PhenixFIN Corp 10-K

Item 1. Business GENERAL PhenixFIN Corporation (“PhenixFIN”, the “Company,” “we” and “us”) is an internally-managed 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 (the “Board”) 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 was a wholly owned subsidiary of Medley LLC, which was controlled by Medley Management Inc. (OTCM: MDLM), a publicly traded asset management firm (“MDLM”). 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, among other things, hold equity securities of portfolio companies organized as pass-through entities while continuing to satisfy the requirements to qualify as a RIC under the Code. The Company’s investment objective is to generate current income and capital appreciation. The management team seeks to achieve this objective primarily through making loans, private equity or other investments in privately-held companies. The Company may also make debt, equity or other investments in publicly-traded companies. (These investments may also include investments in other BDCs, closed-end funds or real estate investment trusts (“REITs”).) We also pursue other strategic opportunities and invest in other assets or operate other businesses to achieve our investment objective, such as operating and managing an asset-based lending business. The portfolio generally consists of senior secured first lien term loans, senior secured second lien term loans, senior secured bonds, preferred equity and common equity. Occasionally, we will receive warrants or other equity participation features which we believe will have the potential to increase total investment returns. Our loan and other debt 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. We believe the private debt market is undergoing structural shifts that are creating significant opportunities for non-bank lenders and investors. The underlying drivers of these structural changes include reduced participation by banks in the private debt markets and demand for private debt created by committed and uninvested private equity capital. We focus on taking advantage of this structural shift by lending directly to companies that are underserved by the traditional banking system and generally seek to avoid broadly marketed investment opportunities. We source investment opportunities primarily through direct relationships with financial sponsors, industry specialists, as well as financial intermediaries such as investment banks and commercial banks. Our Investment Team is responsible for sourcing investment opportunities, conducting industry research, performing diligence on potential investments, structuring our investments and monitoring our portfolio companies on an ongoing basis. Our Investment Team draws on its expertise in lending to predominantly privately held borrowers in a range of sectors, including industrials, transportation, energy and natural resources, financials, gemstones/jewelry and real estate. As a BDC, we are required to comply with regulatory requirements, including limitations on our use of debt. We are permitted to, and expect to continue to, finance our investments through borrowings. However, as a BDC, we are only generally allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% (or 150% if certain requirements under the 1940 Act are met) after such borrowing. The amount of leverage that we employ will depend on our assessment of market conditions and other factors at the time of any proposed borrowing. As of September 30, 2023, the Company’s asset coverage was 270.7% after giving effect to leverage and therefore the Company’s asset coverage was greater than 200%, the minimum asset coverage requirement applicable presently to the Company under the 1940 Act. Our principal executive office is located at 445 Park Avenue, 10th Floor, New York, NY and our telephone number is (212) 859-0390. 1 Investment Process Overview Sourcing and Origination . We typically source investment opportunities through our management team’s network of long-standing relationships. Our sourcing efforts are led by our senior investment professionals, who leverage their experience in the sourcing and origination of investments. Initial Evaluation . We use a systematic, consistent approach to credit evaluation, which typically consists of (i) a preliminary due diligence review conducted by the Company, (ii) an initial diligence meeting with the portfolio company’s management team, investment bank or private equity sponsor, (iii) an initial indication of interest and terms, and (iv) preparation of memoranda including potential portfolio company overviews, investment considerations and risks, financial model and return information. Due Diligence & Underwriting . We typically undertake continued diligence, which expands on the investment thesis, risks and mitigants, and competition factors of our potential investment opportunities. We may conduct third party reviews, on-site visits and/or background checks in connection with our potential investments in portfolio companies. Portfolio Management . We undertake a proactive monitoring process of our portfolio companies, whereby we conduct monthly financial review and monitoring of compliance with covenants, maintain ongoing dialogue with portfolio company management and owners, and exercise board observer rights where appropriate. Rating Criteria. We generally use an investment rating system to characterize and monitor the credit profile and our expected level of returns on each debt investment in our portfolio. We use a five-level numeric rating scale. The following is a description of the conditions associated with each investment rating: Credit Rating Definition 1 Investments that are performing above expectations. 2 Investments that are performing within expectations, with risks that are neutral or favorable compared to risks at the time of origination. All new loans are rated ’2’. 3 Investments that are performing below expectations and that require closer monitoring, but where no loss of interest, dividend or principal is expected. Companies rated ’3’ may be out of compliance with financial covenants, however, loan payments are generally not past due. 4 Investments that are performing below expectations and for which risk has increased materially since origination. Some loss of interest or dividend is expected but no loss of principal. In addition to the borrower being generally out of compliance with debt covenants, loan payments may be past due (but generally not more than 180 days past due). 5 Investments that are performing substantially below expectations and whose risks have increased substantially since origination. Most or all of the debt covenants are out of compliance and payments are substantially delinquent. Some loss of principal is expected. Investment Structure Once we have determined that a prospective portfolio company is suitable for investment, we work with the management of that company and its other capital providers to structure an investment. We negotiate among these parties to agree on how our investment is expected to perform relative to the other capital in the portfolio company’s capital structure. We typically structure our investments as follows: Senior Secured First Lien Term Loans We structure these investments as senior secured loans. We obtain security interests in the assets of the portfolio companies that serve as collateral in support of the repayment of such loans. This collateral generally takes the form of first-priority liens on the assets of the portfolio company borrower. Our senior secured loans may provide for amortization of principal with the majority of the amortization due at maturity. Senior Secured Second Lien Term Loans We structure these investments as junior, secured loans. We obtain security interests in the assets of these portfolio companies that serve as collateral in support of the repayment of such loans. This collateral generally takes the form of second-priority liens on the assets of a portfolio company. These loans typically provide for amortization of principal in the initial years of the loans, with the majority of the amortization due at maturity. 2 Senior Secured First Lien Notes We structure these investments as senior secured loans. We obtain security interests in the assets of these portfolio companies that serve as collateral in support of the repayment of such loans. This collateral generally takes the form of priority liens on the assets of a portfolio company. These loans typically have interest-only payments (often representing a combination of cash pay and payment-in-kind, or (“PIK”), interest), with amortization of principal due at maturity. PIK interest represents contractually deferred interest added to the loan balance that is generally due at the end of the loan term and recorded as interest income on an accrual basis to the extent such amounts are expected to be collected. Warrants and Minority Equity Securities In some cases, we may also receive nominally priced warrants or options to buy a minority equity interest in the portfolio company in connection with a debt investment. As a result, as a portfolio company appreciates in value, we may achieve additional investment return from this equity interest. We may structure such warrants to include provisions protecting our rights as a minority-interest holder, as well as a “put,” or right to sell such securities back to the issuer, upon the occurrence of specified events. In many cases, we may also seek to obtain registration rights in connection with these equity interests, which may include demand and “piggyback” registration rights. Unitranche Loans We structure our unitranche loans, which combine the characteristics of traditional senior secured first lien term loans and subordinated notes as senior secured loans. We obtain security interests in the assets of these portfolio companies that serve as collateral in support of the repayment of these loans. This collateral generally takes the form of first-priority liens on the assets of a portfolio company. Unitranche loans typically provide for amortization of principal in the initial years of the loans, with the majority of the amortization due at maturity. Unsecured Debt We structure these investments as unsecured, subordinated loans that provide for relatively high, fixed interest rates that provide us with significant current interest income. These loans typically have interest-only payments (often representing a combination of cash pay and payment-in-kind, or PIK, interest), with amortization of principal due at maturity. Subordinated notes generally allow the borrower to make a large lump sum payment of principal at the end of the loan term, and there is a risk of loss if the borrower is unable to pay the lump sum or refinance the amount owed at maturity. The valuation of subordinated notes are generally more volatile than secured loans and may involve a greater risk of loss of principal. Subordinated notes often include a PIK feature, which effectively operates as negative amortization of loan principal. We expect to hold most of our investments to maturity or repayment, but we may realize or sell some of our investments earlier if a liquidity event occurs, such as a sale or recapitalization transaction, or the worsening of the credit quality of the portfolio company. The Company has invested in its affiliate, FlexFIN, LLC (“FlexFIN”), which operates an asset-based lending business under which it enters into secured loans and secured financing structures with borrowers engaged in the gemstone/jewelry industry. FlexFIN will generally structure these loans as sale/repurchase transactions under which the collateral (that is, the gemstones/jewelry) remains under FlexFIN’s ownership during the entire term of the loan. Managerial Assistance As a BDC, we offer, and must provide upon request, managerial assistance to certain of our portfolio companies. This assistance could involve, among other things, monitoring the operations of our portfolio companies, participating in board and management meetings, consulting with and advising officers of portfolio companies and providing other organizational and financial guidance. We may receive fees for these services. Leverage As a BDC, we are generally only allowed to employ leverage to the extent that our asset coverage, as defined in the 1940 Act, equals at least 200% after giving effect to such leverage. The amount of leverage that we employ at any time depends on our assessment of the market and other factors at the time of any proposed borrowing. We are also subject to certain regulatory requirements relating to our borrowings. For a discussion of such requirements, see “Regulation - Senior Securities.” We may, from time to time, seek to retire or repurchase our common stock through cash purchases, as well as retire, cancel or purchase our outstanding debt through cash purchases and/or exchanges, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual and regulatory restrictions and other factors. The amounts involved may be material. Competition Our primary competitors to provide financing to private companies are public and private funds, commercial and investment banks, commercial finance companies, other BDCs, SBICs and private equity and hedge funds. Some competitors may have access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC or to the distribution and other requirements we must satisfy to maintain our favorable RIC tax treatment. 3 Human Capital Resources As of September 30, 2023, the internalized management team consists of 3 investment professionals and 6 employees/consultants overall. This team includes our executive officers, investment and finance professionals, and administrative staff. Our senior management team consists of David Lorber, our chief executive officer, and Ellida McMillan, our chief financial officer. As an internally managed BDC, the success of our business and investment strategy, including achieving our investment objective, depends in material part on our professional team. We depend upon the members of our management team and our investment professionals for the identification, final selection, structuring, closing and monitoring of our investments. Our professional team has critical experience and relationships on which we rely to implement our business plan. We expect that the members of our management team and our investment professionals will maintain key informal relationships, which we will use to help identify and gain access to investment opportunities. If we do not attract, develop and retain highly talented professionals, we may not be able to operate our business as we expect and our operating results could be adversely affected. See “Item 1A. Risk Factors.” Administration Prior to January 1, 2021, we operated pursuant to an investment management agreement with MCC Advisors. Since January 1, 2021, we have operated pursuant to an internalized management structure. To lead the internalized management team, the Board approved the appointment of David Lorber, who had served as an independent director of the Company since April 2019, as Chief Executive Officer, and Ellida McMillan as Chief Financial Officer of the Company, each effective January 1, 2021. In connection with the adoption by the board of directors of an internalized management structure, on November 19, 2020, the Company entered into a Fund Accounting Servicing Agreement and an Administration Servicing Agreement on customary terms with U.S. Bancorp Fund Services, LLC d/b/a U.S. Bank Global Fund Services (“U.S. Bancorp”). A U.S. Bancorp affiliate also served as the Company’s custodian. The Company’s administrative and custodial relationship with U.S. Bancorp terminated on August 9, 2022. SS&C Technologies, Inc. (“SS&C”) has since served as administrator of the Company and has provided us with fund accounting and financial reporting services pursuant to its Services Agreement with the Company. Effective September 12, 2022, Computershare Trust Company, N.A. (“Computershare”) serves as custodian for the Company pursuant to its Loan Administration and Custodial Agreement with the Company. Information Available We maintain a website at http://www.phenixfc.com . We make available, free of charge, on our website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission, or the SEC. Information contained on our website is not incorporated by reference into this annual report on Form 10-K and you should not consider information contained on our website to be part of this annual report on Form 10-K or any other report we file with the SEC. Summary of Risk Factors Investing in our securities involves a high degree of risk. You should carefully consider the information in “Item 1A. Risk Factors”, including, but not limited to, the following risks: Certain Risks in the Current Environment ● We are operating in a period of market disruption and economic uncertainty, which may adversely affect the yields, and increase the risks of, our investment, and make it more difficult for us to raise equity capital. ● Events outside of our control could negatively affect the portfolio companies in which we invest and make the valuation of those investments more uncertain. ● Rising interest rates may increase our borrowing costs and reduce the net return that we are able to achieve on our debt investments in portfolio companies, and may also increase the risk of default on our portfolio company loans. Further downgrades of the U.S. credit rating, automatic spending cuts, or another government shutdown could negatively impact our cost of borrowing and the net return on our investments. ● Economic downturns could impair our portfolio companies, increase funding costs and limit access to capital. 4 Risks Related to our Business ● We operate under an internalized operating structure, including our management and investment functions, with the expectation that we will be able to operate more efficiently, but this may not be the case. We are dependent upon our management team, and may not realize the anticipated benefits of the internalization. ● We may suffer credit and capital losses. Because we use borrowed funds to make investments or fund our business operations, we are exposed to risks typically associated with leverage which increase the risk of investing in us. The lack of liquidity in our investments may adversely affect our business. ● A substantial portion of our portfolio investments will be recorded at fair value as determined in good faith by our valuation designee under the oversight of our board of directors and, as a result, there may be uncertainty regarding the value of our portfolio investments. ● We are a non-diversified investment company within the meaning of the 1940 Act, and therefore we are not limited with respect to the proportion of our assets that may be invested in securities of a single issuer. ● We are exposed to risks associated with changes in interest rates. Loans under our credit facility and the financial credit we extend to our portfolio companies bear interest based on the Secured Overnight Financing Rate (“SOFR”) but experience with SOFR based loans is limited. In addition, because we use debt to finance various investments, changes in interest rates will affect our cost of capital and net investment income. ● If our investments are not managed effectively, we may be unable to achieve our investment objective. We may experience fluctuations in our periodic operating results. Any failure on our part to maintain our status as a BDC could reduce our operating flexibility. ● We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income. We may not be able to pay distributions to our shareholders. ● Our board of directors may change our investment objective, operating policies and strategies without notice. ● Because we borrow money, the potential for loss on amounts invested in us will be magnified and may increase the risk of investing in us. ● We are dependent on information systems and systems failures could significantly disrupt our business. A failure of cybersecurity systems, as well as the occurrence of events unanticipated in our disaster recovery systems and management continuity planning could impair our business. Risks Related to our Investments ● We may not realize gains from our equity investments. Our investments are risky and highly speculative. Our investments in private portfolio companies may be risky, and shareholders could lose their investment. ● Our portfolio companies may prepay loans, which prepayment may reduce stated yields if capital returned cannot be invested in transactions with equal or greater expected yields. ● Our failure to make follow-on investments in our portfolio companies could impair the value of our portfolio and our ability to make follow-on investments in certain portfolio companies may be restricted. ● As a BDC, our ability to invest in public companies and foreign companies is limited by the 1940 Act. Investments in foreign securities may involve significant risks in addition to the risks inherent in U.S. investments. ● 16.2% of the Company’s total assets are invested in our affiliate’s asset-based lending business and its activities are influenced by volatility in prices of gemstones/jewelry, and the gemstones and jewelry business is subject to the risk of fraud and counterfeiting. ● We may invest in “unitranche” debt instruments that combine both senior and subordinated debt into one debt instrument, which typically pay a higher rate of interest but may also pose greater risk. ● We may invest in, or obtain exposure to, obligations that may be “covenant-lite,” which means such obligations lack certain financial maintenance covenants. The disposition of our investments may result in contingent liabilities. If we invest in the securities and obligations of distressed and bankrupt issuers, we might not receive interest or other payments. Hedging transactions may expose us to additional risks. ● We are subject to risks associated with significant investments in one or more economic sectors and/or industries, including the business services sector, which includes our investment in our affiliate’s asset-based lending business. 5 Risks Related to our Operations as a BDC and a RIC ● Regulations governing our operation as a BDC may limit our ability to raise additional capital, which could have a material adverse impact on our liquidity, financial condition and results of operations. ● As an internally managed BDC, we are subject to certain restrictions that may adversely affect our ability to offer certain compensation structures. Also, we are dependent upon our management team and investment professionals for their time availability. If we are not able to hire and retain qualified personnel, or if we lose key personnel, our ability to implement our business strategy could be significantly harmed. ● The impact of financial reform legislation on us is uncertain. We also cannot predict how tax reform legislation will affect the Company, our investments, or our stockholders, and any such legislation could adversely affect our business. Legislation that became effective in 2018 may allow the Company to incur additional leverage, which could increase the risk of investing in the Company. ● If we do not invest a sufficient portion of our assets in qualifying assets, we could fail to qualify as a BDC, which would have a material adverse effect on our business, financial condition and results of operations. We would become subject to corporate-level U.S. federal income tax if we are unable to maintain our qualification as a RIC under Subchapter M of the Code or satisfy RIC distribution requirements. Risks Relating to an Investment in our Securities ● Investing in our securities may involve an above average degree of risk. Shares of closed-end investment companies often trade at a discount to their net asset value (“NAV”) and our shares have not traded at or above NAV since the first quarter of 2015. The market price of our common stock fluctuates. ● Certain provisions of the Delaware General Corporation Law and our certificate of incorporation and bylaws could deter takeover attempts and have an adverse impact on the price of our common stock. ● Our NAV per share may be diluted if we sell shares of our common stock at prices below the then current NAV per share of our common stock or securities to subscribe for or convertible into shares of our common stock. ● If we issue preferred stock, the NAV and market value of our common stock may become more volatile. Holders of any preferred stock might have the right to elect board members and have class voting rights. The terms of the Credit Facility place restrictions on our and/or our subsidiaries activities. ● Our business and operations could be negatively affected if we become subject to any securities class actions and derivative lawsuits. 6 INVESTMENTS We have built a diverse portfolio that includes senior secured first lien term loans, senior secured second lien term loans, equity, unitranche loans, senior secured first lien notes, subordinated notes, warrants and minority equity securities by investing approximately $10 million to $50 million of capital, on average, in the securities of portfolio companies. The following table shows the portfolio composition by industry grouping at fair value as of September 30, 2023 (dollars in thousands): Fair Value Percentage Services: Business $ 47,083 20.7 % Banking, Finance, Insurance & Real Estate 43,755 19.3 Hotel, Gaming & Leisure 34,158 15.1 Services: Consumer 18,292 8.1 High Tech Industries 15,472 6.8 Construction & Building 14,676 6.5 Metals & Mining 12,517 5.5 Media: Broadcasting & Subscription 11,665 5.2 Automotive 9,520 4.2 Consumer Discretionary 6,920 3.1 Energy: Oil & Gas 5,384 2.4 Packaging 3,396 1.5 Aerospace & Defense 2,645 1.2 Retail 978 0.4 Total $ 226,461 100.0 % The following table shows the portfolio composition by industry grouping at fair value as of September 30, 2022 (dollars in thousands): Fair Value Percentage Services: Business $ 52,851 27.4 % Hotel, Gaming & Leisure 31,947 16.6 Banking, Finance, Insurance & Real Estate 31,910 16.5 Services: Consumer 21,243 11.0 Construction & Building 17,724 9.2 Automotive 8,075 4.2 Consumer Discretionary 6,208 3.2 High Tech Industries 5,465 2.8 Media: Broadcasting & Subscription 4,220 2.2 Energy: Oil & Gas 4,152 2.2 Packaging 3,361 1.7 Metals & Mining 3,073 1.6 Aerospace & Defense 2,607 1.3 Retail 121 0.1 Total $ 192,957 100.0 % 7 The following table sets forth certain information as of September 30, 2023 for each portfolio company in which we had an investment. Other than these investments, our only formal relationship with our portfolio companies is the managerial assistance that we provide upon request and the board observer or participation rights we may receive in connection with our investment. Name of Portfolio Company Sector Security Owned Maturity Interest Rate (1) Par Amount/ Shares/Units Fair Value % of Net Assets Altisource S.A.R.L. Services: Business Senior Secured First Lien Term Loan B 4/30/2025 5.00 % $ 9,565,710 $ 7,805,619 5.3 % Altisource S.A.R.L. Services: Business Warrants 5/22/2027 75,080 206,470 0.1 % Arcline FM Holdings, LLC Aerospace & Defense First Lien Term Loan 6/23/2028 4.75 % 2,679,494 2,644,660 1.8 % Be Green Packaging, LLC Containers, Packaging & Glass Equity 417 - 0.0 % Boostability Seotowncenter, Inc. Services: Business Equity 833,152 - 0.0 % CB&L Associates Holdco I, LLC Banking, Finance, Insurance & Real Estate First Lien Term Loan 11/1/2025 2.75 % 5,916,102 5,191,380 3.5 % Chimera Investment Corp. Banking, Finance, Insurance & Real Estate Equity 117,310 2,116,271 1.4 % Chimera Investment Corp. Banking, Finance, Insurance & Real Estate Equity 163,601 3,414,353 2.3 % Copper Property CTL Pass Through Trust Banking, Finance, Insurance & Real Estate Equity Certificates 597,795 6,217,067 4.2 % DataOnline Corp. High Tech Industries Senior Secured First Lien Term Loan 11/13/2025 5.50 % 4,812,500 4,764,375 3.2 % DataOnline Corp. High Tech Industries Revolving Credit Facility 11/13/2025 5.50 % 714,286 707,143 0.5 % Deer Management Systems LLC Consumer Discretionary First Lien Term Loan 5/1/2028 8.25 % 3,357,500 3,323,925 2.3 % DirecTV Financing, LLC Media: Broadcasting & Subscription Senior Secured First Lien Term Loan 8/2/2027 5.00 % 4,100,000 4,003,908 2.7 % First Brands Group, LLC Automotive Senior Secured First Lien Term Loan 3/30/2027 5.00 % 3,919,598 3,880,402 2.6 % Franklin BSP Realty Trust, Inc. Banking, Finance, Insurance & Real Estate Equity 226,107 2,993,657 2.0 % Global Accessories Group, LLC Consumer goods: Non-durable Equity 380 - 0.0 % Innovate Corp. Construction & Building Senior Secured Notes 2/1/2026 2,750,000 2,076,250 1.4 % Invesco Mortgage Capital, Inc. Banking, Finance, Insurance & Real Estate Equity 205,000 3,989,300 2.7 % JFL-NGS-WCS Partners, LLC Construction & Building Senior Secured First Lien Term Loan B 11/12/2026 5.50 % 861,605 865,913 0.6 % JFL-NGS-WCS Partners, LLC Construction & Building Equity 10,000,000 11,733,525 8.0 % Lighting Science Group Corporation Containers, Packaging & Glass Warrants 5,000,000 - 0.0 % Lucky Bucks, LLC Consumer Discretionary Equity 180,739 1,545,318 1.1 % Lucky Bucks, LLC Consumer Discretionary Second Out Exit Term Loan 10/2/2029 7.50 % 1,361,240 1,361,240 0.9 % Lucky Bucks, LLC Consumer Discretionary First Out Exit Term Loan 10/2/2028 7.50 % 689,541 689,541 0.5 % McKissock Investment Holdings, LLC (dba Colibri) Services: Consumer Senior Secured First Lien Term Loan 3/10/2029 5.00 % 4,924,535 4,776,799 3.3 % MFA Financial, Inc. Banking, Finance, Insurance & Real Estate Equity 97,426 1,856,940 1.3 % New York Mortgage Trust, Inc. Banking, Finance, Insurance & Real Estate Equity 165,000 3,677,850 2.5 % PennyMac Financial Services, Inc. Banking, Finance, Insurance & Real Estate Equity 29,500 1,964,700 1.3 % PHH Mortgage Corp. Banking, Finance, Insurance & Real Estate Senior Secured Notes 3/15/2026 7.88 % 7,686,000 6,845,344 4.7 % Point.360 Services: Business Senior Secured First Lien Term Loan 7/8/2020 6.00 % 2,777,366 - 0.0 % Power Stop LLC Automotive Senior Secured First Lien Term Loan 1/26/2029 4.75 % 6,919,937 5,639,748 3.8 % Rithm Capital Corp. Banking, Finance, Insurance & Real Estate Equity 206,684 4,695,860 3.2 % Secure Acquisition Inc. (dba Paragon Films) Packaging Senior Secured First Lien Term Loan 12/16/2028 5.00 % 3,430,517 3,396,212 2.3 % SS Acquisition, LLC (dba Soccer Shots Franchising) Services: Consumer Senior Secured First Lien Term Loan 12/30/2026 6.50 % 6,666,667 6,666,667 4.5 % SS Acquisition, LLC (dba Soccer Shots Franchising) Services: Consumer Senior Secured First Lien Delayed Draw Term Loan 12/30/2026 6.50 % 3,200,000 3,200,000 2.2 % SMART Financial Operations, LLC Retail Equity 700,000 978,140 0.7 % Stancor (dba Industrial Flow Solutions Holdings, LLC) Services: Business Equity 338,736 200,566 0.1 % Staples, Inc. Services: Consumer First Lien Term Loan 9/12/2024 4.50 % 3,692,159 3,648,315 2.5 % Tamarix Capital Partners II, L.P. Banking, Finance, Insurance & Real Estate Fund Investment N/A 792,346 0.5 % Thryv Holdings, Inc. Media: Broadcasting & Subscription Senior Secured First Lien Term Loan B 3/1/2026 8.50 % 7,656,442 7,661,227 5.2 % Velocity Pooling Vehicle, LLC Automotive Equity 5,441 - 0.0 % Velocity Pooling Vehicle, LLC Automotive Warrants 3/30/2028 6,506 - 0.0 % Wingman Holdings, Inc. Aerospace & Defense Equity 350 - 0.0 % 1888 Industrial Services, LLC Energy: Oil & Gas Senior Secured First Lien Term Loan A 8/31/2024 5.00 % 9,946,741 - 0.0 % 1888 Industrial Services, LLC Energy: Oil & Gas Senior Secured First Lien Term Loan C 8/31/2024 5.00 % 1,231,932 751,479 0.5 % 1888 Industrial Services, LLC Energy: Oil & Gas Revolving Credit Facility 8/31/2024 5.00 % 4,632,177 4,632,177 3.2 % 1888 Industrial Services, LLC Energy: Oil & Gas Equity 21,562 - 0.0 % Black Angus Steakhouses, LLC Hotel, Gaming & Leisure Senior Secured First Lien Delayed Draw Term Loan 1/31/2024 9.00 % 875,749 875,749 0.6 % Black Angus Steakhouses, LLC Hotel, Gaming & Leisure Senior Secured First Lien Term Loan 1/31/2024 9.00 % 13,029,115 1,459,249 1.0 % Black Angus Steakhouses, LLC Hotel, Gaming & Leisure Senior Secured First Lien Super Priority Delayed Draw Term Loan 1/31/2024 9.00 % 1,920,960 1,920,960 1.3 % FST Holdings Parent, LLC High Tech Industries Equity 625,548 10,000,003 6.8 % Maritime Wireless Holdings LLC Hotel, Gaming & Leisure Senior Secured First Lien Term Loan C 5/31/2027 9.00 % 7,500,000 7,500,000 5.1 % Maritime Wireless Holdings LLC Hotel, Gaming & Leisure Equity 5,000,000 10,150,000 6.9 % FlexFIN, LLC Services: Business Equity Interest 38,870,711 38,870,711 26.5 % Kemmerer Holdings, LLC Metals & Mining Senior Secured First Lien Term Loan 6/21/2025 15.00 % 3,383,877 3,383,877 2.3 % Kemmerer Holdings, LLC Metals & Mining Equity 31 9,133,052 6.2 % NVTN LLC Hotel, Gaming & Leisure Senior Secured First Lien Delayed Draw Term Loan 12/31/2024 4.00 % 7,309,552 7,214,856 4.9 % NVTN LLC Hotel, Gaming & Leisure Senior Secured First Lien Term Loan B 12/31/2024 9.25 % 17,552,420 5,037,547 3.4 % NVTN LLC Hotel, Gaming & Leisure Senior Secured First Lien Term Loan C 12/31/2024 12.00 % 11,506,159 - 0.0 % NVTN LLC Hotel, Gaming & Leisure Equity 1,000 - 0.0 % (1) All interest is payable in cash and/or PIK, and all SOFR or LIBOR represents 1 Month and 3 Month respective rates unless otherwise indicated. For each debt investment, we have provided the current spread over index interest rate as of September 30, 2023. 8 As of September 30, 2023, our income-bearing investment portfolio, which represented 88.2% of our total portfolio, had a weighted average yield based upon cost of our portfolio investments of approximately 13.3% and 59.5% of our income-bearing investment portfolio bore interest based on floating rates, such LIBOR or SOFR, 13.9% of our income-bearing investment portfolio bore interest at fixed rates, and 26.6% of our income-bearing investment portfolio are income-producing equity investments. As of September 30, 2022, our income-bearing investment portfolio, which represented 62.0% of our total portfolio, had a weighted average yield based upon cost of our portfolio investments of approximately 4.9%, and 81.9% of our income-bearing investment portfolio bore interest based on floating rates, such as LIBOR or SOFR, while 18.1% of our income-bearing investment portfolio bore interest at fixed rates. The weighted average yield of our total portfolio does not represent the total return to our stockholders. The weighted average yield on income producing investments is computed based upon a combination of the cash flows to date and the contractual interest payments, principal amortization and fee notes due at maturity without giving effect to closing fees received, base management fees, incentive fees or general fund related expenses. For each floating rate loan, the projected fixed-rate equivalent coupon rate used to forecast the interest cash flows was calculated by adding the interest rate spread specified in the relevant loan document to the fixed-rate equivalent floating rate, duration-matched to the specific loan, adjusted by the floating rate floor and/or cap in place on that loan. Overview of Portfolio Companies Set forth below is a brief description of the business of our portfolio companies as of September 30, 2023: Portfolio Company Brief Description of Portfolio Company 1888 Industrial Services, LLC 1888 Industrial Services, LLC (“1888”) provides field support services to oil and gas independent producers, drilling companies and midstream companies in the Denver-Julesburg Basin and Permian Basin. 1888 builds, repairs, modifies and maintains oil and gas production equipment, sites, wells and pipelines. Altisource S.A.R.L. Altisource operates as an integrated service provider and marketplace for the real estate and mortgage industries. It provides property preservation and inspection services, payment management technologies, and a vendor management oversight software-as-a-service (“SaaS”) platform. Arcline FM Holdings, LLC Arcline FM Holdings, LLC (d/b/a Fairbanks Morse Defense) is a provider of propulsion systems, ancillary power, motors, and controllers for the US Navy and Coast Guard, and provides necessary parts and maintenance, repair and overhaul (MRO) services to its long lived installed base of equipment. Be Green Packaging, LLC Be Green Packaging, LLC, founded in 2007 and headquartered in Thousand Oaks, CA, designs and manufactures the sustainable, tree-free, molded fiber products and packaging for food service and consumer packaged goods end markets. Black Angus Steakhouses, LLC Black Angus Steakhouses, LLC, founded in 1964 and headquartered in Los Altos, CA, operates restaurants across six states including California, Arizona, Alaska, New Mexico, Washington, and Hawaii. Boostability Seotowncenter, Inc. Seotowncenter, Inc. is a tech-enabled business services company that delivers white label search engine optimization and local search and digital campaign fulfillment to the small and midsize business market. CB&L Associates Holdco I, LLC CBL owns, develops, acquires, leases, manages, and operates regional shopping malls, open-air and mixed-use centers, outlet centers, associated centers, community centers, office and other properties. Properties are in 24 states, primarily in the southeastern and midwestern United States. Chimera Investment Corp. Chimera Investment Corp. is an internally managed REIT that is primarily engaged in the business of investing in a diversified portfolio of mortgage assets, including residential mortgage loans, Agency residential mortgage-backed securities (“RMBS”), Non-Agency RMBS, Agency commercial mortgage-backed securities (“CMBS”), and other real estate-related assets. Copper Property CTL Pass Through Trust Copper Property CTL Pass Through Trust was established to acquire 160 retail properties and 6 warehouse distribution centers (the “Properties”) from J.C. Penney as part of its Chapter 11 plan of reorganization. The Trust’s operations consist solely of owning, leasing and selling the Properties. DataOnline Corp. DataOnline Corp. (“DataOnline”) is a global provider of M2M solutions specifically for the monitoring of both fixed and mobile remote industrial assets. DataOnline specializes in robust and reliable devices & sensors, remote data collection, global wireless communications & web-based applications. Deer Management Systems LLC Deer Management Systems LLC (d/b/a Reveal Cellular Cameras) is a provider of subscription-based, cellular trail cameras, which are used extensively by hunters and outdoorsmen. DirecTV Financing, LLC DirecTV offers digital entertainment services in the United States using satellite and IP-based technologies as well as streaming options that do not require either satellite or wired IP services. The Company’s customer base primarily consists of residential customers. First Brands Group, LLC First Brands Group, LLC is an automotive aftermarket platform offering comprehensive solutions for consumable maintenance and mission-critical repair parts under a portfolio of brands. FlexFIN, LLC FlexFIN operates an asset-based lending business under which it enters into secured loans and secured financing structures with borrowers engaged in the gemstone/jewelry industry. Franklin BSP Realty Trust, Inc. Franklin BSP Realty Trust, Inc. is a real estate finance company that primarily originates, acquires and manages a diversified portfolio of commercial real estate debt investments secured by properties located within and outside the United States. FST Holdings Parent, LLC FST is a privately held provider of diversified technical services to the semiconductor / microelectronics, life sciences, data center, government, and higher-education industries. Global Accessories Group, LLC Global Accessories Group, LLC, headquartered in New York City, designs, manufactures, and sells custom-themed jewelry and accessory collections. These collections are tailored to leading retailers in the specialty, department store, off-price and juniors markets. Innovate Corp. Innovate is a diversified holding company that has a portfolio of subsidiaries in a variety of operating segments, infrastructure, life sciences, and broadcasting. Invesco Mortgage Capital, Inc. Invesco Mortgage Capital Inc. is a Maryland corporation primarily focused on investing in, financing and managing mortgage-backed securities (“MBS”) and other mortgage-related assets. JFL-NGS-WCS Partners, LLC JFL-NGS-WCS Partners, LLC was formed in November 2020 when NorthStar Group Services, a provider of environmental remediation and deconstruction services, merged with Waste Control Specialists, a leading provider of hazardous and radioactive waste disposal, storage, and treatment for commercial and government customers. Kemmerer Operations, LLC Kemmerer Operations, LLC, location in Wyoming, is a producer of high-value thermal coal and surface-mined coal. Lighting Science Group Corporation Lighting Science Group Corporation (“LSG”) is a light emitting diode (“LED”) lighting technology company. LSG designs, develops and markets general illumination products that exclusively use LEDs as their light source. LSG’s product portfolio includes LED-based retrofit lamps (replacement bulbs) used in existing light fixtures as well as purpose-built LED-based luminaires (light fixtures). 9 Portfolio Company Brief Description of Portfolio Company Lucky Bucks, LLC Lucky Bucks, LLC owns and operates digital gaming terminals, or Coin Operated Amusement Machines, in the state Georgia. Maritime Wireless Holdings LLC Wireless Maritime Services LLC is a leading provider of on-board cellular communications solutions for the ocean-going cruise industry and other maritime sectors. McKissock Investment Holdings, LLC (dba Colibri) Colibri is a provider of career lifecycle management for mandatory professional education solutions across various end markets including Financial & Accounting Services, Real Estate, Healthcare, Valuation & Property Services and Teaching. MFA Financial, Inc. MFA Financial, Inc. is an internally-managed REIT primarily engaged in investing in residential mortgage assets, with a focus on residential whole loans, residential mortgage securities, and mortgage servicing rights-related assets. New York Mortgage Trust, Inc. NY Mortgage Trust is a REIT that acquires, invests in, finances and manages mortgage-related single-family and multi-family residential assets in the US. NVTN LLC NVTN LLC (d/b/a “Dick’s Last Resort”), established in 1985 and headquartered in Nashville, TN, is a “eatertainment” restaurant concept with locations throughout the US, mostly in budget friendly tourist destinations. NVTN LLC has developed an identifiable brand for its high-energy, unique themed restaurant concept that targets tourists and business travelers in high foot traffic locations. PennyMac Financial Services, Inc. PennyMac Financial Services, Inc. isa specialty financial services firm with a comprehensive mortgage platform and integrated business primarily focused on the production and servicing of U.S. residential mortgage loans and the management of investments related to the U.S. mortgage market. PHH Mortgage Corp. PHH Mortgage Corp. services and originates forward and reverse mortgage loans. The Company has been servicing mortgages since 1988 and commenced origination of forward mortgage loans in 2012 and reverse mortgage loans in 2013. Point.360 Point.360, headquartered in Los Angeles, CA is a full-service content management company with several facilities strategically located throughout Los Angeles supporting all aspects of postproduction. Power Stop LLC Power Stop LLC manufactures and distributes braking systems for cars, trucks, SUVs, performance vehicles, and severe duty trucks and tows. The Company offers brake kits, caliper kits, brake pads, brake rotors, calipers, brake shoes, and pad wear sensors. It provides products through a network of distributors in Europe, North America, South America, the Middle East, and Africa; and online retailers. Rithm Capital Corp. Rithm Capital Corp. (“RITM”) is a vertically integrated investment management and mortgage platform externally managed by Fortress Investment Group. RITM’s investments focus on servicing and origination, residential securities and loans, and consumer loans. Secure Acquisition Inc. (dba Paragon Films) Paragon Films, Inc. manufactures and supplies stretch film products to customers in various industries in the United States, Canada, Mexico, South America, and internationally. SS Acquisition, LLC (dba Soccer Shots Franchising) Soccer Shots Franchising is a franchised-based system operating in the U.S. and Canada that provides children’s enrichment programs with a unique emphasis on social, cognitive, and linguistic skill through soccer. SMART Financial Operations, LLC SMART Financial Operations, LLC, headquartered in Orlando, FL, is a specialty retail platform initially comprised of three distinct retail pawn store chains and a pawn industry consulting firm. Stancor (dba Industrial Flow Solutions Holdings, LLC) Stancor, founded in 1985 and based out of Monroe, CT, is a designer and manufacturer of electric submersible pumps, control, accessories, and parts. Staples, Inc. Staples is a B2B distributor of office supplies in North America and provider of e-commerce via Staples.com. Tamarix Capital Partners II, L.P. Tamarix Capital Partners II, L.P. is a licensed Small Business Investment Company (“SBIC”) formed to generate attractive-risk adjusted returns by making debt and preferred equity investments in United States-based, lower middle market companies operating across a broad cross-section of industries and sectors. Thryv Holdings, Inc. Thryv Holdings, Inc. is a provider of print and digital marketing solutions to small and medium sized businesses and SaaS end-to-end customer experience tools. Velocity Pooling Vehicle, LLC Velocity Pooling Vehicle, LLC, headquartered in Coppell, TX, is a manufacturer, distributor and retailer of branded aftermarket products for the powersports industry. The Company’s brands include Vance & Hines, Kuryakyn, Mustang, Performance Machine, and others. Wingman Holdings, Inc. Wingman Holdings, Inc. (f/k/a Crow Precision Components, LLC) is a Fort Worth, TX based forger of aluminum and steel used for mission critical aircraft components, among other end markets. 10 Payment of Our Expenses Since January 1, 2021, we are internally managed and do not pay any external investment advisory fees, but instead directly incur the operating costs associated with employing professionals and staff. We bear all costs and expenses of our operations and transactions, including, but not limited to those related to: ● our organization and continued corporate existence; ● calculating our net asset value (“NAV”) (including the cost and expenses of any independent valuation firms); ● expenses, including travel expense, incurred by our professionals or payable to third parties performing due diligence on prospective portfolio companies, monitoring our investments and, if necessary, enforcing our rights; ● interest payable on debt incurred to finance our investments; ● the costs of all offerings of common shares and other securities; ● operating costs associated with employing investment professionals and other staff; ● distributions on our shares; ● administration fees payable under our administration agreement; ● custodial fees related to our assets ● amounts payable to third parties relating to, or associated with, making investments; ● transfer agent and custodial fees; ● all registration and listing fees; ● U.S. federal, state and local taxes; ● independent directors’ fees and expenses; ● costs of preparing and filing reports or other documents with the SEC or other regulators; ● the costs of any reports, proxy statements or other notices to our stockholders, including printing costs; ● our fidelity bond; ● the operating lease of our office space; ● directors and officers/errors and omissions liability insurance, and any other insurance premiums; ● indemnification payments; and ● direct costs and expenses of administration, including audit and legal costs. Administration Agreement On January 19, 2011, the Company entered into an administration agreement with MCC Advisors. In connection with the adoption by the board of directors of an internalized management structure, on November 19, 2020, the Company entered into a Fund Accounting Servicing Agreement and an Administration Servicing Agreement on customary terms with U.S. Bancorp. A U.S. Bancorp affiliate also served as the Company’s custodian. The Company’s administrative and custodial relationship with U.S. Bancorp terminated on August 9, 2022. SS&C has since served as administrator of the Company and has provided us with fund accounting and financial reporting services pursuant to its Services Agreement with the Company. Effective September 12, 2022, Computershare serves as custodian for the Company pursuant to its Loan Administration and Custodial Agreement with the Company. For the years ended September 30, 2023, 2022 and 2021, we incurred $0.3 million, $0.3 million and $0.6 million in administrator expenses, respectively. 11 Internalized Management Structure On November 18, 2020, the board of directors approved adoption of an internalized management structure effective January 1, 2021. The new management structure replaced the investment management and administration agreements with MCC Advisors, which expired on December 31, 2020. The board approved the establishment of a committee, consisting of Arthur Ainsberg, Karin Hirtler-Garvey, Lowell Robinson and Howard Amster, to oversee the transition to the internalized management structure. To lead the internalized management team, the board appointed David Lorber, who had served as an independent director of the Company since April 2019, as Chief Executive Officer and Ellida McMillan, who previously served as Chief Financial Officer and Chief Operating Officer of Alcentra Capital Corporation, a NASDAQ-traded BDC, from April 2017 until it merged into Crescent Capital BDC, Inc. in February 2020, as Chief Financial Officer of the Company, each effective January 1, 2021. Mr. Lorber is paid an annual base salary of $530,000, and Ms. McMillan is paid an annual base salary of $350,000, and each is eligible for one or more discretionary cash bonuses. The internalized management team is responsible for the day-to-day management and operations of the Company, under the oversight of the board. The internalized management team presently consists of 3 investment professionals and 6 employees/consultants overall. The Company retained ACA Group, the successor to Alaric Compliance Services, LLC, whose officer serves as the Company’s Chief Compliance Officer. As discussed above, the Company has also entered into a services agreement on customary terms with SS&C, which serves as the Company’s administrator, as well as a loan administration and custodial agreement on customary terms with Computershare, who serves as our primary custodian. REGULATION General We have elected to be regulated as a BDC under the 1940 Act. The 1940 Act contains prohibitions and restrictions relating to transactions between BDCs and their affiliates, principal underwriters and affiliates of those affiliates or underwriters and requires that a majority of the directors be persons other than “interested persons”, as that term is defined in the 1940 Act. In addition, the 1940 Act provides that we may not change the nature of our business so as to cease to be, or to withdraw our election as, a BDC unless approved by “a majority of our outstanding voting securities.” As a BDC, we are required to meet an asset coverage ratio, reflecting the value of our total assets to our total senior securities, which include all of our borrowings and any preferred stock we may issue in the future, of at least 200%. However, in March 2018, the Small Business Credit Availability Act (the “SBCA”) modified the 1940 Act by allowing a BDC to increase the maximum amount of leverage it may incur from 200% to 150%, if certain requirements are met. Under the 1940 Act, we are allowed to increase our leverage capacity if stockholders representing at least a majority of the votes cast, when a quorum is present, approve a proposal to do so. If we receive stockholder approval, we would be allowed to increase our leverage capacity on the first day after such approval. Alternatively, the 1940 Act allows the majority of our independent directors to approve an increase in our leverage capacity, and such approval would become effective on the one-year anniversary of such approval. In either case, we would be required to make certain disclosures on our website and in SEC filings regarding, among other things, the receipt of approval to increase our leverage, our leverage capacity and usage, and risks related to leverage. The Company has not sought stockholder or independent director approval to reduce its asset coverage ratio to 150%. On March 23, 2018, the SBCA was signed into law and, among other things, instructs the SEC to issue rules or amendments to rules allowing BDCs to use the same registration, offering and communication processes that are available to operating companies. The rules and amendments specified by the SBCA became self-implementing on March 24, 2019. On April 8, 2020, the SEC adopted rules and amendments to implement certain provisions of the SBCA (the “Final Rules”) that, among other things, modify the registration, offering, and communication processes available to BDCs relating to: (i) the shelf offering process to permit the use of short-form registration statements on Form N-2 and incorporation by reference; (ii) the ability to qualify for well-known seasoned issuer status; (iii) the immediate or automatic effectiveness of certain filings made in connection with continuous public offerings; and (iv) communication processes and prospectus delivery. In addition, the SEC adopted rules that will require BDCs to comply with certain structured data and inline XBRL requirements. The Final Rules generally became effective on August 1, 2020, except that a BDC eligible to file short-form registration statements on Form N-2, like the Company, must comply with the Inline XBRL structured data requirements for its financial statements, registration statement cover page, and certain prospectus information by August 1, 2022. We may also be prohibited under the 1940 Act from knowingly participating in certain transactions with our affiliates without the prior approval of our directors who are not interested persons and, in some cases, prior approval by the SEC. 12 Qualifying Assets Under the 1940 Act, a BDC may not acquire any asset other than assets of the type listed in Section 55(a) of the 1940 Act, which are referred to as qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company’s total assets. The principal categories of qualifying assets relevant to our business are the following: (1) Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer (subject to certain limited exceptions) is an eligible portfolio company, or from any person who is, or has been during the preceding 13 months, an affiliated person of an eligible portfolio company, or from any other person, subject to such rules as may be prescribed by the SEC. An eligible portfolio company is defined in the 1940 Act as any issuer which: ● is organized under the laws of, and has its principal place of business in, the United States; ● is not an investment company (other than a small business investment company wholly owned by the Company) or a company that would be an investment company but for certain exclusions under the 1940 Act; and ● satisfies any of the following: ● has a market capitalization of less than $250 million or does not have any class of securities listed on a national securities exchange; ● is controlled by a BDC or a group of companies including a BDC, the BDC actually exercises a controlling influence over the management or policies of the eligible portfolio company, and, as a result thereof, the BDC has an affiliated person who is a director of the eligible portfolio company; or ● is a small and solvent company having total assets of not more than $4 million and capital and surplus of not less than $2 million. (2) Securities of an eligible portfolio company purchased from any person in a private transaction if there is no ready market for such securities and we already own 60% of the outstanding equity of the eligible portfolio company. (3) Securities received in exchange for or distributed on or with respect to securities described above, or pursuant to the exercise of warrants or rights relating to such securities. (4) Securities of any eligible portfolio company which we control. (5) Securities purchased in a private transaction from a U.S. issuer that is not an investment company or from an affiliated person of the issuer, or in transactions incident thereto, if the issuer is in bankruptcy and subject to reorganization or if the issuer, immediately prior to the purchase of its securities was unable to meet its obligations as they came due without material assistance other than conventional lending or financing arrangements. (6) Cash, cash equivalents, U.S. Government securities or high-quality debt securities maturing in one year or less from the time of investment. The regulations defining and interpreting qualifying assets may change over time. We may adjust our investment focus needed to comply with and/or take advantage of any regulatory, legislative, administrative or judicial actions in this area. Managerial Assistance to Portfolio Companies A BDC must have been organized and have its principal place of business in the United States and must be operated for the purpose of making investments in the types of securities described in “Regulation — Qualifying Assets” above. However, in order to count portfolio securities as qualifying assets for the purpose of the 70% requirement, the BDC generally must either control the issuer of the securities or must offer to make available to the issuer of the securities significant managerial assistance. Where the BDC purchases such securities in conjunction with one or more other persons acting together, the BDC will satisfy this test if one of the other persons in the group makes available such managerial assistance. Making available managerial assistance means, among other things, any arrangement whereby the BDC, through its directors, officers or employees, offers to provide, and, if accepted, does so provide, significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio company. Temporary Investments Pending investment in other types of “qualifying assets”, as described above, our investments may consist of cash, cash equivalents, U.S. Government securities or high-quality debt securities maturing in one year or less from the time of investment, which we refer to, collectively, as temporary investments, so that 70% of our assets are qualifying assets. Typically, we will invest in highly rated commercial paper, U.S. Government agency notes, U.S. Treasury bills or in repurchase agreements relating to such securities that are fully collateralized by cash or securities issued by the U.S. Government or its agencies. A repurchase agreement involves the purchase by an investor, such as us, of a specified security and the simultaneous agreement by the seller to repurchase it at an agreed-upon future date and at a price which is greater than the purchase price by an amount that reflects an agreed-upon interest rate. There is no percentage restriction on the proportion of our assets that may be invested in such repurchase agreements. However, certain diversification tests that must be met in order to qualify as a RIC for U.S. federal income tax purposes will typically require us to limit the amount we invest with any one counterparty. We will monitor the creditworthiness of the counterparties with which we enter into repurchase agreement transactions. 13 Senior Securities We are permitted, under specified conditions, to issue multiple classes of indebtedness and one class of stock senior to our common stock if our asset coverage, as defined in the 1940 Act, is at least equal to 200% (or 150% if certain requirements are met) immediately after each such issuance. In addition, while any preferred stock or publicly traded debt securities are outstanding, we may be prohibited from making distributions to our stockholders or the repurchasing of such securities or shares unless we meet the applicable asset coverage ratios at the time of the distribution or repurchase. We may also borrow amounts up to 5% of the value of our total assets for temporary or emergency purposes without regard to asset coverage. For a discussion of the risks associated with leverage, see “Item 1A. Risk Factors—Risks Related to our Business—Because we use borrowed funds to make investments or fund our business operations, we are exposed to risks typically associated with leverage which increase the risk of investing in us.” Code of Ethics We have adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act that establishes procedures for personal investments and restricts certain personal securities transactions. Personnel subject to each code may invest in securities for their personal investment accounts, including securities that may be purchased or held by us, so long as such investments are made in accordance with the code’s requirements. The code of ethics is available at our website, www.phenixfc.com , and is available on the EDGAR Database on the SEC’s Internet site at http://www.sec.gov . Privacy Policy We are committed to maintaining the privacy of stockholders and to safeguarding our non-public personal information. The following information is provided to help you understand what personal information we collect, how we protect that information and why, in certain cases, we may share information with select other parties. Generally, we do not receive any non-public personal information relating to our stockholders, although certain non-public personal information of our stockholders may become available to us. We do not disclose any non-public personal information about our stockholders or former stockholders to anyone, except as permitted by law or as is necessary in order to service stockholder accounts (for example, to a transfer agent or third party administrator). We restrict access to non-public personal information about our stockholders to our employees with a legitimate business need for the information. We maintain physical, electronic and procedural safeguards designed to protect the non-public personal information of our stockholders. Proxy Voting Policies and Procedures Our Proxy Voting Policies and Procedures are set forth below. The guidelines are reviewed periodically by management and our independent directors, and, accordingly, are subject to change. Proxy Policies Our proxy voting decisions are made by our investment professionals, who review on a case-by-case basis each proposal submitted to a shareholder vote to determine its impact on the portfolio securities held by the Company. Although the Company generally votes against proposals that may have a negative impact on our portfolio securities, we may vote for such a proposal if there exists compelling long-term reasons to do so. We generally do not believe it is necessary to engage the services of an independent third party to assist in issue analysis and vote recommendation for proxy proposals. Under certain circumstances and when deemed in the best interests of shareholders, the Company may, in the discretion of its officers, refrain from exercising its proxy voting right for a particular decision. To ensure that our vote is not the product of a conflict of interest, we require that: (i) anyone involved in the decision making process disclose to our Chief Compliance Officer any potential conflict that he or she is aware of and any contact that he or she has had with any interested party regarding a proxy vote; and (ii) employees involved in the decision making process or vote administration are prohibited from revealing how we intend to vote on a proposal in order to reduce any attempted influence from interested parties, unless such employee has received pre-approval from our Chief Compliance Officer. 14 Proxy Voting Records You may obtain information about how we voted proxies by making a written request for proxy voting information to: Chief Compliance Officer PhenixFIN Corporation 445 Park Avenue, 10 th Floor New York, NY 10022 Other Under the 1940 Act, we are not generally able to issue and sell our common stock at a price below NAV per share. We may, however, issue and sell our common stock, at a price below the current NAV of the common stock, or issue and sell warrants, options or rights to acquire such common stock, at a price below the current NAV of the common stock if our board of directors determines that such sale is in our best interest and in the best interests of our stockholders, and our stockholders have approved our policy and practice of making such sales within the preceding 12 months. In any such case, the price at which our securities are to be issued and sold may not be less than a price which, in the determination of our board of directors, closely approximates the market value of such securities. However, we currently do not have the requisite stockholder approval, nor do we have any current plans to seek stockholder approval, to sell or issue shares of our common stock at a price below NAV per share. In addition, at our 2012 Annual Meeting of Stockholders we received approval from our stockholders to authorize us, with the approval of our board of directors, to issue securities to, subscribe to, convert to, or purchase shares of the Company’s common stock in one or more offerings, subject to certain conditions as set forth in the proxy statement. Such authorization has no expiration. We expect to be periodically examined by the SEC for compliance with the 1940 Act. We are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect us against larceny and embezzlement. Furthermore, as a BDC, we are prohibited from protecting any director or officer against any liability to us or our stockholders arising from willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person’s office. We adopted written policies and procedures reasonably designed to prevent violation of the federal securities laws, and will review these policies and procedures annually for their adequacy and the effectiveness of their implementation. We have designated a Chief Compliance Officer to be responsible for administering the policies and procedures. Election to Be Taxed as a RIC We have elected and intend to qualify annually to be treated as a RIC under Subchapter M of the Code. As a RIC, we generally will not be subject to corporate-level U.S. federal income taxes on any net ordinary income or capital gains that we timely distribute to our stockholders as dividends. To qualify as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements (as described below). In addition, we must distribute to our stockholders, for each taxable year, at least 90% of our “investment company taxable income,” which is generally our net ordinary income plus the excess of realized net short-term capital gains over realized net long-term capital losses (the “Distribution Requirement”). Taxation as a RIC As a RIC, if we satisfy the Distribution Requirement, we will not be subject to U.S. federal income tax on the portion of our investment company taxable income and net capital gain, defined as net long-term capital gains in excess of net short-term capital losses, we timely distribute to stockholders. We will be subject to U.S. federal income tax at regular corporate rates on any net income or net capital gain not distributed to our stockholders. We will be subject to a nondeductible U.S. federal excise tax of 4% on undistributed income if we do not distribute at least the sum of 98% of our ordinary income in any calendar year, 98.2% of our capital gain net income for each one-year period ending on October 31 of such year, and any income and capital gain net income that we recognized in preceding years, but were not distributed during such years, and on which we did not pay U.S. federal income tax. Depending on the level of investment company taxable income (“ICTI”) earned in a tax year and the amount of net capital gains recognized in such tax year, we may choose to carry forward ICTI in excess of current year dividend distributions into the next tax year. In order to eliminate our liability for income tax, and to the extent necessary to maintain our qualification as a RIC, any such carryover ICTI and net capital gains must be distributed before the end of that next tax year through a dividend declared prior to the 15th day of the 9th month after the close of the taxable year in which such ICTI was generated. To the extent that we determine that our estimated current year annual taxable income will be in excess of estimated current year dividend distributions for U.S. federal excise tax purposes, we accrue U.S. federal excise tax, if any, on estimated excess taxable income as taxable income is earned. 15 In order to qualify as a RIC for U.S. federal income tax purposes, we must, among other things: ● qualify to be treated as a BDC under the 1940 Act at all times during each taxable year; ● derive in each taxable year at least 90% of our gross income from dividends, interest, payments with respect to certain securities loans, gains from the sale of stock or other securities, or other income derived with respect to our business of investing in such stock or securities, and net income derived from interests in “qualified publicly traded partnerships” (generally, partnerships that are traded on an established securities market or tradable on a secondary market, other than partnerships that could qualify as RICs if such partnerships were domestic corporations) (the “90% Income Test”); and ● diversify our holdings so that at the end of each quarter of the taxable year: ● at least 50% of the value of our assets consists of cash, cash equivalents, U.S. government securities, securities of other RICs, and other securities if such other securities of any one issuer do not represent more than 5% of the value of our assets or more than 10% of the outstanding voting securities of the issuer; and ● no more than 25% of the value of our assets is invested in the securities, other than U.S. government securities or securities of other RICs, of one issuer or of two or more issuers that are controlled, as determined under applicable tax rules, by us and that are engaged in the same or similar or related trades or businesses or in the securities of one or more qualified publicly traded partnerships (the “Diversification Tests”). We may invest in partnerships, including qualified publicly traded partnerships, which may result in our being subject to state, local or foreign income and franchise or withholding liabilities. Any underwriting fees paid by us are not deductible. We may be required to recognize taxable income in circumstances in which we do not receive cash. For example, if we hold debt obligations that are treated under applicable tax rules as having original issue discount (such as debt instruments with PIK interest or, in certain cases, with increasing interest rates or issued with warrants), we must include in income 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 us in the same taxable year. Because any original issue discount accrued will be included in our investment company taxable income for the year of accrual, we may be required to make a distribution to our stockholders in order to satisfy the Distribution Requirement, even though we will not have received any corresponding cash amount. Although we do not presently expect to do so, we are authorized to borrow funds and to sell assets in order to satisfy the Distribution Requirement. However, under the 1940 Act, we are not permitted to make distributions to our stockholders while our debt obligations and other senior securities are outstanding unless certain “asset coverage” tests are met. See “Business — Regulation — Senior Securities.” Moreover, our ability to dispose of assets to satisfy the Distribution Requirement may be limited by (1) the illiquid nature of our portfolio and/or (2) other requirements relating to our qualification as a RIC, including the Diversification Tests. If we dispose of assets in order to meet the Distribution Requirement or avoid the imposition of excise tax, we may make such dispositions at times that, from an investment standpoint, are not advantageous. Some of the income and fees that we may recognize will not count towards satisfaction of the 90% Income Test. In order to ensure that such income and fees do not disqualify us as a RIC for a failure to satisfy the 90% Income Test, we may be required to recognize such income and fees indirectly through one or more entities treated as corporations for U.S. federal income tax purposes. Such corporations will be required to pay corporate level U.S. federal income tax on their earnings, which ultimately will reduce our return on such income and fees. Failure to Qualify as a RIC If we were unable to continue to qualify for treatment as a RIC, we would be subject to U.S. federal income tax on all of our taxable income at regular corporate rates. We would not be able to deduct distributions to stockholders, nor would they be required to be made. Distributions, including distributions of net long-term capital gain, would generally be taxable to our stockholders as ordinary dividend income to the extent of our current and accumulated earnings and profits. Subject to certain limitations under the Code, corporate distributees would be eligible for the dividends received deduction. Distributions in excess of our current and accumulated earnings and profits would be treated first as a return of capital to the extent of the stockholder’s tax basis in their shares of the RIC, and any distributions in excess of tax basis would be treated as a capital gain. If we fail to qualify as a RIC for a period greater than two taxable years, to qualify as a RIC in a subsequent year we may be subject to regular corporate level U.S. federal income tax on any net built-in gains with respect to certain of our assets ( i.e. , the excess of the aggregate gains, including items of income, over aggregate losses that would have been realized with respect to such assets if we had been liquidated) that we elect to recognize on requalification or when recognized over the next five years. 16 Company Investments Certain of our investment practices are subject to special and complex U.S. federal income tax provisions that may, among other things, (1) disallow, suspend or otherwise limit the allowance of certain losses or deductions, including the dividends received deduction, (2) convert lower taxed long-term capital gains and qualified dividend income into higher taxed short-term capital gains or ordinary income, (3) convert ordinary loss or a deduction into capital loss (the deductibility of which is more limited), (4) cause us to recognize income or gain without a corresponding receipt of cash, (5) adversely affect the time as to when a purchase or sale of stock or securities is deemed to occur, (6) adversely alter the characterization of certain complex financial transactions and (7) produce income that will not qualify as good income for purposes of the 90% Income Test described above. We will monitor our transactions and may make certain tax elections and may be required to borrow money or dispose of securities to mitigate the effect of these rules and prevent disqualification as a RIC. Investments we make in securities issued at a discount or providing for deferred interest or payment of interest in kind are subject to special tax rules that will affect the amount, timing and character of distributions to stockholders. For example, if we hold debt obligations that are treated under applicable tax rules as having original issue discount (such as debt instruments with PIK interest or, in certain cases, with increasing interest rates or issued with warrants), we will generally be required to accrue daily as income a portion of the discount and to distribute such income each year to avoid U.S. federal income and excise taxes. Since in certain circumstances we may recognize income before or without receiving cash representing such income, we may have difficulty making distributions in the amounts necessary to satisfy the requirements for maintaining RIC tax treatment and for avoiding U.S. federal income and excise taxes. Accordingly, we may have to sell some of our investments at times we would not consider advantageous, raise additional debt or equity capital or reduce new investment originations to meet these distribution requirements. If we are not able to obtain cash from other sources, we may fail to qualify for tax treatment as a RIC and thereby be subject to corporate-level U.S. federal income tax. Gain or loss realized by us from warrants acquired by us as well as any loss attributable to the lapse of such warrants generally will be treated as capital gain or loss. Such gain or loss generally will be long term or short term, depending on how long we held a particular warrant. In the event we invest in foreign securities, we may be subject to withholding and other foreign taxes with respect to those securities. In that case, our yield on those securities would be decreased. We do not expect to satisfy the requirements necessary to pass through to our stockholders their share of the foreign taxes paid by us. If we purchase shares in a “passive foreign investment company’’ (a “PFIC’’), we may be subject to U.S. federal income tax on a portion of any “excess distribution’’ or gain from the disposition of such shares even if such income is distributed as a taxable dividend by us to our stockholders. Additional charges in the nature of interest may be imposed on us in respect of deferred taxes arising from such distributions or gains. If we invest in a PFIC and elect to treat the PFIC as a “qualified electing fund’’ under the Code (a “QEF’’), in lieu of the foregoing requirements, we will be required to include in income each year a portion of the ordinary earnings and net capital gain of the QEF, even if such income is not distributed to us. Alternatively, we may be able to elect to mark-to-market at the end of each taxable year our shares in certain PFICs; in this case, we will recognize as ordinary income any increase in the value of such shares, and as ordinary loss any decrease in such value to the extent it does not exceed prior increases included in income. Under either election, we may be required to recognize in a year income in excess of our distributions from PFICs and our proceeds from dispositions of PFIC stock during that year, and such income will nevertheless be subject to the Distribution Requirement and will be taken into account for purposes of the 4% U.S. federal excise tax described above. Income inclusions from a QEF will be “good income’’ for purposes of the 90% Income Test provided that they are derived in connection with our business of investing in stocks and securities or the QEF distributes such income to us in the same taxable year in which the income is included in our income.