   Transfers
In/(Out) of
Affiliates
   Unrealized
Gain/(Loss)
   Realized
Gain/(Loss)
   Fair Value at
December 31,
2020
   Earned
Income
 
Affiliated Investments                            
1888 Industrial Services, LLC  Senior Secured First Lien Term Loan A  $-   $-   $-   $-   $-   $-   $1,658 
   Senior Secured First Lien Term Loan B   -    -    -    -    -    -    6,484 
   Senior Secured First Lien Term Loan C   1,166,763    -    -    65,169    -    1,231,932    37,985 
   Senior Secured First Lien Term Loan D   -    -    -    -    -    -    - 
   Senior Secured First Lien Term Loan E   -    -    -    -    -    -    - 
   Revolving Credit Facility   3,554,069    -    -    -    -    3,554,069    54,496 
   Equity   -    -    -    -    -    -    - 
Access Media Holdings, LLC  Senior Secured First Lien Term Loan   1,110,563    (1,239,335)   -    7,335,821    (7,207,049)   -    - 
   Preferred Equity Series A   -    -    -    1,600,000    (1,600,000)   -    - 
   Preferred Equity Series AA   -    -    -    800,000    (800,000)   -    - 
   Preferred Equity Series AAA   -    -    -    971,200    (971,200)   -    - 
   Equity   -    -    -    -    -    -    - 
Black Angus Steakhouses,LLC  Senior Secured First Lien Delayed Draw Term Loan   758,929    -    -    -    -    758,929    19,395 
   Senior Secured First Lien Term Loan   5,047,557    -    -