Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
This quarterly report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about us, our current and prospective portfolio investments, our industry, our beliefs and opinions, and our assumptions. Words such as “anticipates,” “expects,” “intends,” “plans,” “will,” “may,” “continue,” “believes,” “seeks,” “estimates,” “would,” “could,” “should,” “targets,” “projects,” “outlook,” “potential,” “predicts” 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 without limitation:
● 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 current COVID 19 pandemic and market volatility resulting from the Russian invasion of Ukraine;
● our ability to continue to effectively manage our business due to the disruptions caused by the current COVID-19 pandemic;
● an economic downturn could impair our portfolio companies’ ability to continue to operate, which could lead to the loss of some or all of our investments in such portfolio companies;
● such an economic downturn could disproportionately impact the companies that we intend to target for investment, potentially causing us to experience a decrease in investment opportunities and diminished demand for capital from these companies;
● a contraction of available credit and/or an inability to access the equity markets that could impair our lending and investment activities, including as a result of the COVID-19 pandemic;
● interest rate volatility that could adversely affect our results, particularly to the extent that we use leverage as part of our investment strategy;
● the impact of interest and inflation rates on our business prospects and the prospects of our portfolio companies;
● our future operating results, including our ability to achieve objectives as a result of the COVID-19 pandemic;
● our business prospects and the prospects of our portfolio companies, including the impact of the COVID-19 pandemic thereon;
● our contractual arrangements and relationships with third parties;
● the ability of our portfolio companies to achieve their objectives, including as a result of the COVID-19 pandemic;
● competition with other entities and our affiliates for investment opportunities;
● the speculative and illiquid nature of our investments;
● the use of borrowed money to finance a portion of our investments;
● the adequacy of our financing sources and working capital;
● the loss of key personnel;
● the timing of cash flows, if any, from the operations of our portfolio companies and the impact of the COVID-19 pandemic thereon;
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● the ability of our external investment adviser, Runway Growth Capital LLC (“RGC”), to locate suitable investments for us and to monitor and administer our investments and the impacts of the COVID-19 pandemic thereon;
● the ability of RGC to attract and retain highly talented professionals;
● our ability to maintain our qualification as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), and as a business development company (“BDC”);
● the occurrence of a disaster, such as a cyber-attack against us or against a third party that has access to our data or networks, a natural catastrophe, an industrial accident, failure of our disaster-recovery systems, or consequential employee error;
● the effect of legal, tax, and regulatory changes; and
● the other risks, uncertainties and other factors we identify under “Risk Factors” in Part I, Item 1A of our annual report on Form 10 K, as modified by the annual report on Form 10-K/A for the year ended December 31, 2021, filed with the SEC on March 2, 2022 and March 14, 2022, respectively and in our other filings with the Securities and Exchange Commission (the “SEC”).
Although we believe the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this quarterly report on Form 10 Q should not be regarded as a representation by us that our plans and objectives will be achieved. These risks and uncertainties include those described or identified in “Risk Factors” in in Part I, Item 1A of our annual report on Form 10 K, as modified by the annual report on Form 10-K/A for the year ended December 31, 2021, filed with the SEC on March 2, 2022 and March 14, 2022, respectively.
We have based the forward-looking statements included in this Form 10-Q on information available to us on the date of this Form 10-Q, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with the SEC, including our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
The following analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes thereto contained elsewhere in this quarterly report on Form 10-Q.
Overview
We are an externally managed, non-diversified closed-end investment management company that was formed on August 31, 2015 as a corporation under the laws of the State of Maryland. On August 18, 2021, we changed our name to “Runway Growth Finance Corp.” from “Runway Growth Credit Fund Inc.” We have elected to be regulated as a BDC under the 1940 Act. In addition, we have elected to be treated, have qualified, and intend to continue to qualify annually as a RIC under Subchapter M of the Code. If we fail to qualify as a RIC for any taxable year, we will be subject to corporate-level U.S. federal income tax on any net taxable income for such year. As a BDC and a RIC, we are required to comply with various regulatory requirements, such as the requirement to invest at least 70% of our assets in “qualifying assets,” source-of-income limitations, asset diversification requirements, and the requirement to distribute annually at least 90% of our investment company taxable income and net tax-exempt interest.
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). We will remain an emerging growth company until the last day of our fiscal year following the fifth anniversary of our IPO on October 25, 2021, or until the earliest of (i) the last day of the first fiscal year in which we have total annual gross revenue of $1,070,000,000 or more, (ii) December 31 of the fiscal year in which we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (together with the rules and regulations promulgated thereunder, the “Exchange Act”), (which would occur if the market value of our common stock held by non-affiliates exceeds $700.0 million, measured as of the last business day of our most recently completed second fiscal quarter, and we have been publicly reporting for at least 12 months), or (iii) the date on which we have issued more than $1.0 billion in non-convertible debt during the preceding three-year period. For so long as we remain an emerging growth company under the JOBS Act, we will be subject to reduced public company reporting requirements.
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We are externally managed by RGC, an investment adviser that has registered with the SEC under the Investment Advisers Act of 1940, as amended. The Administrator, a wholly-owned subsidiary of RGC, provides all the administrative services necessary for us to operate.
In October 2015, in connection with our formation, we issued and sold 1,667 shares of common stock to R. David Spreng, our President, Chief Executive Officer and Chairman of our Board of Directors, for an aggregate purchase price of $25,000. The sale of shares of common stock was approved by the unanimous consent of the sole director at the time. On December 1, 2017, we completed our Initial Private Offering, in which we issued 18,241,157 shares of our common stock to stockholders for a total purchase price of $275,000,000 in reliance on exemptions from the registration requirements of the Securities Act, and other applicable securities laws.
As of March 31, 2022, we had completed multiple closings under our second private offering (the “Second Private Offering”) and had accepted aggregate capital commitments of $181,673,500. As of March 31, 2022, in connection with the Second Private Offering we have issued 9,617,379 shares of our common stock for a total purchase price of $144,260,683. Concurrent with the IPO, all undrawn commitments under the Second Private Offering were cancelled.
On October 25, 2021, we closed our IPO, issuing 6,850,000 shares of our common stock at a public offering price of $14.60 per share. Net of underwriting fees and offering costs, we received net cash proceeds of $93.0 million. Our common stock began trading on the Nasdaq Global Select Market under the symbol “RWAY” on October 21, 2021.
As of March 31, 2022, we have issued 22,564 shares as an additional direct investment by Runway Growth Holdings LLC, an affiliate of RGC, for a total purchase price of $338,453. As of March 31, 2022, we have issued an additional 6,647,847 shares as part of our dividend reinvestment plan. Refer to Note 6 for further detail.
On August 10, 2020, we, RGC, and certain other funds and accounts sponsored or managed by RGC and/or its affiliates were granted an order (the “Order”) that permits us greater flexibility than the 1940 Act permits to negotiate the terms of co-investments if the Board determines that it would be advantageous for us to co-invest with other accounts sponsored or managed by RGC or its affiliates in a manner consistent with our investment objective or criteria, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors. We believe that the ability to co-invest with similar investment structures and accounts sponsored or managed by RGC or its affiliates will provide additional investment opportunities and the ability to achieve greater diversification. Under the terms of the Order, a majority of our independent directors are required to make certain determinations in connection with a co-investment transaction, including that (1) the terms of the proposed transaction are reasonable and fair to us and our stockholders and do not involve overreaching of us or our stockholders on the part of any person concerned and (2) the transaction is consistent with the interests of our stockholders and is consistent with our investment objective, criteria, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors.
In addition, pursuant to an exemptive order issued by the SEC on April 8, 2020 and applicable to all BDCs with exemptive orders, through December 31, 2020, we were permitted, subject to the satisfaction of certain conditions, to co-invest in our existing portfolio companies with certain affiliates that are private funds even if such other funds had not previously invested in such existing portfolio company. Without this order, such affiliated funds that are private funds would not be able to participate in such co-investments with us unless the affiliated funds had previously acquired securities of the portfolio company in a co-investment transaction with us. Although the conditional exemptive order expired on December 31, 2021, the SEC’s Division of Investment Management indicated that until March 31, 2022, it would not recommend enforcement action, to the extent that any BDC with an existing co-investment order continued to engage in certain transactions described in the conditional exemptive order, pursuant to the same terms and conditions described therein.
In connection with the expiration of the conditional exemptive order, the Division of Investment Management has indicated that, although BDCs would not be able to rely on the conditional exemptive order subsequent to March 31, 2022, BDCs can apply to amend their existing orders to permanently implement the relief. We intend to file an amendment to our existing Order to permanently implement the relief, but there is no guarantee that such amendment will be granted.
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Portfolio Composition and Investment Activity
Portfolio Composition
At March 31, 2022, we had investments in 40 portfolio companies, representing 19 companies in which we held loan and warrant investments, four companies in which we held loan investments and shares of common, preferred stock, or a combination with warrants, three companies in which we held a loan investment only, nine companies in which we held warrant investments only, and five companies in which we held shares of common or preferred stock only, or a combination with warrants. At December 31, 2021, we had investments in 39 portfolio companies, representing 20 companies where we held loan and warrant investments, 12 companies where we held warrant interests only, and we held one U.S. Treasury Bill. The following table shows the fair value of our investments, by asset class, as of March 31, 2022 and December 31, 2021:
March 31, 2022 (Unaudited)
December 31, 2021
Percentage
Percentage
of Total
of Total
Investments
Cost
Fair Value
Portfolio
Cost
Fair Value
Portfolio
Portfolio Investments
Common Stocks
$
9,260,979
$
7,823,497
1.1
%
$
4,709,744
$
11,463,865
1.6
%
Senior Secured Term Loans
705,379,740
698,576,393
92.6
629,009,432
623,053,646
85.4
Second Lien Term Loans
13,048,827
13,048,827
1.7
12,872,588
12,872,588
1.8
Preferred Stocks
15,181,866
13,506,215
1.8
17,337,836
17,037,125
2.3
Warrants
18,461,215
21,334,438
2.8
18,393,141
20,087,550
2.7
Total Portfolio Investments
761,332,627
754,289,370
100.0
682,322,741
684,514,774
93.8
U.S. Treasury Bill
—
—
—
45,001,250
45,001,500
6.2
Total Investments
$
761,332,627
$
754,289,370
100.0
%
$
727,323,991
$
729,516,274
100.0
%
For the three months ended March 31, 2022, our debt investment portfolio had a dollar-weighted annualized yield of 12.15%. For the three months ended March 31 , 2021, our debt investment portfolio had a dollar-weighted annualized yield of 13.45%. We calculate the yield on dollar-weighted debt investments for any period measured as (1) total related investment income during the period divided by (2) the daily average of the fair value of debt investments outstanding during the period. As of March 31, 2022, our debt investments had a dollar-weighted average outstanding term of 48 months at origination and a dollar-weighted average remaining term of 36 months, or approximately 3.0 years. As of March 31, 2022, substantially all of our debt investments had an original committed principal amount of between $6 million and $75 million, repayment terms of between 34 months and 60 months and pay cash interest at annual interest rates of between 5.92% and 12.00%.
The following table shows our dollar-weighted annualized yield by investment type for the three months ended March 31, 2022 and March 31 , 2021:
Fair Value (1)
Cost (2)
Three Months Ended
Three Months Ended
March 31, 2022
March 31, 2021
March 31, 2022
March 31, 2021
Investment type:
Debt investments
12.15
%
13.45
%
12.03
%
13.29
%
Equity interest
3.36
%
2.73
%
3.79
%
3.05
%
All investments
11.54
%
12.43
%
11.53
%
12.42
%
(1) We calculate the dollar-weighted annualized yield on average investment type for any period as (a) total related investment income during the period divided by (b) the daily average of the fair value of the investment type outstanding during the period. The dollar-weighted annualized yield represents the portfolio yield and will be higher than what investors will realize because it does not reflect our expenses or any sales load paid by investors.
(2) We calculate the dollar-weighted annualized yield on average investment type for any period as (a) total related investment income during the period divided by (b) the daily average of the investment type outstanding during the period, at amortized cost. The dollar-weighted annualized yield represents the portfolio yield and will be higher than what investors will realize because it does not reflect our expenses or any saled load paid by investors.
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Investment Activity
The value of our investment portfolio will change over time due to changes in the fair value of our underlying investments, as well as changes in the composition of our portfolio resulting from purchases of new and follow-on investments as well as repayments and sales of existing investments. During the three months ended March 31, 2022, the Company funded $42.1 million in two new portfolio companies and $40.7 million in four existing portfolio companies, net of upfront loan origination fees. The Company also received $7.6 million in a loan repayment from one portfolio company and $0.3 million in proceeds from the termination of warrants. During the three months ended March 31, 2021, the Company funded $34.7 million in two new portfolio companies and $19.3 million in five existing portfolio companies. The Company also received $16.6 million in loan repayments from four portfolio companies.
Portfolio Reconciliation
The following is a reconciliation of our investment portfolio, including U.S. Treasury Bills, for the three months ended March 31, 2022 and 2021:
Three Months Ended
Three Months Ended
March 31, 2022
March 31, 2021
(unaudited)
(unaudited)
Beginning Investment Portfolio
$
729,516,274
$
621,826,650
Purchases of Investments (1)
86,856,674
54,844,031
Purchases of U.S. Treasury Bills
—
24,999,969
Amortization of Fixed Income Premiums or Accretion of Discounts
2,824,612
2,171,173
Sales or Repayments of Investments
(9,878,071)
(14,500,000)
Scheduled Principal Payments of Investments
(423,570)
(2,066,442)
Sales and Maturities of U.S. Treasury Bills
(44,999,747)
(69,999,183)
Realized Gain (Loss) on Investments
(371,262)
(217,427)
Net Change in Unrealized Appreciation (Depreciation) on Investments
(9,235,540)
(1,911,181)
Ending Investment Portfolio
$
754,289,370
$
615,147,590
(1) Includes PIK interest.
Asset Quality
In addition to various risk management and monitoring tools, RGC uses an investment rating system to characterize and monitor the quality of our debt investment portfolio. Equity securities and Treasury Bills are not graded. This debt investment rating system uses a five-level numeric scale. The following is a description of the conditions associated with each investment rating:
Investment
Rating
Rating Definition
1
Performing above plan and/or strong enterprise profile, value, financial performance/coverage. Maintaining full covenant and payment compliance as agreed.
2
Performing at or reasonably close to plan. Acceptable business prospects, enterprise value, financial coverage. Maintaining key covenant and payment compliance as agreed. All new loans are initially graded Category 2.
3
Performing below plan of record. Potential elements of concern over performance, trends and business outlook. Loan-to-value remains adequate. Potential key covenant non-compliance. Full payment compliance.
4
Performing materially below plan. Non-compliant with material financial covenants. Payment default/deferral could result without corrective action. Requires close monitoring. Business prospects, enterprise value and collateral coverage declining. These investments may be in workout, and there is a possibility of loss of return but no loss of principal is expected.
5
Going concern nature in question. Substantial decline in enterprise value and all coverages. Covenant and payment default imminent if not currently present. Investments are nearly always in workout. May experience partial and/or full loss.
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The following table shows the investment ratings of our debt investments at fair value as of March 31, 2022 and December 31, 2021:
March 31, 2022 (Unaudited)
As of December 31, 2021
% of
Number of
% of
Number of
Investment
Total
Portfolio
Total
Portfolio
Rating
Fair Value
Portfolio
Companies
Fair Value
Portfolio
Companies
1
$
91,965,427
12.2
%
2
$
91,424,112
12.5
%
2
2
584,822,376
77.5
21
479,114,147
65.7
17
3
20,187,629
2.7
2
47,490,324
6.5
4
4
—
—
—
3,247,863
0.4
1
5
14,649,788
1.9
1
14,649,788
2.0
1
$
711,625,220
94.3
%
26
$
635,926,234
87.2
%
25
The global COVID-19 pandemic, to date, has had limited impact on the investment ratings of our debt investments, taken as a whole. However, the ongoing impact of the global COVID-19 pandemic is uncertain and we can make no assurances that the pandemic will not have a negative impact on our investment portfolio in the future.
Loans and Debt Securities on Non-Accrual Status
Generally, when interest and/or principal payments on a loan become past due, or if we otherwise do not expect the borrower to be able to service its debt and other obligations, we will place the loan on non-accrual status and will generally cease recognizing interest income on that loan for financial reporting purposes until all principal and interest have been brought current through payment or due to a restructuring such that the interest income is deemed to be collectible. As of March 31, 2022, we had one loan to Pivot3 Holdings, Inc., representing an aggregate principal funded of $18,598,265 at a fair value of $14,649,788 on non-accrual status, which represents 2.45% of the Company’s net assets. As of December 31, 2021, we had six loans to Mojix, Inc. and one loan to Pivot3 Holdings, Inc., representing an aggregate principal funded of $30,278,707 at a fair value of $28,259,976, on non-accrual status, which represented 4.66% of our net assets .
Results of Operations
An important measure of our financial performance is net increase/(decrease) in net assets resulting from operations, which includes net investment income/(loss), net realized gain/(loss) and net unrealized appreciation/(depreciation). Net investment income/(loss) is the difference between our income from interest, dividends, fees and other investment income and our operating expenses, including interest on borrowed funds. Net realized gain/(loss) on investments is the difference between the proceeds received from dispositions of portfolio investments and their amortized cost. Net unrealized appreciation/(depreciation) on investments is the net change in the fair value of our investment portfolio.
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Comparison of the Three Months Ended March 31, 2022 and 2021
Three Months Ended
Three Months Ended
March 31, 2022
March 31, 2021
Per
Per
Total
Share (1)
Total
Share (1)
Investment income
Interest and dividend income
$
19,068,659
$
0.46
$
16,308,361
$
0.52
Other income
190,239
—
114,412
—
Total investment income
19,258,898
0.47
16,422,773
0.52
Operating expenses
Management fees
2,559,936
0.06
2,069,209
0.07
Incentive fees
1,343,996
0.03
975,704
0.03
Interest expense
873,486
0.02
727,915
0.02
Professional fees
359,806
0.01
321,592
0.01
Overhead allocation expense
236,972
0.01
197,384
0.01
Insurance expense
268,618
0.01
23,275
—
Administration fees
168,573
—
148,100
0.01
Debt financing fees
705,965
0.02
289,985
0.01
Directors’ fees
88,500
—
64,750
—
Tax expense
250
—
—
—
Other expenses
192,903
—
123,127
—
Total operating expenses
6,799,005
0.16
4,941,041
0.16
Net investment income
12,459,893
0.30
11,481,732
0.36
Realized gain (loss) on investments
(371,262)
(0.01)
(199,223)
(0.01)
Net change in unrealized appreciation (depreciation) on investments
(9,235,540)
(0.22)
(1,911,181)
(0.06)
Net increase in net assets resulting from operations
$
2,853,091
0.07
$
9,371,328
0.30
(1) The basic per share figures noted above are based on weighted averages of 41,375,187 and 31,505,254 shares outstanding for the three months ended March 31, 2022 and 2021, respectively.
Investment Income
Our investment objective is to maximize total return to our stockholders primarily through current income on our loan portfolio, and secondarily through capital appreciation on our warrants and other equity positions. We intend to achieve our investment objective by investing in high growth-potential, private companies. We typically invest in senior secured and second lien secured loans that generally fall into two strategies: Sponsored Growth Lending and Non-Sponsored Growth Lending. Our Sponsored Growth Lending strategy also typically includes the receipt of warrants and/or other equity from venture-backed companies. We expect our investments in loans will generally range from between $5.0 million to $50.0 million, and the upper end of this range may increase as we raise additional capital.
We generate revenue in the form of interest on the debt securities that we hold and distributions and capital gains on other interests that we acquire in our portfolio companies. We expect that the debt we invest in will generally have stated terms of 36 to 60 months. Interest on debt securities is generally payable quarterly or semiannually, primarily based on a floating rate index, and subject to certain floors determined by market rates at the time the investment is made. In some cases, some of our investments may provide for deferred interest payments or PIK interest. The principal amount of the debt securities and any accrued but unpaid interest generally will become due at the maturity date. In addition, we may generate revenue in the form of commitment and other fees in connection with transactions. Original issue discounts and market discounts or premiums will be capitalized, and we will accrete or amortize such amounts as interest income. We record prepayment premiums on loans and debt securities as interest income. Dividend income, if any, will be recognized on an accrual basis to the extent that we expect to collect such amounts.
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Included in investment income are non-recurring fees primarily comprised of early prepayment fees and unamortized original issue discounts recorded as interest income. Other non-recurring income consisting of amendment fees, legal fees, reimburseable income, and any other fee income for services rendered, if any, are recorded as other income when earned.
Investment income for the three months ended March 31 , 2022 and 2021 was $19,258,898 and $16,422,773, respectively, and includes non-recurring income of $823,299 and $602,109, respectively. The increase in investment income for the three months ended March 31 , 2022 compared to the three months ended March 31 , 2021 was primarily due to interest income and driven by our deployment of capital, increased invested balance, prepayments, end-of-term payments, and increased market interest rates.
Operating Expenses
Our primary operating expenses include the payment of fees to RGC under the Advisory Agreement, our allocable portion of overhead expenses under the Administration Agreement, professional fees, and other operating costs described below. We bear all other out-of-pocket costs and expenses of our operations and transactions, including those relating to:
● our pro-rata portion of fees and expenses related an initial public offering of the Public Fund in connection with a Spin-Off transaction;
● fees and expenses related to public and private offerings, sales and repurchases of our securities;
● calculating our net asset value (including the cost and expenses of any independent valuation firm);
● fees and expenses payable to third parties, including agents, consultants or other advisers, in connection with monitoring financial and legal affairs for us and in providing administrative services, monitoring our investments and performing due diligence on our prospective portfolio companies or otherwise relating to, or associated with, evaluating and making investments;
● interest payable on debt incurred to finance our investments;
● sales and purchases of our common stock and other securities;
● investment advisory and management fees;
● administration fees payable under the Administration Agreement;
● transfer agent and custodial fees;
● federal and state registration fees;
● all costs of registration and listing our securities on any securities exchange;
● U.S. federal, state and local taxes;
● independent directors’ fees and expenses;
● costs of preparing and filing reports or other documents required by the SEC, the Financial Industry Regulatory Authority or other regulators;
● costs of any reports, proxy statements or other notices to stockholders, including printing costs;
● our allocable portion of any fidelity bond, directors’ and officers’ errors and omissions liability insurance, and any other insurance premiums;
● direct costs and expenses of administration, including printing, mailing, long distance telephone, copying, secretarial and other staff, independent auditors and outside legal costs; and
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● all other expenses incurred by us, our Administrator or RGC in connection with administering our business, including payments under the Administration Agreement based on our allocable portion of our Administrator’s overhead in performing its obligations under the Administration Agreement, including rent and the allocable portion of the cost of our Chief Compliance Officer and Chief Financial Officer and their respective staffs.
Operating expenses for the three months ended March 31, 2022 and 2021 were $6,799,005 and $4,941,040 respectively. Operating expenses increased for the three months ended March 31, 2022 from the three months ended March 31, 2021 primarily due to an increase in incentive fees, management fees, credit facility fees, and interest expense. Operating expenses per share for the three months ended March 31, 2022 and 2021 were $0.16 per share and $0.16 per share, respectively.
Incentive Fees
Incentive fees for the three months ended March 31, 2022 and 2021 were $1,343,996 and $975,704, respectively. Incentive fees increased for the three months ended March 31, 2022 from the three months ended March 31, 2021 primarily due to an increase in net investment income arising from increased market interest rates. $1,056,223 of the incentive fees for the three months ended March 31, 2022 were earned, payable in cash, and included under Accrued incentive fees on the Statement of Assets and Liabilities as of March 31, 2022. $287,773 of the incentive fees for the three months ended March 31, 2022 were deferred and accrued, and included in Accrued incentive fees on the Statement of Assets and Liabilities as of March 31, 2022. $739,231 of the incentive fees for the three months ended March 31, 2021 were earned, payable in cash, and included under Accrued incentive fees on the Statement of Assets and Liabilities as of March 31, 2021. $236,473 of the incentive fees for the three months ended March 31, 2021 were deferred and accrued, and included under Accrued incentive fees on the Statement of Assets and Liabilities as of March 31, 2021. Incentive fees related to PIK or deferred interest are accrued and payment is deferred until such interest is collected in cash. Incentive fees per share for the three months ended March 31, 2022 and March 31, 2021 were $0.03 and $0.03 per share, respectively.
Net Investment Income
Net investment income for the three months ended March 31, 2022 and 2021 was $12,459,893 and $11,481,733 respectively. Net investment income increased for the three months ended March 31, 2022 from the three months ended March 31, 2021, primarily due to an increase in interest income resulting from an increase in the size of the investment portfolio and increased market interest rates. Net investment income per share for the three months ended March 31, 2022 and 2021 was $0.30 per share and $0.36 per share, respectively.
Net Realized Gain (Loss) on Investments
The net realized loss on investments of $371,262 for the three months ended March 31, 2022 was primarily due to the loss on a portion of our investment in the preferred stock and warrants of CareCloud, Inc. partially offset by the gain on our investment in the warrants of CrossRoads Extremity Systems, LLC. The net realized loss on investments of $199,223 for the three months ended March 31, 2021 was primarily due to the loss on our investment in the warrants for preferred stock of Pivot3 Holdings, Inc.
Net Change in Unrealized Appreciation (Depreciation) on Investments
Net change in unrealized depreciation on investments of $9,235,540 for the three months ended March 31, 2022 was primarily due to decreases in the fair value of our common stock in Brilliant Earth Group, Inc. and preferred stock in CareCloud, Inc. The net change in unrealized depreciation on investments of $1,911,181 for the three months ended March 31, 2021 was primarily due to decreases in the fair value of our investments in the warrants of Aspen Group, Inc. and CareCloud, Inc. This was partially offset by increases in the fair value of our senior secured loans to Mojix, Inc. and our investment in the preferred stock of CareCloud, Inc.
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Net Increase in Net Assets Resulting from Operations
We had a net increase in net assets resulting from operations of $2,853,091 for the three months ended March 31, 2022, as compared to a net increase in net assets resulting from operations of $9,371,328 for the three months ended March 31, 2021. The net decrease in net assets resulting from operations for the three months ended March 31, 2022 from the three months ended March 31, 2021 was primarily due to an increase in unrealized depreciation in our portfolio and an increase in operating expenses for the three months ended March 31, 2022.
Financial Condition, Liquidity and Capital Resources
We generate cash primarily from the net proceeds of the offering of our securities and cash flows from our operations, including investment sales and repayments as well as income earned on investments and cash equivalents. We may also fund a portion of our investments through borrowings under the Credit Agreement (discussed below). We expect that we may also generate cash from any financing arrangements we may enter into in the future and any future offerings of our equity or debt securities. We may fund a portion of our investments through borrowings from banks and issuances of senior securities, which may be secured or unsecured, through registered offerings or private placements. Our primary use of funds is to make investments in eligible portfolio companies, pay our operating expenses and make distributions to holders of our common stock.
During the three months ended March 31, 2022, cash and cash equivalents decreased to $3,510,311 from $4,696,693 as of December 31, 2021. This decrease was primarily the result of the purchase of investments in portfolio companies and was partially offset by the repayment of an investment in a portfolio company, proceeds from our 2026 Senior Notes, and net borrowings under the Credit Agreement.
Equity Activity
We have the authority to issue 100,000,000 shares of common stock, $0.01 par value per share.
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On October 8, 2015, we issued 1,667 shares of our common stock to R. David Spreng, our President, Chief Executive Officer and Chairman of our Board of Directors, for an aggregate purchase price of $25,000. The remaining shares were issued in connection with the Initial Private Offering, the Second Private Offering, pursuant to the dividend reinvestment plan or the IPO as follows:
Shares
Price
Gross
Issuance Date
Issued
Per Share
Proceeds
December 22, 2016
333,333
$
15.00
$
5,000,000
April 19, 2017
1,000,000
15.00
15,000,000
June 26, 2017
1,666,667
15.00
25,000,000
September 12, 2017
2,666,667
15.00
40,000,000
December 22, 2017
3,000,000
15.00
45,000,000
May 31, 2018 (1)
70,563
14.82
1,045,570
August 31, 2018 (1)
117,582
14.92
1,754,244
September 27, 2018
1,997,337
15.02
30,000,000
November 15, 2018 (1)
202,779
15.07
3,055,498
January 14, 2019
4,344,964
15.19
66,000,000
March 26, 2019 (1)
326,431
15.14
4,942,168
May 21, 2019 (1)
374,783
15.13
5,670,467
May 24, 2019
3,232,189
15.16
49,000,000
July 16, 2019 (1)
464,986
15.13
7,035,236
August 26, 2019 (1)
480,121
14.76
7,088,143
October 15, 2019
1,666,667
15.00
25,000,000
November 12, 2019 (1)
43,979
14.76
649,123
December 20, 2019
3,333,333
15.00
50,000,000
December 23, 2019 (1)
487,166
14.52
7,073,650
March 20, 2020 (1)
575,132
14.58
8,385,423
March 31, 2020
21,021
15.00
315,308
May 21, 2020 (1)
529,020
14.25
7,538,541
August 6, 2020 (1)
550,639
14.41
7,934,712
October 15, 2020
3,333,333
15.00
50,000,000
November 12, 2020 (1)
593,692
14.46
8,584,772
March 19, 2021 (1)
618,815
14.84
9,183,220
March 24, 2021
20,461
15.00
306,911
May 13, 2021 (1)
637,127
14.77
9,410,371
August 12, 2021 (1)
575,032
14.61
8,401,215
September 29, 2021
1,265,128
15.00
18,976,917
October 25, 2021
6,850,000
14.60
100,010,000
Total
41,378,947
$
617,361,489
(1)
Shares were issued as part of the dividend reinvestment plan.
Stock Repurchase Plans
On February 24, 2022, the Board of Directors approved the Repurchase Program under which the Company may repurchase up to $25 million of its outstanding common stock . Under the Repurchase Program, purchases may be made at management’s discretion from time to time in open-market transactions, in accordance with all applicable securities laws and regulations. Unless extended by the Board of Directors, the repurchase program will terminate 12-months from the date it was approved.
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The following table provides information regarding our repurchases of our common stock pursuant to the Repurchase Program for three months ended March 31, 2022.
Approximate
Approximate
Dollar Value of
Dollar Value of
Total Number
Average
Shares That Have
Shares That May
of Shares
Price Paid
Been Purchased
Yet Be Purchased
Repurchased
Per Share
Under the Plan
Under the Plan
Quarter ended March 31, 2022
31,782
$
12.88
$
409,223
$
24,590,776
Contractual Obligations
At March 31, 2022, the Company had $230,984,615 in unfunded loan commitments to provide debt financing to 14 portfolio companies. The Company’s management believes that its available cash balances, availability under the Credit Agreement, provides sufficient funds to cover its unfunded commitments as of March 31, 2022.
Payments Due By Period
Less than
More than
Total
1 year
1–3 years
3–5 years
5 years
Credit facilities (1)
$
86,000,000
$
—
$
86,000,000
$
—
$
—
2026 Senior Notes (1)
70,000,000
—
—
70,000,000
—
Total
$
156,000,000
$
—
$
86,000,000
$
70,000,000
$
—
(1) See “Note 10 – Borrowings” to our financial statements in Part I, Item 1 of this Form 10-Q for more information.
Borrowings
On December 10, 2021, we entered into a Note Purchase Agreement governing the issuance of $70,000,000 in aggregate principal amount of 2026 Senior Notes to institutional accredited investors (as defined in Regulation D under the Securities Act) in a private placement. The 2026 Senior Notes were issued in two closings. The initial issuance of $20 million 2026 Senior Notes closed on December 10, 2021 and the second and final issuance of $50 million closed on February 10, 2022.
The 2026 Senior Notes bear an interest rate of 4.25% per year and are due on December 10, 2026, unless redeemed, purchased or prepaid prior to such date by us or our affiliates in accordance with their terms. Interest on the 2026 Senior Notes will be due semiannually. The interest rate is subject to a 1.00% increase in the event that, subject to certain exceptions, the 2026 Senior Notes cease to have an investment grade rating or receive an investment grade rating below the Investment Grade (as defined in the Note Purchase Agreement). The 2026 Senior Notes are general unsecured obligations of the Company that rank pari passu with all outstanding and future unsecured unsubordinated indebtedness issued by us.
Aggregate offering costs in connection with the 2026 Senior Notes issuance, including the underwriter’s discount and commissions, were $899,277 which were capitalized and deferred. As of March 31, 2022 and December 31, 2021, unamortized deferred debt costs related to the 2026 Senior Notes were $860,614 and $376,029, respectively. See “Note 10—Borrowings” to our financial satements in Part I of this Form 10-Q for more information on the 2026 Senior Notes.
On May 31, 2019, we entered into the Credit Agreement by and among us, as borrower, KeyBank National Association, as administrative agent, syndication agent, and a lender, CIBC, as documentation agent and a lender, and U.S. Bank National Association, as paying agent. The Credit Agreement provides for borrowings up to a maximum aggregate principal amount of $100 million, subject to availability under a borrowing base that is determined by the number and value of eligible loan investments in the collateral, applicable advance rates and concentration limits, and certain of our cash and cash equivalent holdings. The Credit Agreement has an accordion feature that allows us to increase the aggregate commitments up to $200 million, subject to new or existing lenders agreeing to participate in the increase and other customary conditions. Borrowings under the Credit Agreement bear interest on a per annum basis equal to a three-month adjusted LIBOR rate (with a LIBOR floor of zero), plus an applicable margin rate that varies from 3.00% to 2.50% per annum depending on utilization and other factors. During the availability period, the applicable margin rate (i) is 3.00% per annum for interest periods during which the average utilization is less than 60% and (ii) varies from 3.00% to 2.50% per annum when the average utilization equals or exceeds 60% (with 3.00% applying when the eligible loans in the collateral consist of 9 or fewer unaffiliated
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obligors, 2.75% applying when the eligible loans consist of between 10 and 29 unaffiliated obligors, and 2.50% applying when the eligible loans consist of 30 or more unaffiliated obligors). During the amortization period, the applicable margin rate will be 3.00%. If certain eurodollar disruption events occur, then borrowings under the Credit Agreement will bear interest on a per annum basis equal to (i) a base rate instead of LIBOR that is set at the higher of (x) the federal funds rate plus 0.50% and (y) the prime rate, plus (ii) the applicable margin rate discussed above. Interest is payable quarterly in arrears. We also pay unused commitment fees of 0.50% per annum on the unused lender commitments under the Credit Agreement, as well as a minimum earnings fee of 3.00% that will be payable annually in arrears, starting on May 31, 2021, on the average unused commitments below 60% of the aggregate commitments during the preceding 12-month period. The availability period under the Credit Agreement expires on May 31, 2022 and is followed by a two-year amortization period. The stated maturity date under the Credit Agreement is May 31, 2024. The Credit Agreement is secured by a perfected first priority security interest in substantially all of our assets and portfolio investments.
During the fourth quarter of 2020, we amended the Credit Agreement and others to increase its size to $215 million, increase the accordion feature to $300 million, add additional lenders, implement a 0.50% LIBOR floor and benchmark replacement rate floor on borrowings under the Credit Agreement and modify certain pricing elements and other provisions. We also amended the fee letter (the “Fee Letter”) to revise the interest rate margin to be 3.00% for the remaining term of the Credit Agreement regardless of the Credit Agreement average utilization or the number of unaffiliated obligors on loans in the collateral.
During the second quarter of 2021, we amended the Credit Agreement to: (i) allow the Company to incur permitted indebtedness without the prior written consent of Keybank National Association, as administrative agent, subject to the limitations described in the Credit Agreement; (ii) increase the accordion amount under the Credit Agreement from a $300 million maximum aggregate commitment amount to a $350 million maximum aggregate commitment amount; and (iii) amend certain other terms of the Credit Agreement. See "Note 10—Borrowings" to our financial statements in Part I of this Form 10 Q for more information on the Credit Agreement.
During the third quarter of 2021, we adopted the Second Amended and Restated Fee Letter to amend the first payment date of the minimum earnings fee, which will be payable annually starting on May 31, 2022. Under the Second Amended and Restated Fee Letter, we the Company will also pay a supplemental fee on the 15th calendar day of each month beginning August 16, 2021 and ending July 15, 2022 in an aggregate amount equal to $66,367, which is paid pro rata to the lenders listed in Schedule A of the Second Amended and Restated Fee Letter.
During the three months ended March 31, 2022, we drew down $86,000,000 on the Credit Agreement and repaid $61,000,000, of which $86,000,000 remains outstanding at March 31, 2022. We anticipate continued usage of the Credit Agreement as well as other potential debt financing alternatives to fund future portfolio growth. At March 31, 2022, interest was accruing at a rate of 3.50%. During the year ended December 31, 2021, we drew down $161,000,000 on the Credit Agreement and repaid $199,000,000 of which $61,000,000 remained outstanding at December 31, 2021. At December 31, 2021, interest was accruing at a rate of 3.50%. See “Note 10– Borrowings” to our financial statements in Part I, Item 1 of this Form 10-Q for more information on the Credit Agreement.
For more information regarding the Credit Agreement, see “Recent Developments.”
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements, including any risk management of commodity pricing or other hedging practices.
Distributions
To the extent that we have funds available, we intend to make quarterly distributions to our stockholders. Our stockholder distributions, if any, will be determined by our Board of Directors. Any distribution to our stockholders will be declared out of assets legally available for distribution. We anticipate that distributions will be paid from income primarily generated by interest and dividend income earned on investments made by us.
We maintain an “opt out” dividend reinvestment plan for our common stockholders. As a result, if we declare a distribution, then stockholders’ cash distributions will be automatically reinvested in additional shares of our common stock, unless they specifically “opt out” of the dividend reinvestment plan so as to receive cash distributions.
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If newly issued shares are used to implement the dividend reinvestment plan, the number of shares to be issued to a shareholder will be determined by dividing the total dollar amount of the cash dividend or distribution payable to a shareholder by the market price per share of our common stock at the close of regular trading on the Nasdaq Global Select Market on the payment date of a distribution, or if no sale is reported for such day, the average of the reported bid and ask prices. However, if the market price per share on the payment date of a cash dividend or distribution exceeds the most recently computed net asset value per share, we will issue shares at the greater of (i) the most recently computed net asset value per share and (ii) 95% of the current market price per share (or such lesser discount to the current market price per share that still exceeded the most recently computed net asset value per share).
If shares are purchased in the open market to implement the dividend reinvestment plan, the number of shares to be issued to a shareholder shall be determined by dividing the dollar amount of the cash dividend payable to such shareholder by the weighted average price per share for all shares purchased by the plan administrator in the open market in connection with the dividend.
The number of shares to be issued to a participant in the dividend reinvestment plan are rounded downward to the nearest whole number to avoid the issuance of fractional shares, and any fractional share otherwise issuable to a participant but for this provision is instead be paid to such participant in cash contemporaneously with the issuance of such shares in connection with such cash dividend.
During the three months ended March 31, 2022, we declared and paid dividends in the amount of $11,172,667, of which $3,753,085 was distributed in cash and the remainder distributed in shares to stockholders pursuant to the Company’s dividend reinvestment plan. During the year ended December 31, 2021, we declared and paid dividends in the amount of $44,942,937, of which $17,948,126 was distributed in cash and the remainder distributed in shares to stockholders pursuant to our dividend reinvestment plan.
The timing and amount of our distributions, if any, will be determined by our Board of Directors and will be declared out of assets legally available for distribution. The following table shows the dividends per share declared since our formation through March 31, 2022.
Amount
Date Declared
Record Date
Payment Date
per Share
May 3, 2018
May 15, 2018
May 31, 2018
$
0.15
July 26, 2018
August 15, 2018
August 31, 2018
$
0.25
November 1, 2018
October 31, 2018
November 15, 2018
$
0.35
March 22, 2019
March 22, 2019
March 26, 2019
$
0.40
May 2, 2019
May 7, 2019
May 21, 2019
$
0.45
May 2, 2019
May 31, 2019
July 16, 2019
$
0.46
July 30, 2019
August 5, 2019
August 26, 2019
$
0.45
September 27, 2019
September 30, 2019
November 12, 2019
$
0.04
December 9, 2019
December 10, 2019
December 23, 2019
$
0.40
March 5, 2020
March 6, 2020
March 20, 2020
$
0.40
May 7, 2020
May 8, 2020
May 21, 2020
$
0.35
August 5, 2020
August 6, 2020
August 20, 2020
$
0.36
October 1, 2020
October 1, 2020
November 12, 2020
$
0.38
March 4, 2021
March 5, 2021
March 19, 2021
$
0.37
April 29, 2021
April 30, 2021
May 13, 2021
$
0.37
July 19, 2021
July 20, 2021
August 12, 2021
$
0.34
October 28, 2021
November 8, 2021
November 22, 2021
$
0.25
February 24, 2022
March 8, 2022
March 22, 2022
$
0.27
Critical Accounting Policies
Basis of Presentation
The preparation of the financial statements and related disclosures in conformity with U.S. GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the period reports. Actual results could materially differ from those estimates. We believe that our most critical accounting policies, which are those that are most important to the portrayal of our
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financial condition and results of operations and require management’s most difficult, subjective and complex judgments, include the valuation of investments and our election to be treated, and intent to qualify annually, as a RIC. See “Note 2 — Summary of Significant Accounting Policies” to our financial statements in Part I, Item 1 of this Form 10-Q, which describes our critical accounting policies and recently adopted accounting pronouncements not yet required to be adopted by us.
Valuation of Investments
We measure the value of our portfolio investments at fair value in accordance with ASC Topic 820, Fair Value Measurements (“ASC Topic 820”) issued by the FASB. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The Audit Committee assists our Board of Directors in valuing investments that are not publicly traded or for which current market values are not readily available. Investments for which market quotations are readily available are valued using market quotations, which are generally obtained from independent pricing services, broker-dealers or market makers. With respect to portfolio investments for which market quotations are not readily available, our Board of Directors, with the assistance of the Audit Committee, RGC and its senior investment team and independent valuation agents, is responsible for determining, in good faith, the fair value of such portfolio investments in accordance with the valuation policy approved by our Board of Directors. If more than one valuation method is used to measure fair value, the results are evaluated and weighted, as appropriate, considering the reasonableness of the range indicated by those results. We consider a range of fair values based upon the valuation techniques utilized and select the value within that range that was most representative of fair value based on current market conditions as well as other factors RGC’s senior investment team considers relevant.
Our Board of Directors makes this fair value determination on a quarterly basis and any other time when a decision regarding the fair value of the portfolio investments is required. A determination of fair value involves subjective judgments and estimates and depends on the facts and circumstances. Due to the inherent uncertainty of determining the fair value of portfolio investments that do not have a readily available market value, the fair value of the investments may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material.
ASC Topic 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. ASC Topic 820 also provides guidance regarding a fair value hierarchy, which prioritizes information used to measure fair value and the effect of fair value measurements on earnings and provides for enhanced disclosures determined by the level within the hierarchy of information used in the valuation. In accordance with ASC Topic 820, these inputs are summarized in the three levels listed below:
● Level 1—Valuations are based on quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date.
● Level 2—Valuations are based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly and model-based valuation techniques for which all significant inputs are observable.
● Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models incorporating significant unobservable inputs, such as discounted cash flow models and other similar valuations techniques. The valuation of Level 3 assets and liabilities generally requires significant management judgment due to the inability to observe inputs to valuation.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of observable input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment.
Under ASC Topic 820, the fair value measurement also assumes that the transaction to sell an asset occurs in the principal market for the asset or, in the absence of a principal market, the most advantageous market for the asset, which may be a hypothetical market, and excludes transaction costs. The principal market for any asset is the market with the greatest volume and level of activity for such asset in which the reporting entity would or could sell or transfer the asset. In determining the principal market for an asset or
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liability under ASC Topic 820, it is assumed that the reporting entity has access to such market as of the measurement date. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent, knowledgeable and willing and able to transact.
With respect to investments for which market quotations are not readily available, our Board of Directors undertakes a multi-step valuation process each quarter, as described below:
● Our quarterly valuation process begins with each portfolio company investment being initially valued by RGC’s investment professionals that are responsible for the portfolio investment;
● Preliminary valuation conclusions are then documented and discussed with RGC’s senior investment team;
● At least once annually, the valuation for each portfolio investment is reviewed by one or more independent valuation firms. Certain investments, however, may not be evaluated by the applicable independent valuation firm if the net asset value and other aspects of such investments in the aggregate do not exceed certain thresholds;
● The Audit Committee then reviews these preliminary valuations from RGC and the applicable independent valuation firm, if any, and makes a recommendation to our Board of Directors regarding such valuations; and
● Our Board of Directors reviews the recommended preliminary valuations and determines the fair value of each investment in our portfolio, in good faith, based on the input of RGC, the applicable independent valuation firm and the Audit Committee.
Our investments are primarily loans made to high growth-potential companies focused in technology, life sciences, healthcare information and services, business services, select consumer services and products and other high-growth industries. These investments are considered Level 3 assets under ASC Topic 820 because there is no known or accessible market or market indices for these types of debt instruments and, thus, RGC’s senior investment team must estimate the fair value of these investment securities based on models utilizing unobservable inputs.
Rule 2a-5 under the 1940 Act was adopted by the SEC in December 2020 and establishes a framework for determining fair value in good faith for purposes of the 1940 Act. The Company is evaluating the impact of adopting Rule 2a-5 on the financial statements and intends to comply with the new rule’s requirements on or before the compliance date in September 2022.
Investment Valuation Techniques
Debt Investments. To determine the fair value of our debt investments, we compare the cost basis of the debt investment, which includes original issue discount, to the resulting fair value determined using a discounted cash flow model, unless another model is more appropriate based on the circumstances at the measurement date. The discounted cash flow approach entails analyzing the interest rate spreads for recently completed financing transactions that are similar in nature to our investments, in order to determine a comparable range of effective market interest rates for our investments. The range of interest rate spreads utilized is based on borrowers with similar credit profiles. All remaining expected cash flows of the investment are discounted using this range of interest rates to determine a range of fair values for the debt investment.
This valuation process includes, among other things, evaluating the underlying investment performance, the portfolio company’s current financial condition and ability to raise additional capital, as well as macro-economic events that may impact valuations. These events include, but are not limited to, current market yields and interest rate spreads of similar securities as of the measurement date. Significant increases or decreases in these unobservable inputs could result in a significantly higher or lower fair value measurement; however, a significantly higher or lower fair value measurement of any of the Company’s portfolio investments may occur regardless of whether there is a significant increase or decrease in these unobservable inputs; however, a significantly higher or lower fair value measurement of any of the Company’s portfolio investments may occur regardless of whether there is a signficiant increase or decrease in these unobservable inputs.
Under certain circumstances, we may use an alternative technique to value the debt investments to be acquired by us that better reflects the fair value of the investment, such as the price paid or realized in a recently completed transaction or a binding offer received
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in an arms-length transaction, the use of multiple probability-weighted cash flow models when the expected future cash flows contain elements of variability or estimates of proceeds that would be received in a liquidation scenario.
Warrants. Fair value of warrants is primarily determined using a Black Scholes option-pricing model. Privately held warrants and equity-related securities are valued based on an analysis of various factors including, but not limited to, the following:
● Underlying enterprise value of the issuer is estimated based on information available, including any information regarding the most recent rounds of issuer funding. Valuation techniques to determine enterprise value include market multiple approaches, income approaches or approaches that utilize recent rounds of financing and the portfolio company’s capital structure to determine enterprise value. Valuation techniques are also utilized to allocate the enterprise fair value of a portfolio company to the specific class of common or preferred stock exercisable in the warrant. Such techniques take into account the rights and preferences of the portfolio company’s securities, expected exit scenarios, and volatility associated with such outcomes to allocate the fair value to the specific class of stock held in the portfolio. Such techniques include Option Pricing Models, or “OPM,” including back-solve techniques, Probability Weighted Expected Return Models, or “PWERM,” and other techniques as determined to be appropriate.
● Volatility, or the amount of uncertainty or risk about the size of the changes in the warrant price, is based on comparable publicly traded companies within indices similar in nature to the underlying company issuing the warrant. Significant increases (decreases) in this unobservable input could result in a significantly lower (higher) fair value, but a significantly higher or lower fair value measurement of any of the Company’s portfolio investments may occur regardless of whether there is a significant increase or decrease in this unobservable input.
● The risk-free interest rates are derived from the U.S. Treasury yield curve. The risk-free interest rates are calculated based on a weighted average of the risk-free interest rates that correspond closest to the expected remaining life of the warrant. Significant increases (decreases) in this unobservable input could result in a significantly higher (lower) fair value, but a significantly higher or lower fair value measurement of any of the Company’s portfolio investments may occur regardless of whether there is a significant increase or decrease in this unobservable input.
● Other adjustments, including a marketability discount on private company warrants, are estimated based on our judgment about the general industry environment. Significant increases (decreases) in this unobservable input could result in a significantly lower (higher) fair value, but a significantly higher or lower fair value measurement of any of the Company’s portfolio investments may occur regardless of whether there is a significant increase or decrease in this unobservable input.
● Historical portfolio experience on cancellations and exercises of warrants are utilized as the basis for determining the estimated life of the warrants in each financial reporting period. Warrants may be exercised in the event of acquisitions, mergers or IPOs, and cancelled due to events such as bankruptcies, restructuring activities or additional financings. These events cause the expected remaining life assumption to be shorter than the contractual term of the warrants. Significant increases (decreases) in this unobservable input could result in a significantly higher (lower) fair value, but a significantly higher or lower fair value measurement of any of the Company’s portfolio investments may occur regardless of whether there is a significant increase or decrease in this unobservable input.
Under certain circumstances we may use an alternative technique to value warrants that better reflects the warrants’ fair values, such as an expected settlement of a warrant in the near term, a model that incorporates a put feature associated with the warrant, or the price paid or realized in a recently completed transaction or binding offer received in an arms-length transaction. The fair value may be determined based on the expected proceeds to be received from such settlement or based on the net present value of the expected proceeds from the put option.
These valuation methodologies involve a significant degree of judgment. There is no single standard for determining the fair value of investments that do not have an active public market. Valuations of privately held investments are inherently uncertain, as they are based on estimates, and their values may fluctuate over time. The determination of fair value may differ materially from the values that would have been used if an active market for these investments existed. In some cases, the fair value of such investments is best expressed as a range of values derived utilizing different methodologies from which a fair value may then be determined.
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Equity Investments. The fair value of an equity investment in a privately held company is initially the face value of the amount invested. We adjust the fair value of equity investments in private companies upon the completion of a new third-party round of equity financing subsequent to our investment. We may make adjustments to fair value, absent a new equity financing event, based upon positive or negative changes in a portfolio company’s financial or operational performance. We may also reference comparable transactions and/or secondary market transactions in connection with our determination of fair value. The fair value of an equity investment in a publicly traded company is based upon the closing public share price on the date of measurement. These assets are recorded at fair value on a recurring basis. These valuation methodologies involve a significant degree of judgment. There is no single standard for determining the fair value of investments that do not have an active public market. Valuations of privately held investments are inherently uncertain, as they are based on estimates, and their values may fluctuate over time. The determination of fair value may differ materially from the values that would have been used if an active market for these investments existed. In some cases, the fair value of such investments is best expressed as a range of values derived utilizing different methodologies from which a fair value may then be determined.
Fair Value
The Company’s assets measured at fair value on a recurring basis subject to the requirements of ASC Topic 820 at March 31, 2022 and December 31, 2021 were as follows:
As of March 31, 2022 (Unaudited)
Level 1
Level 2
Level 3
Total
Portfolio Investments
Common Stock
$
6,474,723
$
—
$
1,348,774
$
7,823,497
Senior Secured Term Loans
—
—
698,576,393
698,576,393
Second Lien Term Loans
—
—
13,048,827
13,048,827
Preferred Stock
12,064,491
—
1,441,724
13,506,215
Warrants
—
—
21,334,438
21,334,438
Total Portfolio Investments
18,539,214
—
735,750,156
754,289,370
Total Investments
$
18,539,214
$
—
$
735,750,156
$
754,289,370
As of December 31, 2021
Level 1
Level 2
Level 3
Total
Portfolio Investments
Common Stock
$
2,559,932
$
8,903,933
$
—
$
11,463,865
Corporate Bonds
—
—
623,053,646
623,053,646
Senior Secured Term Loans
—
—
12,872,588
12,872,588
Preferred Stock
15,704,705
—
1,332,420
17,037,125
Warrants
—
—
20,087,550
20,087,550
Total Portfolio Investments
18,264,637
8,903,933
657,346,204
684,514,774
U.S. Treasury Bill
45,001,500
—
—
45,001,500
Total Investments
$
63,266,137
$
8,903,933
$
657,346,204
$
729,516,274
Investment Transactions and Related Investment Income
Security transactions, if any, are recorded on a trade-date basis. We measure realized gains or losses from the repayment or sale of investments using the specific identification method. The amortized cost basis of investments represents the original cost adjusted for the accretion/amortization of discounts and premiums and upfront loan origination fees. We report changes in fair value of investments that are measured at fair value as a component of net change in unrealized appreciation (depreciation) on investments on the statement of operations.
Dividends are recorded on the applicable ex-dividend date. Interest income, if any, adjusted for amortization of market premium and accretion of market discount, is recorded on an accrual basis to the extent that we expect to collect such amounts. OID, principally representing the estimated fair value of detachable equity or warrants obtained in conjunction with our debt investments, loan origination fees, end of term payments, and market discount or premium are capitalized and accreted or amortized into interest income over the life of the respective security using the effective interest method. Loan origination fees received in connection with the closing of
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investments are reported as unearned income, which is included as amortized cost of the investment; the unearned income from such fees is accreted over the contractual life of the loan based on the effective interest method. Upon prepayment of a loan or debt security, any prepayment penalties, unamortized loan origination fees, end of term payments and unamortized market discounts are recorded as interest income.
Management and Incentive Fees
We accrue for base management fees and incentive fees. The accrual for incentive fees includes the recognition of incentive fees on unrealized capital gains, even though such incentive fees are neither earned nor payable to RGC until the gains are both realized and in excess of unrealized depreciation on investments. See “Note 7 –Related Party Agreements and Transactions” to our financial statements in Part I, Item 1 of this Form 10-Q for more information on the Advisory Agreement and the fee structure thereunder.
Income Taxes
We have elected to be treated, have qualified and intend to qualify annually, as a RIC under Subchapter M of the Code. Generally, a RIC is not subject to U.S. federal income taxes on distributed income and gains if it distributes at least 90% of its net ordinary income and net short-term capital gains in excess of its net long-term capital losses, if any, to its stockholders. So long as we qualify, and maintain our status, as a RIC, we generally will not pay corporate-level U.S. federal income taxes on any ordinary income or capital gains that we distribute at least annually to our stockholders as dividends. Rather, any tax liability related to income earned by us represents obligations of our investors and will not be reflected in the financial statements of the Company. We intend to make sufficient distributions to maintain our RIC tax treatment each year and we do not anticipate paying any material U.S. federal income taxes in the future.
Recent Developments
We evaluated events subsequent to March 31, 2022 through May 5, 2022.
On April 20, 2022, we entered into a certain amended and restated credit agreement (the “Amended and Restated Credit Agreement”) among us, as borrower, the financial institutions party thereto as lenders (the “Lenders”), KeyBank National Association, as administrative agent for Lenders (“Administrative Agent”) and a Lender, CIBC Bank USA, as documentation agent and a Lender, MUFG Union Bank, N.A. as co-documentation agent, and U.S. Bank Trust Company, National Association, as collateral custodian and paying agent. Effective as of April 20, 2022, the Amended and Restated Credit Agreement amended and restated that certain Credit Agreement, dated as of May 31, 2019, among us, as borrower, the financial institutions party thereto as lenders, KeyBank National Association, as administrative agent and a lender, CIBC Bank USA, as documentation agent and a lender, MUFG Union Bank, N.A. as co-documentation agent, and U.S. Bank, National Association, as collateral custodian and paying agent (as amended prior to April 20, 2022, the “Prior Credit Agreement”).
The Amended and Restated Credit Agreement amended and restated the Prior Credit Agreement to: (i) increase the commitment amount from $215 million to $225 million, (ii) increase the accordion amount from a $350 million maximum aggregate commitment amount to a $500 million maximum aggregate commitment amount; (iii) extend the maturity date and revolving period, (iv) calculate the interest rate based on SOFR (rather than LIBOR), and (v) amend certain other terms of the Prior Credit Agreement, including without limitation the borrowing base calculation and excess concentration measures.
On April 28, 2022, we declared a dividend of $0.30 per share payable on May 24, 2022 to shareholders of record as of May 10, 2022.
On March 2, 2022, Coginiti Corp prepaid its outstanding principal balance of $500,000 along with outstanding interest for total consideration of $509,276.
On March 3, 2022, we funded an investment of $5,000,000 to INRIX, Inc.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.