Palmer Square Capital BDC Inc. 10-K

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Market Information There is currently no public market for our common stock, nor can we give any assurance that one will develop. As of the date hereof, none of our shares of common stock are subject to outstanding options or warrants, nor do we have any outstanding equity that is convertible into shares of our common stock. In addition, as of the date hereof, we have not granted any registration rights to any of our stockholders. No stock has been authorized for issuance under any equity compensation plans. Holders As of March 12, 2021, we had 131 record holders of our common stock. Distributions The following table reflects the distributions declared on shares during the fiscal year ended December 31, 2020: Declaration Date Record Date Per Share Payment Date Total Distributions Declared 5/12/2020 5/12/2020 $ 0.040 5/14/2020 $ 488,608 8/17/2020 8/17/2020 0.270 8/18/2020 3,325,960 11/16/2020 11/16/2020 0.360 11/17/2020 4,472,622 12/29/2020 12/31/2020 0.310 1/19/2021 3,894,469 $ 12,181,659 Distribution Reinvestment Plan The Company has adopted a dividend reinvestment plan that provides for reinvestment of its dividends and other distributions on behalf of the Company’s stockholders, unless a stockholder elects to receive cash. As a result, if the Company’s Board authorizes, and the Company declares, a cash dividend or other distribution, then stockholders who do not “opt out” of the Company’s dividend reinvestment plan will have their cash dividends and distributions automatically reinvested in additional shares of the Company’s common stock, rather than receiving cash dividends and distributions. 47 Prior to a Listing, the Board will use newly-issued shares of the Company’s common stock to implement the dividend reinvestment plan. The number of shares of common stock to be issued to a participant prior to a Listing would be equal to the quotient determined by dividing the cash value of the dividend payable to such stockholder by the net asset value per share as of the date such dividend was declared. After a Listing, the Board intends to primarily use newly-issued shares to implement the dividend reinvestment plan, whether or not the shares are trading at a price per share at, below or above net asset value. However, the Board reserves the right to purchase shares in the open market in connection with the implementation of the dividend reinvestment plan. The number of newly issued shares to be issued to a participant would be determined by dividing the total dollar amount of the dividend payable to such stockholder by the market price per share of the Company’s common stock at the close of regular trading on a national securities exchange on the dividend payment date. Shares purchased in open market transactions by US Bank, the plan administrator and the Company’s transfer agent, registrar and dividend disbursing agent, will be allocated to a participant based upon the average purchase price, excluding any brokerage charges or other charges, of all shares of the Company’s common stock purchased with respect to the dividend. A registered stockholder may elect to receive an entire distribution in cash by notifying US Bank in writing so that such notice is received by the plan administrator no later than the record date for distributions to stockholders. The plan administrator will set up an account for shares acquired through the plan for each stockholder who has not elected to receive dividends or other distributions in cash and hold such shares in noncertificated form. There will be no brokerage charges or other charges to stockholders who participate in the plan. The plan administrator’s fees are paid by the Company. Stockholders who receive dividends and other distributions in the form of stock are generally subject to the same U.S. federal, state and local tax consequences as are stockholders who elect to receive their distributions in cash. However, since a participating stockholder’s cash dividends will be reinvested, such stockholder will not receive cash with which to pay any applicable taxes on reinvested dividends. A stockholder’s basis for determining gain or loss upon the sale of stock received in a dividend or other distribution from the Company will generally be equal to the total dollar amount of the distribution payable to the stockholder. Any stock received in a dividend or other distribution will have a new holding period for tax purposes commencing on the day following the day on which the shares are credited to the U.S. stockholder’s account. Participants may terminate their accounts under the plan by so notifying the plan administrator by submitting a letter of instruction terminating the participant’s account under the plan to US Bank. The plan may be terminated by the Company upon notice in writing mailed to each participant at least 30 days prior to any record date for the payment of any dividend by the Company. If participants withdraw from the plan or the plan is terminated, the plan administrator will cause the shares held for the participant under the plan to be delivered to the participant. If an investor holds common stock with a brokerage firm that does not participate in the plan, such investor will not be able to participate in the plan and any dividend reinvestment may be affected on different terms than those described above. Recent sales of Unregistered Securities During the year ended December 31, 2020, the Company issued and sold 12,562,805 shares of its common stock at an aggregate purchase price of approximately $238.6 million. The issuance of the shares of common stock was exempt from the registration requirements of the Securities Act, pursuant to Section 4(a)(2) and Rule 506(b) of Regulation D thereof. 48 ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data for the period from January 23, 2020 (commencement of operations) through December 31, 2020 is derived from our consolidated financial statements which have been audited by PricewaterhouseCoopers LLP, our independent registered public accounting firm. For the Period January 23, 2020 (Commencement of Operations) through December 31, 2020 Total investment income $ 25,468,576 Total expenses 11,265,237 Less: Management fee waiver (493,447 ) Net expenses 10,771,790 Net investment income 14,696,786 Net realized gains (losses) on investments (1,018,741 ) Net unrealized gains (losses) on investments 13,055,565 Net increase in net assets resulting from operations $ 26,733,610 Per share information - basic and diluted Net investment income $ 1.32 Net realized and unrealized gain (loss) on investments (0.19 ) Net increase (decrease) in net assets resulting from operations 1.13 Distributions from net investment income $ (0.98 ) Balance sheet data: Total assets $ 667,490,101 Net assets $ 253,144,971 Other data: Total return based on net asset value 4.29 % Number of portfolio company investments at period end 181 Total portfolio investments at period end 202 Proceeds from sale of portfolio investments $ 268,256,929 The data should be read in conjunction with our consolidated financial statements and related notes thereto and “ Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations ” included elsewhere in this Annual Report on Form 10-K. 49 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing elsewhere in this Annual Report on Form 10-K. Forward Looking Statements This annual report on Form 10-K contains forward-looking statements that involve substantial known and unknown risks, uncertainties and other factors. Undue reliance should not be placed on such statements. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about our company, our current and prospective portfolio investments, our industry, our beliefs and our assumptions. Words such as “anticipates,” “expects,” “intends,” “plans,” “will,” “may,” “continue,” “believes,” “seeks,” “estimates,” “would,” “could,” “should,” “targets,” “projects,” and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including: ● our future operating results; ● our business prospects and the prospects of our portfolio companies; ● changes in political, economic or industry conditions, the interest rate environment or conditions affecting the financial and capital markets, including changes from the impact of the novel coronavirus (SARS-CoV-2) and related respiratory disease (“COVID-19”) pandemic; ● the ability of the Investment Advisor to locate suitable investments for us and to monitor and administer our investments; ● the ability of the Investment Advisor and its affiliates to attract and retain highly talented professionals; ● risk associated with possible disruptions in our operations or the economy generally; ● the timing of cash flows, if any, from the operations of the companies in which we invest; ● the ability of the companies in which we invest to achieve their objectives, including as a result of the current COVID-19 pandemic; ● our ability to continue to effectively manage our business due to the disruptions caused by the current COVID-19 pandemic; ● the dependence of our future success on the general economy and its effect on the industries in which we invest; ● our ability to maintain our qualification as a BDC and as a RIC under the Code; ● the use of borrowed money to finance a portion of our investments; ● the adequacy, availability and pricing of our financing sources and working capital; ● actual or potential conflicts of interest with the Investment Advisor and its affiliates; ● our contractual arrangements and relationships with third parties; 50 ● the current economic downturn, interest rate volatility, loss of key personnel, and the illiquid nature of our investments; and ● the risks, uncertainties and other factors we identify under “Item 1A. Risk Factors” and elsewhere in this annual report on Form 10-K. Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of the assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this annual report on Form 10-K should not be regarded as a representation by us that our plans and objectives will be achieved. These risks and uncertainties include those described or identified in the section entitled “Item 1A. Risk Factors” and elsewhere in this annual report on Form 10-K. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this annual report on Form 10-K. Moreover, we assume no duty and do not undertake to update the forward-looking statements. Overview We are a financial services company that primarily lends to and invests in corporate debt securities of privately held companies, including small to large private U.S. companies. We were organized as a Maryland corporation on August 26, 2019 and are structured as an externally managed, non-diversified closed-end management investment company. We have elected to be regulated as a BDC under the 1940 Act and, beginning with our taxable year ending December 31, 2020, we have elected to be treated as a RIC under Subchapter M of the Code, and we expect to qualify as a RIC annually thereafter. We are externally managed by the Investment Advisor, an investment adviser that is registered with the SEC under the Advisers Act, pursuant to the Advisory Agreement. Subject to the supervision of our Board, a majority of which is made up of Independent Directors, our Investment Advisor manages our day-to-day operations and provides us with investment advisory and management services and certain administrative services. The Investment Advisor, in its capacity as Administrator, provides the administrative services necessary for us to operate pursuant to the Administration Agreement. The Administrator has entered into the Sub-Administration Agreement to delegate certain administrative functions to the Sub-Administrator. Our Investment Advisor is a majority-owned subsidiary of Palmer Square, which is a privately-held firm specializing in global alternative (non-traditional) investments with a total return orientation. Our investment objective is to maximize total return, comprised of current income and capital appreciation. The Company’s current investment focus is guided by two strategies that facilitate our investment opportunities and core competencies: (1) investing in corporate debt securities and, to a lesser extent, (2) investing in CLO structured credit that typically owns corporate debt securities, including the equity and junior debt tranches of CLOs. To a limited extent, we may enter into derivatives transactions, which may utilize instruments such as forward contracts, currency options and interest rate swaps, caps, collars and floors to seek to hedge against fluctuations in the relative values of our portfolio positions from changes in currency exchange rates and market interest rates or to earn income and enhance our total returns. We may also receive or purchase warrants or rights to acquire equity or other securities in connection with making a debt investment in a company. We may also invest in other strategies and opportunities from time to time that we view as attractive. We will continue to evaluate other investment strategies in the ordinary course of business with no specific top-down allocation to any single investment strategy. Revenues We generate revenue primarily in the form of interest and fee income on debt investments we hold and capital gains, if any, on investments. Our debt investments generally bear interest at a floating rate usually determined on the basis of a benchmark such as LIBOR. Interest on debt securities is generally payable quarterly or semi-annually. In some instances, we receive payments on our debt investments based on scheduled amortization of the outstanding balances. In addition, we receive repayments of some of our debt investments prior to their scheduled maturity date. The frequency or volume of these repayments is expected to fluctuate significantly from period to period. Our portfolio activity also reflects the proceeds of sales of securities. We may also generate revenue in the form of commitment, origination, amendment, structuring or due diligence fees, fees for providing managerial assistance and consulting fees. 51 Expenses Our primary operating expenses include the payment of fees to the Investment Advisor under the Advisory Agreement, our allocable portion of overhead and rental expenses under the Administration Agreement and other operating costs described below. We bear all other out-of-pocket costs and expenses of our operations and transactions, including: ● interest expense and other costs associated with our indebtedness; ● the cost of calculating our net asset value, including the cost of any third-party valuation services; ● the cost of effecting sales and repurchases of shares of our common stock and other securities; ● fees payable to third parties relating to making investments, including our Investment Advisor’s or its affiliates’ travel expenses, research costs and out-of-pocket fees and expenses associated with performing due diligence and reviews of prospective investments; ● transfer agent and custodial fees; ● operating costs incurred prior to the commencement of our operations; ● out-of-pocket fees and expenses associated with marketing efforts; ● federal and state registration fees and any stock exchange listing fees; ● U.S. federal, state and local taxes; ● Independent Directors’ fees and expenses; ● brokerage commissions and markups; ● fidelity bond, directors’ and officers’ liability insurance and other insurance premiums; ● direct costs, such as printing, mailing, long distance telephone and staff; ● fees and expenses associated with independent audits and outside legal costs; ● costs associated with our reporting and compliance obligations under the 1940 Act and other applicable U.S. federal and state securities laws; and ● other expenses incurred by the Administrator or us in connection with administering our business, including payments under the Administration Agreement that will be based upon our allocable portion (subject to the review and approval of our Board) of overhead, including rental expenses. Portfolio and Investment Activity As of December 31, 2020, our weighted average total yield to maturity of debt and income producing securities at fair value was 4.96%, and our weighted average total yield to maturity of debt and income producing securities at amortized cost was 5.49%. As of December 31, 2020, we had 202 debt and private investments in 181 portfolio companies with an aggregate fair value of approximately $600.1 million. 52 Our investment activity for the period January 23, 2020 (Commencement of Operations) through December 31, 2020 is presented below (information presented herein is at amortized cost unless otherwise indicated). For the Period January 23, 2020 (Commencement of Operations) through December 31, 2020 New investments: Gross investments $ 854,515,933 Less: sold investments (268,256,929 ) Total new investments 586,259,004 Principal amount of investments funded: First-lien senior secured debt investments $ 810,935,108 Second-lien senior secured debt investments 20,328,052 Corporate Bonds 6,494,148 Collateralized securities and structured products - debt 16,758,625 Total principal amount of investments funded 854,515,933 Principal amount of investments sold: First-lien senior secured debt investments 257,021,739 Second-lien senior secured debt investments 920,206 Corporate Bonds 6,494,148 Collateralized securities and structured products - debt 3,820,836 Total principal amount of investments sold or repaid 268,256,929 Number of new investment commitments 206 Average new investment commitment amount $ 2,950,629 Weighted average maturity for new investment commitments 5.15 years Percentage of new debt investment commitments at floating rates 99.79 % Percentage of new debt investment commitments at fixed rates 0.21 % Weighted average interest rate of new investment commitments 4.74 % Weighted average spread over LIBOR of new floating rate investment commitments 4.15 % Weighted average interest rate on investment sold or paid down 3.94 % 53 As of December 31, 2020, our investments consisted of the following: December 31, 2020 Amortized Fair Cost Value Investments: First-lien senior secured debt $ 554,650,131 $ 566,459,850 Second-lien senior secured debt 19,407,847 19,975,980 Collateralized securities and structured products - debt 12,937,788 13,615,501 Short-term investments 53,104,869 53,104,869 Total Investments $ 640,100,635 $ 653,156,200 The table below describes investments by industry composition based on fair value as of December 31, 2020: December 31, 2020 Software 13.3 % Healthcare Providers and Services 12.0 % Short-Term Investments 8.1 % Insurance 7.7 % Professional Services 4.4 % Media 4.4 % Diversified Financial Services 3.7 % Hotels, Restaurants and Leisure 3.6 % Independent Power and Renewable Electricity Producers 3.2 % Diversified Consumer Services 3.2 % IT Services 3.1 % Commercial Services and Supplies 2.8 % Specialty Retail 2.4 % Containers and Packaging 2.4 % Health Care Technology 2.3 % Diversified Telecommunication Services 2.2 % Construction and Engineering 2.2 % Structured Note 2.1 % Chemicals 1.8 % Oil, Gas and Consumable Fuels 1.7 % Interactive Media and Services 1.5 % Metals and Mining 1.3 % Food Products 1.2 % Healthcare Equipment and Supplies 1.1 % Building Products 1.1 % Pharmaceuticals 1.0 % Wireless Telecommunication Services 0.9 % Leisure Products 0.8 % Electric Utilities 0.8 % Aerospace and Defense 0.7 % Construction Materials 0.6 % Internet and Direct Marketing Retail 0.5 % Technology Hardware, Storage and Peripherals 0.5 % Capital Markets 0.4 % Energy Equipment and Services 0.3 % Real Estate Investment Trusts (REITs) 0.3 % Textiles, Apparel and Luxury Goods 0.3 % Transportation Infrastructure 0.1 % Total 100.0 % 54 The table below shows the weighted average yields and interest rate of our debt investments at fair value as of December 31, 2020: December 31, 2020 Weighted average total yield of debt and income producing securities 4.96 % Weighted average interest rate of debt and income producing securities 4.73 % Weighted average spread over LIBOR of all floating rate investments 4.14 % Results of Operations The following table represents the operating results for the period January 23, 2020 (Commencement of Operations) through December 31, 2020: For the Period January 23, 2020 (Commencement of Operations) through December 31, 2020 Total investment income $ 25,468,576 Less: Net expenses 10,771,790 Net investment income 14,696,786 Net realized gains (losses) on investments (1,018,741 ) Net change in unrealized gains (losses) on investments 13,055,565 Net increase (decrease) in net assets resulting from operations $ 26,733,610 Investment Income Investment income for the period January 23, 2020 (Commencement of Operations) through December 31, 2020, was as follows: For the Period January 23, 2020 (Commencement of Operations) through December 31, 2020 Interest from investments $ 24,956,907 Dividend income 228,092 Other income 283,577 Total investment income $ 25,468,576 55 Comparative consolidated financial statements are not presented as the Company commenced operations on January 23, 2020. Expenses Operating expenses for the period January 23, 2020 (Commencement of Operations) through December 31, 2020, was as follows: For the Period January 23, 2020 (Commencement of Operations) through December 31, 2020 Interest expenses $ 4,739,682 Management fees 3,947,575 Other operating expenses 2,375,781 Initial organization 122,199 Directors fees 80,000 Management fee waiver (493,447 ) Net expenses $ 10,771,790 Net expenses for the period from January 23, 2020 (Commencement of Operations) through December 31, 2020 were $10.8 million which consisted of $3.9 million in management fees, $122 thousand in initial organization expenses, $2.4 million in other operating expense, and $4.7 million in interest expenses offset by $493 thousand in management fee waiver from the Investment Advisor. Net Change in Unrealized Gains (Losses) on Investments We fair value our portfolio investments quarterly and any changes in fair value are recorded as unrealized gains or losses. During the period January 23, 2020 (Commencement of Operations) through December 31, 2020, net unrealized gains (losses) on our investment portfolio were comprised of the following: For the Period January 23, 2020 (Commencement of Operations) through December 31, 2020 Unrealized gains on investments $ 13,991,108 Unrealized (losses) on investments (935,543 ) Net change in unrealized gains (losses) on investments $ 13,055,565 56 The change in unrealized appreciation (depreciation) for the period from January 23, 2020 (Commencement of Operations) through December 31, 2020 totaled $13.1 million. The change in net unrealized appreciation for the period from January 23, 2020 (Commencement of Operations) through December 31, 2020 was related to the appreciation of our investments in Boxer Parent Company, Inc., CHG Healthcare Services, Inc, and Traverse Midstream Partners, LLC among other existing portfolio investments. Financial Condition, Liquidity and Capital Resources We anticipate cash to be generated from the private offering of our common stock and other future offerings of securities (including an initial public offering), and cash flows from operations, including interest earned from the temporary investment of cash in cash equivalents, U.S. government securities and other high-quality debt investments that mature in one year or less. Additionally, 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 150% immediately after each such issuance. If we are unable to obtain leverage or raise equity capital on terms that are acceptable to us, our ability to grow our portfolio could be substantially impacted. Furthermore, while any indebtedness and senior securities remain outstanding, we may be required to prohibit any distribution to our stockholders or the repurchase of shares unless we meet the applicable asset coverage ratios at the time of the distribution or repurchase. In connection with borrowings, our lenders, including under the Credit Facility and the WF Credit Facility, may require us to pledge assets, investor commitments to fund capital calls and/or the proceeds of those capital calls. In addition, such lenders may ask us to comply with positive or negative covenants that could have an effect on our operations. During the period January 23, 2020 (Commencement of Operations) through December 31, 2020, we experienced a net increase in cash and cash equivalents of $681 thousand. During the period, net cash used in operating activities was $623.2 million, primarily as a result of fundings of portfolio investments (excluding investments in short-term money market funds) of $854.5 million, partially offset by proceeds received from sale of investments of $268.3 million. We invested in short-term money market funds during the period, and as of the end of the period we held $53.1 million in fair value of short-term money market funds. During the same period, net cash provided by financing activities was $623.9 million, primarily consisting of $395.3 million of net borrowing under the Credit Facility and proceeds from the issuance of common stock of $233.7 million As of December 31, 2020, we had cash and cash equivalents of $683 thousand. As of December 31, 2020, we had $395 million principal outstanding under the Credit Facility. As of December 31, 2020, we had aggregate capital commitments and undrawn capital commitments from investors as follows: December 31, 2020 Capital Commitments Unfunded Capital Commitments % of Capital Commitments Funded Common stock $ 235,670,000 $ 2,000,000 99 % As a BDC, we are required to meet a coverage ratio of total assets to total borrowings and other senior securities, which include all of our borrowings and any preferred stock that we may issue in the future, of at least 150%. If this ratio declines below 150%, we cannot incur additional debt and could be required to sell a portion of our investments to repay some debt when it is disadvantageous to do so. As of December 31, 2020, our asset coverage ratio was 164%. Capital Contributions During the period January 23, 2020 (Commencement of Operations) through December 31, 2020, the Company issued and sold 12,562,805 shares at an aggregate purchase price of $238.6 million. The amount includes shares issued in reinvestment. 57 Financing Arrangements Bank of America Credit Facility On February 18, 2020, the Company, through a special purpose wholly-owned subsidiary, PS BDC Funding, entered into the Credit Agreement with the Lenders, BofA N.A. as the administrative agent and BofA Securities, as Lead Arranger and Sole Book Manager, pursuant to which the Lenders agreed to provide the Company with a revolving line of credit. Under the Credit Facility, which matures on February 18, 2023, the Lenders have agreed to extend credit to PS BDC Funding in an aggregate amount up to the Commitment (as defined in the Credit Agreement) amount. The Commitment amount for the Credit Facility was $200.0 million as of the closing date of the Credit Agreement and increased to $400.0 million on the one-month anniversary of the closing date, and further increased to $475.0 million on October 12, 2020. The Borrowers’ ability to draw under the Credit Facility is scheduled to terminate on February 11, 2023. All amounts outstanding under the Credit Facility are required to be repaid by February 18, 2023. The loans under the Credit Facility may be base rate loans or eurocurrency rate loans. The base rate loans will bear interest at the base rate plus 1.30%, and the eurocurrency rate loans will bear interest at LIBOR plus 1.30%. The “base rate” will be equal to the highest of (a) the federal funds rate plus 1/2 of 1%, (b) the prime rate and (c) LIBOR. The Credit Agreement includes fallback language in the event that LIBOR becomes unavailable. Interest pursuant to base rate loans is payable quarterly in arrears, and interest pursuant to eurocurrency loans is payable either quarterly or monthly, as specified by the Borrowers in a loan notice pertaining thereto. The Credit Agreement requires the payment of a commitment fee of 0.50% for unused Commitments during the first five months following the closing of the Credit Facility, and, thereafter, 1.80% for any unused Commitments above 70% of the total Commitments. Such fee is payable quarterly in arrears. The advance rate for PS BDC Funding’s Eligible Collateral Assets ranges from 40% for Second Lien Bank Loans to 70% for First Lien Bank Loans that are B Assets to 100% for Cash (excluding Excluded Amounts) (as each such term is defined in the Credit Agreement). PS BDC Funding has pledged all of its assets to BofA N.A., in its capacity as Administrative Agent, to secure its obligations under the Credit Facility. Both the Company and PS BDC Funding have made customary representations and warranties and are required to comply with various covenants, reporting requirements, and other customary requirements for similar credit facilities. Borrowing under the Credit Facility is subject to the leverage restrictions contained in the 1940 Act. The obligations under the Credit Agreement may be accelerated upon the occurrence of an event of default under the Credit Agreement, including in the event of a change of control of PS BDC Funding or if the Investment Advisor ceases to serve as investment adviser to the Company. As of December 31, 2020, we had approximately $395 million principal outstanding and $80 million of available Commitments under the Credit Facility, and PS BDC Funding was in compliance with the applicable covenants in the Credit Facility on such date. Wells Fargo Credit Facility On December 18, 2020, the Company, through a special purpose wholly-owned subsidiary, PS BDC Funding II, entered into the Loan Agreement with the WF Lenders, WFB as the administrative agent and U.S. Bank, as Collateral Agent and Custodian, pursuant to which the WF Lenders agreed to provide the Company with a line of credit. Under the WF Credit Facility, which matures on December 18, 2025, the WF Lenders have agreed to extend credit to PS BDC Funding II in an aggregate amount up to the Facility Amount (as defined in the Loan Agreement). The Facility Amount for the WF Credit Facility was $150.0 million as of the closing date of the Loan Agreement. The WF Borrowers’ ability to draw under the WF Credit Facility is scheduled to terminate on December 18, 2023. All amounts outstanding under the WF Credit Facility are required to be repaid by December 18, 2025. The loans under the WF Credit Facility may be Broadly Syndicated Loans or Middle Market Loans and shall be eurocurrency rate loans unless such rate is unavailable, in which case the loans shall be base rate loans until such rate is available. Broadly Syndicated Loans will bear interest at the LIBOR or base rate, as applicable, plus 1.85%, and Middle Market Loans will bear interest at LIBOR or base rate, as applicable, plus 2.35%. The “base rate” will be equal to the highest of (a) the federal funds rate plus 1/2 of 1% and (b) the prime rate. The Loan Agreement includes fallback language in the event that LIBOR becomes unavailable. Interest is payable quarterly, as determined by the WFB as the administrative agent. The WF Loan Agreement requires the payment of a non-usage fee of (x) 0.50% multiplied by daily unused Facility Amounts during the first six months following the closing of the WF Credit Facility, (y) 0.50% multiplied by the lesser of (1) daily unused Facility Amounts and (2) 50% of the Facility Amount plus 2.00% multiplied by the greater of (i) the difference between the daily unused Facility Amount and 50% of the Facility Amount and (ii) zero between six and twelve months following the closing of the WF Credit Facility, and, (z) thereafter, 0.50% multiplied by the lesser of (1) daily unused Facility Amounts and (2) 20% of the Facility Amount plus 2.00% multiplied by the greater of (i) the difference between the daily unused Facility Amount and 20% of the Facility Amount and (ii) zero. Such fee is payable quarterly in arrears. The applicable percentage for PS BDC Funding II’s Eligible Loans ranges from 67.5% for Middle Market Loans to 70% for Broadly Syndicated Loans (as each such term is defined in the Loan Agreement). 58 PS BDC Funding II has pledged all of its assets to U.S. Bank, in its capacity as Collateral Agent, to secure its obligations under the WF Credit Facility. Both the Company and PS BDC Funding II have made customary representations and warranties and are required to comply with various covenants, reporting requirements, and other customary requirements for similar credit facilities. Borrowing under the WF Credit Facility is subject to the leverage restrictions contained in the 1940 Act. The obligations under the Loan Agreement may be accelerated upon the occurrence of an event of default under the Loan Agreement, including in the event of a change of control of PS BDC Funding II, if the Investment Advisor ceases to serve as investment adviser to the Company, or if Palmer Square or its affiliates cease to directly or indirectly own a majority of the membership interests of the Investment Advisor. As of December 31, 2020, we had no principal outstanding and $150 million of available Commitments under the WF Credit Facility. Distribution Policy To the extent that we have income available, we intend to distribute quarterly dividends to our stockholders. Our quarterly dividends, if any, will be determined by our Board. Any dividends to our stockholders will be declared out of assets legally available for distribution. Beginning with our taxable year ending December 31, 2020 we have elected to be treated as a RIC under the Code, and we expect to qualify as a RIC annually thereafter. To obtain and maintain RIC tax treatment, among other things, we must distribute dividends to our stockholders in respect of each taxable year of an amount at least equal to 90% of the sum of our net ordinary income and net short-term capital gains in excess of our net long-term capital losses (“investment company taxable income”), determined without regard to any deduction for dividends paid. In order to avoid certain excise taxes imposed on RICs, we currently intend to distribute dividends to our stockholders in respect of each calendar year of an amount at least equal to the sum of: (1) 98% of our net ordinary income (taking into account certain deferrals and elections) for such calendar year; (2) 98.2% of our capital gains in excess of capital losses (“capital gain net income”), adjusted for certain ordinary losses, generally for the one-year period ending on October 31 of such calendar year; and (3) any net ordinary income and capital gain net income for preceding years that were not distributed during such years and on which we previously paid no U.S. federal income tax. Under certain applicable provisions of the Code and U.S. Treasury regulations, distributions payable in cash or in shares of stock at the election of the stockholders are treated as taxable dividends. The Internal Revenue Service has published guidance indicating that this rule will apply even where the total amount of cash that may be distributed is limited to no more than 20% of the total distribution. Under this guidance if too many stockholders elect to receive their distributions in cash, the cash available for distribution must be allocated among the stockholders electing to receive cash (with the balance of the distribution paid in stock). If we decide to make any distributions consistent with this guidance that are payable in part in its stock, taxable stockholders receiving such dividends will be required to include the full amount of the dividend (whether received in cash, shares of our stock, or a combination thereof) as ordinary income (or as long-term capital gain to the extent such distribution is properly reported as a capital gain dividend) to the extent of our current and accumulated earnings and profits for U.S. federal income tax purposes. As a result, a U.S. stockholder may be required to pay tax with respect to such dividends in excess of any cash received. If a U.S. stockholder sells the stock it receives in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the value of our stock at the time of the sale. Furthermore, with respect to non-U.S. stockholders, the Company may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock. We currently intend to distribute net capital gains (i.e., net long-term capital gains in excess of net short-term capital losses), if any, at least annually out of the assets legally available for such distributions. However, we may decide in the future to retain such capital gains for investment, incur a corporate-level tax on such capital gains, and elect to treat such capital gains as deemed distributions to our stockholders. If this happens, our stockholders will be treated for U.S. federal income tax purposes as if they had received an actual distribution of the capital gains that we retain and reinvested the net after tax proceeds in us. In this situation, our stockholders would be eligible to claim a tax credit equal to their allocable share of the tax we paid on the capital gains deemed distributed to them. We may not be able to achieve operating results that will permit us to pay any cash distributions, and if we issue senior securities, we will be prohibited from making distributions if doing so would cause us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if such distributions are limited by the terms of any of our borrowings. We have adopted a dividend reinvestment plan that will provide for reinvestment of our dividends and other distributions on behalf of our stockholders, unless a stockholder elects to receive cash. As a result, if our Board authorizes, and we declare, a cash dividend or other distribution, then stockholders who do not “opt out” of the Company’s dividend reinvestment plan will have their cash dividends and distributions automatically reinvested in additional shares of our common stock, rather than receiving cash dividends and distributions. Prior to a Listing, the Board will use newly-issued shares of the Company’s common stock to implement the dividend reinvestment plan. The number of shares of common stock to be issued to a participant prior to a Listing would be equal to the quotient determined by dividing the cash value of the dividend payable to such stockholder by the net asset value per share as of the date such dividend was declared. 59 After a Listing, the Board intends to primarily use newly-issued shares to implement the dividend reinvestment plan, whether or not the shares are trading at a price per share at, below or above net asset value. However, the Board reserves the right to purchase shares in the open market in connection with the implementation of the dividend reinvestment plan. The number of newly issued shares to be issued to a participant would be determined by dividing the total dollar amount of the dividend payable to such stockholder by the market price per share of our common stock at the close of regular trading on a national securities exchange on the dividend payment date. Shares purchased in open market transactions by US Bank, the plan administrator and our transfer agent, registrar, and dividend disbursing agent, will be allocated to a participant based upon the average purchase price, excluding any brokerage charges or other charges, of all shares of the our common stock purchased with respect to the dividend. A registered stockholder may elect to receive an entire distribution in cash by notifying US Bank in writing so that such notice is received by the plan administrator no later than the record date for distributions to stockholders. The plan administrator will set up an account for shares acquired through the plan for each stockholder who has not elected to receive dividends or other distributions in cash and hold such shares in noncertificated form. Critical Accounting Policies Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Critical accounting policies are those that require the application of management’s most difficult, subjective, or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. The preparation of these financial statements will require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ. In addition to the discussion below, we have described our critical accounting policies in the notes to our consolidated financial statements. Valuation of Portfolio Investments Under procedures established by our Board, we value investments for which market quotations are readily available at such market quotations. Assets listed on an exchange will be valued at their last sales prices as reported to the consolidated quotation service at 4:00 P.M. eastern time on the date of determination. If no such sales of such securities occurred, such securities will be valued at the mean between the last available bid and ask prices as reported by an independent, third party pricing service on the date of determination. Debt and equity securities that are not publicly traded or whose market prices are not readily available are valued at fair value, subject at all times to the oversight and approval of our Board. Such determination of fair values may involve subjective judgments and estimates, although we will also engage independent valuation providers to review the valuation of each portfolio investment that constitutes a material portion of our portfolio and that does not have a readily available market quotation at least once annually. With respect to unquoted securities, our Investment Advisor, together with our independent valuation advisors, and subject at all times to the oversight and approval of our Board, will value each investment considering, among other measures, discounted cash flow models, comparisons of financial ratios of peer companies that are public and other factors. With respect to Level 3 assets, we intend to retain one or more independent providers of financial advisory services to assist the Investment Advisor and the Board by performing certain limited third-party valuation services. We may appoint additional or different third-party valuation firms in the future. 60 When an external event such as a purchase transaction, public offering or subsequent equity sale occurs with respect to a fair-valued portfolio company or comparable company, our Board will use the pricing indicated by the external event to corroborate and/or assist us in our valuation. Because we expect that there will not be a readily available market for many of the investments in our portfolio, we expect to value many of our portfolio investments at fair value as determined in good faith by our Board using a documented valuation policy and a consistently applied valuation process. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may differ significantly from the values that would have been used had readily available market quotations existed for such investments, and the differences could be material. With respect to investments for which market quotations are not readily available, our Investment Advisor will undertake a multi-step valuation process each quarter, as described below: ● Securities for which no such market prices are available or reliable will be preliminarily valued at such value as the Investment Advisor may reasonably determine, which may include third party valuations; ● The audit committee of our Board (the “Audit Committee”) will then review these preliminary valuations; ● At least once annually, the valuation for each portfolio investment that constitutes a material portion of our portfolio and that does not have a readily available market quotation will be reviewed by an independent valuation firm; and ● Our Board will then discuss valuations and determine the fair value of each investment in our portfolio in good faith, based on the input of our Investment Advisor, the respective independent valuation firms and the Audit Committee. All values assigned to securities and other assets by the Board will be binding on all stockholders. Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation We measure realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized upfront fees and prepayment penalties. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized. Realized gains and losses from securities transactions and unrealized appreciation and depreciation of securities are determined using the identified cost basis method for financial reporting. Related Party Transactions We have entered into the Advisory Agreement with the Investment Advisor and the Administration Agreement with the Investment Advisor (in such capacity, the Administrator). Mr. Christopher D. Long and Jeffrey D. Fox, each an interested member of our Board, have an indirect pecuniary interest in the Investment Advisor. The Investment Advisor is a registered investment adviser under the Advisers Act that is wholly owned by Palmer Square. See “ Note 3. Agreements and Related Party Transactions – Administration Agreement ” and “ – Investment Advisory Agreement ” in the notes to the accompanying consolidated financial statements. Contractual Obligations We have certain contracts under which we have material future commitments. We have entered into the Advisory Agreement with the Investment Advisor in accordance with the 1940 Act. Payments for investment advisory services under the Advisory Agreement are equal to (a) a base management fee calculated at an annual rate of 2.0% of the average value of the weighted average of our total net assets at the end of the two most recently completed quarters and (b) an incentive fee based on our performance. The Investment Advisor has agreed to waive its right to receive management fees in excess of 1.75% of the total net assets during any period prior to a Listing. We have entered into an Administration Agreement with the Administrator to serve as our administrator. Pursuant to the Administration Agreement, the Administrator furnishes us with office facilities and equipment, provides us with clerical, bookkeeping and recordkeeping services at such facilities, and provides us with other services necessary for us to operate or has engaged a third-party firm to perform some or all of these functions. A summary of our significant contractual payment obligations related to the repayment of our outstanding indebtedness at December 31, 2020 is as follows: Payments Due by Period Total Less than 1 year 1-3 years 3-5 years After 5 years Credit Facility, Net $ 393,152,103 $ - $ 393,152,103 $ - $ - Total contractual obligations $ 393,152,103 $ - $ 393,152,103 $ - $ - 61 Off-Balance Sheet Arrangements Unfunded commitments to provide funds to portfolio companies are not recorded on our consolidated statements of assets and liabilities. Our unfunded commitments may be significant from time to time. Unfunded commitments may expire without being drawn upon and the total commitment amount does not necessarily represent future cash requirements. As of December 31, 2020, we had three unfunded commitments totaling $1.3 million. See “Note 8. Commitments and Contingencies” in the notes to the accompanying consolidated financial statements for specific identification of the unfunded commitments. We believe we maintain sufficient liquidity in the form of cash (including restricted cash, if any), receivables and borrowing capacity to fund these unfunded commitments should the need arise. See Financial Condition, Liquidity and Capital Resources above. Other than contractual commitments and other legal contingencies incurred in the normal course of our business, we do not have any off- balance sheet financings or liabilities.