This report contains certain statements of a forward-looking nature relating to
future events or the future financial performance of the Company and its
investment portfolio companies. Words such as may, will, expect, believe,
anticipate, intend, could, estimate, might and continue, and the negative or
other variations thereof or comparable terminology, are intended to identify
forward-looking statements. Forward-looking statements are included in this
report pursuant to the "Safe Harbor" provision of the Private Securities
Litigation Reform Act of 1995. Such statements are predictions only, and the
actual events or results may differ materially from those discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those relating to adverse
conditions in the U.S. and international economies, competition in the markets
in which our portfolio companies operate, investment capital demand, pricing,
market acceptance, any changes in the regulatory environments in which we
operate, changes in our accounting assumptions that regulatory agencies,
including the SEC, may require or that result from changes in the accounting
rules or their application, competitive forces, adverse conditions in the credit
markets impacting the cost, including interest rates and/or availability of
financing, the results of financing and investing efforts, the ability to
complete transactions, the inability to implement our business strategies and
other risks identified below or in the Company's filings with the SEC. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. The Company undertakes no obligation to
publicly revise these forward-looking statements to reflect events or
circumstances occurring after the date hereof or to reflect the occurrence of
unanticipated events. The following analysis of the financial condition and
results of operations of the Company should be read in conjunction with the
consolidated financial statements, the notes thereto and the other financial
information included elsewhere in this report.
OVERVIEW
The Company is an externally managed, non-diversified, closed-end management
investment company that has elected to be regulated as a business development
company under the 1940 Act. The Company's investment objective is to seek to
maximize total return from capital appreciation and/or income, though our
current focus is more on yield generating investments.
On November 6, 2003, Mr. Tokarz assumed his positions as Chairman and Portfolio
Manager of the Company. He and the Company's management team are seeking to
implement our investment
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objective (i.e., to maximize total return from capital appreciation and/or
income) through making a broad range of private investments in a variety of
industries.
The investments can include senior or subordinated loans, convertible debt and
convertible preferred securities, common or preferred stock, equity interests,
warrants or rights to acquire equity interests and other private equity
transactions, among other investments. During the fiscal year ended October 31,
2018, the Company made six new investments and follow-on investments in eight
existing portfolio companies totaling approximately $62.3 million. During the
fiscal year ended October 31, 2019, the Company made six new investments and
follow-on investments in six existing portfolio companies totaling approximately
$44.9 million.
The Company's prior investment objective was to achieve long-term capital
appreciation from venture capital investments in information technology
companies. Accordingly, the Company's investments had focused on investments in
equity and debt securities of information technology companies. As of
October 31, 2019, approximately 1.8% of the current fair value of our assets
consisted of Legacy Investments. We are, however, seeking to manage these Legacy
Investments to try and realize maximum returns. We generally seek to capitalize
on opportunities to realize cash returns on these investments when presented
with a potential "liquidity event," i.e., a sale, public offering, merger or
other reorganization.
Our new portfolio investments are made pursuant to our current objective and
strategy. We are concentrating our investment efforts on small and middle-market
companies that, in our view, provide opportunities to maximize total return from
capital appreciation and/or income though our current focus is more on yield
generating investments which can include, but is not limited to senior and
subordinated loans, convertible debt, common and preferred equity with a coupon
or liquidation preference and warrants or rights to acquire equity interests
(the "Yield-Focused Strategy"). We have continued the transition to the
Yield-Focused Strategy. We have done this through selling a number of equity
investments. These sales and repayments improve our liquidity position, which
provides us with flexibility to redeploy capital into debt or similar
income-producing investments. The Company continues to seek to monetize various
equity investments to further support the Yield-Focused Strategy. We
participate in the private equity business generally by providing negotiated
long-term equity and/or debt investment capital to privately-owned small and
middle-market companies. Our financings are generally used to fund growth,
buyouts, acquisitions, recapitalizations, note purchases and/or bridge
financings. We generally invest in private companies, though, from time to time,
we may invest in public companies that may lack adequate access to public
capital.
We may also seek to achieve our investment objective by establishing a
subsidiary or subsidiaries that would serve as general partner to a private
equity or other investment fund(s). In fact, during fiscal year 2006, we
established MVC Partners for this purpose. Furthermore, the Board of Directors
authorized the establishment of a PE Fund, for which an indirect wholly-owned
subsidiary of the Company serves as the GP and which may raise up to $250
million. On October 29, 2010, through MVC Partners and MVCFS, the Company
committed to invest approximately $20.1 million in the PE Fund. The PE Fund
closed on approximately $104 million of capital commitments. The Company's
Board of Directors authorized the establishment of, and investment in, the PE
Fund for a variety of reasons, including the Company's ability to make
Non-Diversified Investments through the PE Fund. As previously disclosed, the
Company may be restricted in its ability to make Non-Diversified Investments.
For services provided to the PE Fund, the GP and MVC Partners are together
entitled to receive 25% of all management fees and other fees paid by
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the PE Fund and its portfolio companies and up to 30% of the carried interest
generated by the PE Fund. Further, at the direction of the Board of Directors,
the GP retained TTG Advisers to serve as the portfolio manager of the PE Fund.
In exchange for providing those services, and pursuant to the Board of
Directors' authorization and direction, TTG Advisers is entitled to receive the
balance of the fees and any carried interest generated by the PE Fund and its
portfolio companies. Given this separate arrangement with the GP and the PE
Fund, under the terms of the Company's Advisory Agreement with TTG Advisers, TTG
Advisers is not entitled to receive from the Company a management fee or an
incentive fee on assets of the Company that are invested in the PE Fund. During
the fiscal year ended October 31, 2012 and thereafter, MVC Partners was
consolidated with the operations of the Company as MVC Partners' limited
partnership interest in the PE Fund is a substantial portion of MVC Partners
operations. Previously, MVC Partners was presented as a portfolio company on
the Schedule of Investments. The consolidation of MVC Partners has not had any
material effect on the financial position or net results of operations of the
Company. Also, during fiscal year ended October 31, 2014, MVC Turf, Inc. ("MVC
Turf") was consolidated with the Company as MVC Turf was an MVC wholly-owned
holding company. The consolidation of MVC Turf did not have a material effect
on the financial position or net results of operations of the Company. On
March 7, 2017, the Company exchanged its shares of MVC Turf for approximately
$3.8 million of additional subordinated debt in Turf Products. MVC Turf is no
longer consolidated with the Company. Please see Note 2 of our consolidated
financial statements "Consolidation" for more information.
As a result of the closing of the PE Fund, consistent with the Board-approved
policy concerning the allocation of investment opportunities, the PE Fund
received a priority allocation of all private equity investments that would
otherwise be Non-Diversified Investments for the Company during the PE Fund's
investment period that ended on October 28, 2014. Additional capital may be
called for follow-on investments in existing portfolio companies of the PE Fund
or to pay operating expenses of the PE Fund until the partnership is no longer
extended.
Additionally, in pursuit of our objective, we may acquire a portfolio of
existing private equity or debt investments held by financial institutions or
other investment funds should such opportunities arise.
Furthermore, pending investments in portfolio companies pursuant to the
Company's principal investment strategy, the Company may invest in certain
securities on a short-term or temporary basis. In addition to cash-equivalents
and other money market-type investments, such short-term investments may include
exchange-traded funds and private investment funds offering periodic liquidity.
OPERATING INCOME
For the Fiscal Years Ended October 31, 2019, 2018 and 2017. Total operating
income was $30.5 million for the fiscal year ended October 31, 2019 and $22.6
million for the fiscal year ended October 31, 2018, an increase of approximately
$7.9 million. Fiscal year 2018 operating income increased by approximately $2.6
million compared to Fiscal year 2017 operating income of $20.0 million.
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For the Fiscal Year Ended October 31, 2019
Total operating income was $30.5 million for the fiscal year ended October 31,
2019. The increase in operating income over the same period last year was
primarily due to the increase in dividend income and the increase in interest
earned on loans from the Company's portfolio companies, continuing the
transition to the Yield-Focused Strategy. The Company earned approximately
$26.8 million in interest income from investments in portfolio companies. Of
the $26.8 million recorded in interest income, approximately $5.5 million was
"payment in kind" interest. The "payment in kind" interest is computed at the
contractual rate specified in each investment agreement and may be added to the
principal balance of each investment. The Company's debt investments yielded
annualized rates from 3.1% to 16.0%. The Company also recorded fee income from
asset management of the PE Fund and its portfolio companies totaling
approximately $842,000 and fee income from the Company's portfolio companies of
approximately $102,000, totaling approximately $944,000 in fee income. Of the
$842,000 of fee income from asset management activities, 75% of the income is
obligated to be paid to TTG Advisers. However, under the PE Fund's agreements,
a significant portion of the portfolio fees that are paid by the PE Fund's
portfolio companies to the GP and TTG Advisers is subject to recoupment by the
PE Fund in the form of an offset to future management fees paid by the PE Fund.
For the Fiscal Year Ended October 31, 2018
Total operating income was $22.6 million for the fiscal year ended October 31,
2018. The increase in operating income over the same period last year was
primarily due to the increase in dividend income and the increase in interest
earned on loans from the Company's portfolio companies, reflecting the continued
transition to the Yield-Focused Strategy. The Company earned approximately
$19.4 million in interest income from investments in portfolio companies. Of
the $19.4 million recorded in interest income, approximately $3.6 million was
"payment in kind" interest. The "payment in kind" is computed at the
contractual rate specified in each investment agreement and may be added to the
principal balance of each investment. The Company's debt investments yielded
annualized rates from 5.0% to 16.0%. The Company also received fee income from
asset management of the PE Fund and its portfolio companies totaling
approximately $1.1 million and fee income from the Company's portfolio companies
of approximately $280,000, totaling approximately $1.4 million in fee income.
Of the $1.1 million of fee income from asset management activities, 75% of the
income is obligated to be paid to TTG Advisers. However, under the PE Fund's
agreements, a significant portion of the portfolio fees that are paid by the PE
Fund's portfolio companies to the GP and TTG Advisers is subject to recoupment
by the PE Fund in the form of an offset to future management fees paid by the PE
Fund.
For the Fiscal Year Ended October 31, 2017
Total operating income was $20.0 million for the fiscal year ended October 31,
2017. The decrease in operating income over the same period last year was
primarily due to the decrease in dividend income and the decrease in interest
earned on loans and fee income from the Company's portfolio companies. The
Company earned approximately $17.2 million in interest and dividend income from
investments in portfolio companies. Of the $17.2 million recorded in
interest/dividend income, approximately $643,000 was dividend income and $2.2
million was "payment in kind" interest. The "payment in kind" is computed at
the contractual rate specified in each investment agreement and may be added to
the principal balance of each investment. The Company's debt investments yielded
annualized rates from 5.0% to 16.0%. The Company also received fee income from
asset management of the PE Fund and its portfolio companies totaling
approximately $1.1 million and fee income from the Company's portfolio companies
of
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approximately $1.7 million, totaling approximately $2.8 million in fee income.
Of the $1.1 million of fee income from asset management activities, 75% of the
income is obligated to be paid to TTG Advisers. However, under the PE Fund's
agreements, a significant portion of the portfolio fees that are paid by the PE
Fund's portfolio companies to the GP and TTG Advisers is subject to recoupment
by the PE Fund in the form of an offset to future management fees paid by the PE
Fund.
OPERATING EXPENSES
For the Fiscal Years Ended October 31, 2019, 2018 and 2017. Net Operating
expenses were $19.0 million for the fiscal year ended October 31, 2019 and $18.9
million for the fiscal year ended October 31, 2018, an increase of approximately
$100,000. Fiscal year 2018 operating expenses decreased by approximately $6.7
million compared to fiscal year 2017 operating expenses of $25.6 million.
For the Fiscal Year Ended October 31, 2019
Operating expenses, net of the Voluntary Waivers (as described below), were
approximately $19.0 million or 8.39% of the Company's average net assets for the
fiscal year ended October 31, 2019. Significant components of operating
expenses for the fiscal year ended October 31, 2019 were interest and other
borrowing costs of approximately $9.7 million and management fee expense paid by
the Company of approximately $4.0 million, which is net of the voluntary
management fee waiver of approximately $2.4 million.
The approximately $100,000 increase in the Company's net operating expenses for
the fiscal year ended October 31, 2019 compared to the same period in 2018, was
primarily due to the approximately $1.8 million decrease in loss on
extinguishment of debt related to the unamortized deferred financing fees for
the Senior Notes that were expensed at the time they were repaid and an
approximately $1.1 million decrease in interest and other borrowing costs.
These decreases were partially offset by the $2.1 million difference in
incentive compensation expense and the $543,000 increase in settlement expenses
(associated with a former portfolio company, G3K Displays, Inc.) for the fiscal
year ended October 31, 2019 when compared to the same period in 2018. The
portfolio fees - asset management are payable to TTG Advisers for monitoring and
other customary fees received by the GP from portfolio companies of the PE
Fund. To the extent the GP or TTG Advisers receives advisory, monitoring,
organization or other customary fees from any portfolio company of the PE Fund
or management fees related to the PE Fund, 25% of such fees shall be paid to or
retained by the GP and 75% of such fees shall be paid to or retained by TTG
Advisers. On October 30, 2018, the Board approved the renewal of the Advisory
Agreement for the 2019 fiscal year. On October 31, 2019, the Board approved the
renewal of the Advisory Agreement for the 2020 fiscal year. The Company and the
Adviser agreed on an expense cap for fiscal 2019 and fiscal 2020 of 3.25% under
the Modified Methodology. The amount of any payments made by the GP of the PE
Fund to TTG Advisers pursuant to the Portfolio Management Agreement between the
GP and TTG Advisers respecting the PE Fund continues to be excluded from the
calculation of the Company's expense ratio under the Expense Limitation
Agreement. In addition, for fiscal years 2010 through 2020, TTG Advisers
voluntarily agreed to extend the Voluntary Waiver. TTG Advisers also
voluntarily agreed that any assets of the Company that are invested in
exchange-traded funds would not be taken into account in the calculation of the
base management fee due to TTG Advisers under the Advisory Agreement. As of
October 31, 2019, the Company did not have an investment in an exchange traded
fund. Under the Modified Methodology, for the quarter ended
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October 31, 2019, the Company's annualized expense ratio was 2.74%, (taking into
account the same carve outs as those applicable to the expense cap). In
addition, the Adviser agreed, effective November 1, 2017, to a revised
management fee structure that ties management fees to the NAV discount2 as
follows: (A) If the Company's NAV discount is greater than 20%, the management
fee for the current quarter is reduced to 1.25%; (B) If the NAV discount is
between 10% and 20%, the management fee will be 1.50%; and (C) If the NAV
discount is less than 10% or eliminated, the 1.50% management fee would be
re-examined, but in no event would it exceed 1.75%. For the quarter ended
October 31, 2019, the management fee was 1.25%.
Pursuant to the terms of the Advisory Agreement, during the fiscal year ended
October 31, 2019, the provision for incentive compensation was unchanged from $0
as of October 31, 2018, including both the pre-incentive fee net operating
income (the "Income Incentive Fee") and the capital gain incentive fee. The
provision for incentive compensation includes the Valuation Committee's
determination to decrease the fair values of ten of the Company's portfolio
investments (Advantage, Highpoint, Initials, Legal Solutions, MVC Environmental,
RuMe, Trientis, U.S. Spray, U.S. Gas and Equus) by a total of approximately
$17.9 million. The provision also includes the Valuation Committee's
determination to increase the fair values of twelve of the Company's portfolio
investments (Array, Black Diamond, Custom Alloy, Dukane, HTI, JSC Tekers,
Security Holdings, Tuf-Tug, Turf, Crius, Centile escrow and MVC Automotive) by a
total of approximately $12.8 million. Also, for the fiscal year ended
October 31, 2019, no provision was recorded for the net operating income portion
of the incentive fee as pre-incentive fee net operating income for the quarter
did not exceed the hurdle rate. As of October 31, 2018, the balance of the
Deferred Portion (defined below) of the incentive compensation payable was
approximately $2.5 million. During the fiscal year ended October 31, 2019, the
Company made an approximately $975,000 incentive compensation payment to TTG
Advisers related to the sale of the Crius equity units, resulting in a balance
of approximately $1.5 million as of October 31, 2019.
On October 31, 2019, the Adviser indicated its voluntary agreement to modify the
manner in which the Income Incentive Fee is calculated under the Advisory
Agreement for the fiscal year ending October 31, 2020 (the "Current Incentive
Fee Modification"). Details of the modification can be found under Section 5 -
Incentive Compensation.
For the Fiscal Year Ended October 31, 2018
Operating expenses, net of the Voluntary Waivers, were approximately $18.9
million or 7.59% of the Company's average net assets for the fiscal year ended
October 31, 2018. Significant components of operating expenses for the fiscal
year ended October 31, 2018 were interest and other borrowing costs of
approximately $10.7 million and management fee expense paid by the Company of
approximately $3.9 million, which is net of the voluntary management fee waiver
of approximately $2.0 million.
The approximately $6.7 million decrease in the Company's net operating expenses
for the fiscal year ended October 31, 2018 compared to the same period in 2017,
was primarily due to the approximately $7.7 million decrease in the payable for
incentive compensation expense and an approximately $821,000 decrease in
management fee expense paid by the Company, including the voluntary management
fee waiver. These decreases were partially offset by increases in interest and
other borrowing costs of approximately $452,000 and approximately $1.8 million
in unamortized deferred financing fees for the Senior Notes that were expensed
at the time they were repaid. The Company incurred approximately $800,000 of
additional interest expense for a brief
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2 The NAV discount referred to herein is the average daily discount to NAV for
a quarter. The discount is determined using the most recently determined NAV
per share, which is typically the prior quarter end's NAV per share and the
Company stock closing price on any given day for the quarter.
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period during the fiscal year ended October 31, 2018, when both the Senior Notes
and Senior Notes II were outstanding at the same time. Also during the period,
the Company recorded approximately $870,000 of additional interest expense
associated with the deferred tax liability resulting from the installment sale
treatment applied to the realized gain associated with the U.S. Gas note. The
interest expense is required to be paid under IRS Code section 453A. The
$870,000 is comprised of the calculated interest expense for fiscal year 2017 as
well as an estimate for the fiscal year ended October 31, 2018. The Company has
discussed with the IRS whether the IRS would be willing to issue a ruling to the
Company that the Company is not liable for this interest expense given its
"pass-through" status as a Regulated Investment Company. The Company has not
yet received a response from the IRS, but has determined to record the
associated interest expense during the period. The portfolio fees - asset
management are payable to TTG Advisers for monitoring and other customary fees
received by the GP from portfolio companies of the PE Fund. To the extent the
GP or TTG Advisers receives advisory, monitoring, organization or other
customary fees from any portfolio company of the PE Fund or management fees
related to the PE Fund, 25% of such fees shall be paid to or retained by the GP
and 75% of such fees shall be paid to or retained by TTG Advisers. On
October 31, 2017, the Board approved the renewal of the Advisory Agreement for
the 2018 fiscal year. The Company and the Adviser agreed on an expense cap for
fiscal 2017 of 3.25% under the Modified Methodology. For fiscal years 2018 and
2019, the Adviser has agreed to continue the 3.25% expense cap under the
Modified Methodology. The amount of any payments made by the GP of the PE Fund
to TTG Advisers pursuant to the Portfolio Management Agreement between the GP
and TTG Advisers respecting the PE Fund continues to be excluded from the
calculation of the Company's expense ratio under the Expense Limitation
Agreement. In addition, for fiscal years 2010 through 2018, TTG Advisers
voluntarily agreed to extend the Voluntary Waiver. TTG Advisers also
voluntarily agreed that any assets of the Company that are invested in
exchange-traded funds would not be taken into account in the calculation of the
base management fee due to TTG Advisers under the Advisory Agreement. As of
October 31, 2018, the Company did not have an investment in an exchange traded
fund. Under the Modified Methodology, for the fiscal year ended October 31,
2018, the Company's annualized expense ratio was 2.70%, (taking into account the
same carve outs as those applicable to the expense cap). In addition, the
Adviser agreed, effective November 1, 2017, to a revised management fee
structure that ties management fees to the NAV discount3 as follows: (A) If the
Company's NAV discount is greater than 20%, the management fee for the current
quarter is reduced to 1.25%; (B) If the NAV discount is between 10% and 20%, the
management fee will be 1.50%; and (C) If the NAV discount is less than 10% or
eliminated, the 1.50% management fee would be re-examined, but in no event would
it exceed 1.75%. For the quarter ended October 31, 2018, the effective
management fee was 1.25%.
Pursuant to the terms of the Advisory Agreement, during the fiscal year ended
October 31, 2018, the provision for incentive compensation was decreased by a
net amount of approximately $2.1 million to $0, including both the pre-incentive
fee net operating income (the "Income Incentive Fee") and the capital gain
incentive fee. The net decrease in the provision for incentive compensation
reflects the realized loss on the U.S. Gas loan, the realized gain on the
Centile equity and the Valuation Committee's determination to decrease the fair
values of sixteen of the Company's portfolio investments (Advantage, Dukane,
Equus, HTI, Initials, JSC Tekers, MVC Environmental, RuMe, Security Holdings,
Trientis, Turf, U.S. Gas, SCSD, U.S. Tech, Centile escrow and Crius) by
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3 The NAV discount referred to herein is the average daily discount to NAV for
a quarter. The discount is determined using the most recently determined NAV
per share, which is typically the prior quarter end's NAV per share and the
Company stock closing price on any given day for the quarter.
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a total of approximately $23.7 million. The net decrease in the provision also
reflects the Valuation Committee's determination to increase the fair values of
five of the Company's portfolio investments (Centile, Custom Alloy, Highpoint,
Legal Solutions and MVC Automotive) by a total of approximately $8.1 million.
Also, for the quarter ended October 31, 2018, no provision was recorded for the
net operating income portion of the incentive fee as pre-incentive fee net
operating income for the quarter did not exceed the hurdle rate. As discussed
in "Realized Gains and Losses on Portfolio Securities," on July 5, 2017, the
Company realized a gain of approximately $115.9 million from the sale of U.S.
Gas (the U.S. Gas Sale"). Under the Advisory Agreement, this transaction
triggered an incentive compensation payment obligation to TTG Advisers, which
payment, under the Advisory Agreement, was not required to be made until soon
after the completion of the audit of the fiscal 2017 financials. The fiscal 2017
incentive fee payment obligation to TTG Advisers was approximately $4.4 million.
The portion of the payment obligation attributable to the cash portion of the
realized gain, $1.9 million, was paid following the audit of the fiscal 2017
financials per the Advisory Agreement. Please see Note 5 of our consolidated
financial statements "Incentive Compensation" for more information, particularly
on the deferred collection of the incentive fee payment on the Deferred Portion
(defined below). For fiscal years ending on October 31, 2019 and October 31,
2020, the Adviser agreed to voluntarily modify the calculation of the Income
Incentive Fee so that the fee accrued shall equal the lesser of: (i) the amount
of the Income Incentive Fee computed and determined quarterly as currently set
forth in the Advisory Agreement; and (ii) the amount of the Income Incentive Fee
computed and determined on an annual basis (in lieu of quarterly). Further,
regardless of the amount of Income Incentive Fee computed or accrued, the
Adviser agreed to defer collection of any Income Incentive Fee due and payable
for the fiscal year until after the completion of the annual audit for such
fiscal year (the "Prior Incentive Fee Modification"). The Prior Incentive Fee
Modification was superseded by the Current Incentive Fee Modification.
For the Fiscal Year Ended October 31, 2017
Operating expenses, net of the Voluntary Waivers (as described below), were
approximately $25.6 million or 9.01% of the Company's average net assets for the
fiscal year ended October 31, 2017. Significant components of operating
expenses for the fiscal year ended October 31, 2017 were interest and other
borrowing costs of approximately $10.3 million, net incentive compensation
expense of approximately $5.6 million and management fee expense paid by the
Company of approximately $4.7 million, which is net of the voluntary management
fee waiver of approximately $1.6 million.
The approximately $7.6 million increase in the Company's net operating expenses
for the fiscal year ended October 31, 2017 compared to the same period in 2016,
was primarily due to the approximately $8.6 million increase in the estimated
provision for incentive compensation expense, which takes into account the $1.0
million incentive fee waiver in 2016 and was partially offset by a decrease in
management fee expense paid by the Company of approximately $1.0 million,
including the voluntary management fee waiver. The portfolio fees - asset
management are payable to TTG Advisers for monitoring and other customary fees
received by the GP from portfolio companies of the PE Fund. To the extent the
GP or TTG Advisers receives advisory, monitoring, organization or other
customary fees from any portfolio company of the PE Fund or management fees
related to the PE Fund, 25% of such fees shall be paid to or retained by the GP
and 75% of such fees shall be paid to or retained by TTG Advisers. On
October 31, 2017, the Board approved the renewal of the Advisory Agreement for
the 2018 fiscal year. In March 2016, the Adviser agreed to modify its prior
agreement to waive, effective November 1, 2015, the first $1.0 million of
capital
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gains incentive fee due under the Advisory Agreement, such that the $1.0 million
waiver of incentive fee would be applied to any incentive fee due under the
agreement, whether it is a capital gains incentive fee or net operating income
incentive fee. As such, a $1.0 million incentive fee waiver was recorded during
the quarter ended April 30, 2016 resulting in a net $1.1 million payable being
recorded for the net operating income portion of the incentive fee. During the
fiscal year ended October 31, 2017, the Company paid the Adviser the previously
accrued $1.1 million incentive fee payment related to the net operating income
for the quarter ended April 30, 2016. The Company and the Adviser, similar to
fiscal year 2016, agreed on an expense cap for fiscal 2017 of 3.25% under the
Modified Methodology. For fiscal year 2018, the Adviser has agreed to continue
the 3.25% expense cap under the Modified Methodology. The amount of any
payments made by the GP of the PE Fund to TTG Advisers pursuant to the Portfolio
Management Agreement between the GP and TTG Advisers respecting the PE Fund
continues to be excluded from the calculation of the Company's expense ratio
under the Expense Limitation Agreement. In addition, for fiscal years 2010
through 2017, TTG Advisers voluntarily agreed to extend the Voluntary Waiver.
TTG Advisers also voluntarily agreed that any assets of the Company that are
invested in exchange-traded funds would not be taken into account in the
calculation of the base management fee due to TTG Advisers under the Advisory
Agreement. As of October 31, 2017, the Company did not have an investment in an
exchange traded fund. Under the Modified Methodology, for the fiscal year ended
October 31, 2017, the Company's expense ratio was 2.93%, (taking into account
the same carve outs as those applicable to the expense cap). In addition, the
Adviser has agreed, effective November 1, 2017, to a revised management fee
structure that ties management fees to the NAV discount4 as follows: (A) If the
Company's NAV discount is greater than 20%, the management fee for the current
quarter is reduced to 1.25%; (B) If the NAV discount is between 10% and 20%, the
management fee will be 1.50%; and (C) If the NAV discount is less than 10% or
eliminated, the 1.50% management fee would be re-examined, but in no event would
it exceed 1.75%.
Pursuant to the terms of the Advisory Agreement, during the fiscal year ended
October 31, 2017, the provision for incentive compensation was increased by a
net amount of approximately $4.5 million to approximately $6.4 million,
including both the pre-incentive fee net operating income and the capital gains
incentive fee. The net increase in the provision for incentive compensation
during the fiscal year ended October 31, 2017, primarily reflects the realized
gain from the sale of U.S. Gas above the October 31, 2016 fair value and the
Valuation Committee's determination to increase the fair values of twelve of the
Company's portfolio investments (Advantage, Centile, Custom Alloy, Dukane, JSC
Tekers, Legal Solutions, Morey's, MVC Automotive, Pride, Quantum, U.S. Tech and
Equus) by a total of approximately $14.1 million. The net increase in the
provision also reflects the Valuation Committee's determination to decrease the
fair values of eleven of the Company's portfolio investments (BAC,
HTI, Initials, MVC Environmental, RuMe, Turf, SCSD, Vestal, Security Holdings,
SGDA Europe and Crius) by a total of approximately $14.5 million. Also, for the
quarter ended October 31, 2017, no provision was recorded for the net operating
income portion of the incentive fee as pre-incentive fee net operating income
for the quarter did not exceed the hurdle rate. On July 5, 2017 and as
discussed in "Realized Gains and Losses on Portfolio Securities," the Company
realized a gain of $115.9 million from the sale of U.S. Gas (the U.S. Gas
Sale"). Under the Advisory Agreement, this transaction triggered an incentive
compensation payment obligation to TTG Advisers, which payment, under the
Advisory Agreement, was not required to be made until soon after the completion
of the audit of the fiscal 2017 financials in this
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4 All NAV discount calculations are arrived at by taking the average daily
discount to NAV for a quarter (i.e., the discount to the most recently
determined NAV per share at which the Company stock price closes on any given
day for the quarter based on the prior fiscal quarter's NAV per share).
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Report. The fiscal 2017 incentive fee payment obligation to TTG Advisers was
approximately $4.4 million. The Adviser has voluntarily agreed to defer the
timing for collection of the portion of this payment obligation attributable to
the portions of the proceeds of the U.S. Gas Sale not represented by cash
proceeds (the "Deferred Portion"). There has not been a definitive
determination as to the timing of the ultimate collection of the Deferred
Portion. Please see Note 5 of our consolidated financial statements "Incentive
Compensation" for more information.
REALIZED GAINS AND LOSSES ON PORTFOLIO SECURITIES
For the Fiscal Years Ended October 31, 2019, 2018 and 2017. Net realized losses
for the fiscal year ended October 31, 2019 were approximately $7.1 million and
net realized gains for the fiscal year ended October 31, 2018 were approximately
$203,000, a decrease of approximately $7.3 million. Net realized gains for the
fiscal year ended October 31, 2017 were $89.9 million.
For the Fiscal Year Ended October 31, 2019
Net realized losses for the fiscal year ended October 31, 2019, were
approximately $7.1 million. The Company's net realized losses were primarily
due to the $3.8 million realized loss on the sale of the Crius equity units, the
approximately $487,000 realized loss on the sale of the Equus common shares and
the $13.0 million net realized loss related to the sale of MVC Environmental
common stock and loan conversion. These realized losses were partially offset
by the realized gains on the sale of Plymouth Rock Energy, LLC ("Plymouth"), a
portfolio company of the PE Fund, which resulted in a realized gain of
approximately $5.0 million, $3.2 million realized gain associated with the
redemption of the Custom Alloy series C preferred shares and a $1.6 million
realized gain associated with a settlement, which is expected to be paid in
November 2019, related to a former portfolio company, G3K Display, Inc. The
Company also received a carried interest payment from the PE Fund of
approximately $173,000 related to the sale of Plymouth, which was recorded as
additional realized gains.
During the fiscal year ended October 31, 2019, the Company also recorded net
realized gains of approximately $166,000 from its escrow receivables.
For the Fiscal Year Ended October 31, 2018
Net realized gains for the fiscal year ended October 31, 2018 were approximately
$203,000. The Company's net realized gains were primarily due to the realized
gain on the sale of the Centile common equity of approximately $3.5 million,
which was partially offset by the realized loss of approximately $3.0 million on
the U.S. Gas second lien loan due to a working capital adjustment. The second
lien loan is still subject to indemnification adjustments.
During the fiscal year ended October 31, 2018, the Company also recorded net
realized losses of approximately $95,000 from the sale of certain short-term
investments and net realized losses of approximately $223,000 from its escrow
receivables.
For the Fiscal Year Ended October 31, 2017
Net realized gains for the fiscal year ended October 31, 2017 were approximately
$89.9 million. The Company's net realized gains for the fiscal year ended
October 31, 2017 were primarily due to realized gains of approximately $115.9
million from the sale of U.S. Gas and approximately $10.2
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million on the sale of AccuMed Corp., a portfolio company of the PE Fund, which
were partially offset by realized losses of $27.5 million from the SGDA Europe
conversion and the sale of two legacy investments, Actelis Network, Inc.
("Actelis") and Mainstream Data Inc. ("Mainstream"), totaling $8.7 million.
On December 23, 2016, the Company received proceeds of approximately $12.2
million from the PE Fund related to the sale of AccuMed Corp., a portfolio
company of the PE Fund. The Company's pro-rata share of the PE Fund's
investment in AccuMed Corp. totaled approximately $2.4 million, resulting in a
realized gain of approximately $9.8 million. The Company later received an
escrow distribution of approximately $416,000 and carried interest payments from
the PE Fund totaling approximately $390,000 related to the sale, which were
recorded as additional realized gains.
On March 7, 2017, the Company exchanged its shares of MVC Turf, the holding
company which owned the Company's LLC interest in Turf Products, for
approximately $3.8 million of additional subordinated debt in Turf Products.
The Company also received a cash distribution from MVC Turf prior to the share
exchange of approximately $323,000, which was treated as a return of capital.
The Company realized a gain of approximately $609,000 as a result of the share
exchange.
On March 22, 2017, the Company sold its common stock and warrant in Vestal
receiving proceeds of approximately $687,000 and approximately $413,000,
respectively. This resulted in realized gains of approximately $437,000 and
approximately $413,000 related to the common stock and warrant, respectively.
On April 7, 2017, the Company realized a loss of approximately $2.3 million on
the common stock and loan of Tekers.
On June 8, 2017, the Company received total proceeds of approximately $18.1
million for the repayment of the outstanding Biogenic loans. The total proceeds
include repayment of all outstanding principal and a substantial portion of the
unpaid accrued interest related to the loans that were previously reserved
against in full beginning on April 1, 2016. The warrants were also realized as
part of this transaction resulting in a realized loss of approximately $620,000.
On July 5, 2017, the Company received gross consideration for its investment in
U.S. Gas valued at approximately $127.4 million, including approximately $11.0
million for the repayment of its two outstanding loans from the Company. The
fair value of the consideration received by the Company for its equity
investment in U.S. Gas was $116.4 million. As a result of the gross
consideration received, the Company realized a gain of approximately $115.9
million. The $116.4 million was comprised of: (i) cash of approximately $50.0
million; (ii) 9.5% second-lien callable notes due in July 2025 with a face
amount of approximately $40.5 million (before certain post-closing and
indemnification adjustments, if any); and (iii) 3,282,982 Crius trust units
valued at approximately $25.9 million on the date of closing.
On August 29, 2017, the Company realized a loss of approximately $5.0 million on
the sale of the Actelis common stock back to the company.
On September 19, 2017, Quantum repaid its loan in full, including all accrued
interest. At the same time, the Company sold the Quantum warrant resulting in a
realized gain of approximately $540,000.
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On September 29, 2017, the Company realized a loss of approximately $3.7 million
on the sale of Mainstream common stock back to the company.
On October 18, 2017, the Company realized a loss of approximately $785,000 on
the sale of the BAC common stock.
On October 26, 2017, the Company exchanged its common equity interest in SGDA
Europe for a $1.2 million first lien note, resulting in a realized loss of
approximately $27.5 million.
During the fiscal year ended October 31, 2017, the Company recorded net realized
gains of approximately $230,000 from the sale of certain short-term investments
and approximately $1.3 million from its escrow receivables.
UNREALIZED APPRECIATION AND DEPRECIATION ON PORTFOLIO SECURITIES
For the Fiscal Years Ended October 31, 2019, 2018 and 2017. The Company had a
net change in unrealized appreciation on portfolio investments for fiscal years
ended October 31, 2019 of approximately $11.8 million and unrealized
depreciation of approximately $14.5 million for fiscal year ended October 31,
2018, an increase of approximately $26.3 million. The Company had a net change
in unrealized depreciation on portfolio investments of approximately $57.0
million for the fiscal year ended October 31, 2017.
For the Fiscal Year Ended October 31, 2019
The Company had a net change in unrealized appreciation on portfolio investments
of approximately $11.8 million for the fiscal year ended October 31, 2019. The
net change in unrealized appreciation for the fiscal year ended October 31, 2019
was the result of the reversal of the unrealized depreciation of approximately
$4.6 million on the Crius equity units, reversal of the unrealized depreciation
of approximately $6.1 million and $6.9 million related to the MVC Environmental
common stock and loan, respectively, reversal of the unrealized appreciation on
the PE Fund of approximately $5.3 million (as a result of the Company's sale of
the Plymouth Rock Energy, LLC), and the $2.4 million of unrealized appreciation
due to the reversal of the unrealized depreciation on the MVC Environmental
letter of credit. The net change also includes Valuation Committee
determination to increase the fair value of the Company's investments in: Array
loan by approximately $63,000, Black Diamond loan and warrant by a net total of
approximately $871,000, Custom Alloy second lien loans, series A preferred
stock, series B preferred stock and series C preferred stock by a net total of
approximately $1.8 million, Dukane loan by approximately $1,000, Foliofn
preferred stock by $1.4 million, HTI loan by approximately $192,000, JSC Tekers
preferred stock by approximately $831,000, Security Holdings equity and letter
of credit by a net total of approximately $2.2 million, Tuf-Tug loan and common
stock by approximately $78,000, Turf loans by approximately $302,000, MVC
Automotive equity by approximately $701,000 and the Centile escrow by $166,000.
The value of Crius stock was also increased by approximately $5.5 million based
on its market value. These changes in unrealized appreciation were off-set by
the Valuation Committee determination to decrease the fair value of the
Company's investments in: Advantage preferred stock by approximately $1.3
million, Highpoint loan by approximately $51,000, Initials loan by approximately
$1.4 million, Legal Solutions loan by approximately $118,000, MVC Environmental
loan and common stock by a total of approximately $3.9 million, RuMe series B-1
preferred stock, guarantee and letter of credit by a net total of approximately
$3.0 million, Trientis
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loan by approximately $208,000, U.S. Spray common stock by $3.6 million, U.S.
Gas loan by approximately $2.5 million and the MVC Private Equity Fund L.P.
general partnership interest and limited partnership interest in the PE Fund by
a total of approximately $140,000. The value of Equus stock was also decreased
by approximately $1.8 million based on its market value.
For the Fiscal Year Ended October 31, 2018
The Company had a net change in unrealized depreciation on portfolio investments
of approximately $14.5 million for the fiscal year ended October 31, 2018. The
net change in unrealized depreciation for the fiscal year ended October 31, 2018
was the result of the reversal of the unrealized appreciation on the Centile
equity interest of approximately $3.3 million (as a result of the Company's sale
of the Centile equity interest) and the Valuation Committee determination to
decrease the fair value of the Company's investments in: Advantage preferred
stock by approximately $61,000, Dukane loan by approximately $29,000, Foliofn
preferred stock by $414,000, HTI loan by approximately $80,000, Initials loan by
approximately $2.5 million, JSC Tekers preferred stock by approximately
$117,000, MVC Environmental loan and letter of credit by a total of
approximately $6.4 million, RuMe series B-1 preferred stock, series C preferred
stock, common stock, letters of credit and warrants by a total of approximately
$3.7 million, Security Holdings equity interest and letter of credit by a total
of $685,000, Trientis loan and warrant by a total of approximately $932,000,
Turf loans by approximately $319,000, U.S. Gas loan by approximately $1.1
million, SCSD common stock by approximately $134,000 and the U.S. Tech loan by
$55,000. The market values of Crius and Equus decreased by approximately $5.3
million and $2.1 million, respectively. These changes in unrealized
depreciation were partially off-set by the Valuation Committee determination to
increase the fair value of the Company's investments in: Centile equity interest
by $491,000, Custom Alloy second lien loan, series A preferred stock, series B
preferred stock, series C preferred stock and letter of credits by a total of
approximately $6.0 million, Highpoint loan by approximately $150,000, Legal
Solutions loan by approximately $3,500, MVC Automotive equity interest by
approximately $1.5 million and the MVC Private Equity Fund L.P. general
partnership interest and limited partnership interest in the PE Fund by a total
of approximately $2.2 million.
For the Fiscal Year Ended October 31, 2017
The Company had a net change in unrealized depreciation on portfolio investments
of approximately $57.0 million for the fiscal year ended October 31, 2017. The
primary components of the net change in unrealized depreciation for the fiscal
year ended October 31, 2017 were the reversal of the unrealized appreciation on
the U.S. Gas convertible series I preferred stock of approximately $88.9 million
(due to the sale of U.S. Gas), the general partnership interest and limited
partnership interest in the PE Fund by a total of approximately $6.5 million,
the Turf equity interest of approximately $456,000 and the Vestal common stock
and warrant totaling approximately $750,000. These reversals were partially
offset by the reversal of the unrealized depreciation on the Tekers common stock
and loan of approximately $2.3 million, the Biogenic loan and warrant totaling
approximately $1.3 million, the Actelis common stock of $5.0 million, the
Mainstream common stock of approximately $3.8 million and the SGDA Europe common
equity interest by approximately $27.7 million. The net change is also a result
of the Valuation Committee determination to decrease the fair value of the
Company's investments in: BAC common stock by approximately $55,000, Foliofn
preferred stock by $533,000, HTI loan by approximately $112,000, Initials loan
by approximately $444,000, MVC Environmental common stock by approximately $1.7
million, loan by approximately $2.0 million and letter of credit by
approximately 9,000, RuMe
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series C preferred stock by approximately $619,000, common stock by
approximately $137,000, series B-1 preferred stock by approximately $9,000 and
letter of credit by approximately $345,000, Security Holdings equity interest by
approximately $3.0 million, Turf loan by approximately $14,000, SCSD common
stock by $1.1 million, Vestal loan by approximately $57,000, common stock by
approximately $54,000 and warrant by approximately $62,000, SGDA Europe common
equity interest by approximately $431,000 and the Crius equity units by
approximately $4.8 million. These changes in unrealized depreciation were
partially off-set by the Valuation Committee determination to increase the fair
value of the Company's investments in: Advantage preferred stock by
approximately $592,000, Centile equity interest by $1.4 million, Custom Alloy
second lien and unsecured loans by a total of approximately $732,000, Dukane
loan by approximately $73,000, JSC Tekers preferred stock by approximately
$466,000, Legal Solutions loan by approximately $244,000, Morey's loan by
approximately $2.7 million, MVC Automotive equity interest by approximately $3.9
million, Pride loan by approximately $51,000, Quantum loan by approximately
$323,000 and warrant by approximately $1.0 million, U.S. Tech loan by $5,000,
MVC Private Equity Fund L.P. general partnership interest and limited
partnership interest in the PE Fund by a total of approximately $1.7 million,
RuMe warrants by approximately $348,000 and guarantee by approximately $81,000,
Turf guarantee by approximately $3,000 and the Equus common stock by
approximately $2.5 million.
PORTFOLIO INVESTMENTS
For the Fiscal Years Ended October 31, 2019 and October 31, 2018. The cost of
the portfolio investments held by the Company at October 31, 2019 and at
October 31, 2018 was $415.7 million and $409.6 million, respectively, an
increase of $6.1 million. The aggregate fair value of portfolio investments at
October 31, 2019 and at October 31, 2018 was $340.2 million and $324.5 million,
respectively, an increase of approximately $15.7 million. The cost and fair
value of cash, restricted cash and cash equivalents held by the Company at
October 31, 2019 and October 31, 2018 was $11.7 million and $15.9 million,
respectively, representing a decrease of approximately $4.2 million.
For the Fiscal Year Ended October 31, 2019
During the fiscal year ended October 31, 2019, the Company made six new
investments, committing capital that totaled approximately $32.4 million.
Pursuant to an exemptive order received by the Company from the SEC (the
"Order"), that allows the Company to co-invest, subject to certain conditions,
with certain affiliated private funds as described in the Order, each of the
Company and the Private Fund co-invested in GTM ($1.9 million investment for the
Company). The Company also invested in Powers ($6.5 million), IPCC ($8.0
million), Jedson ($6.0 million), SMA ($7.0 million) and Global Prairie ($3.0
million).
During the fiscal year ended October 31, 2019, the Company made follow-on
investments in six portfolio companies that totaled approximately $12.5
million. Specifically, on December 21, 2018, the Company loaned an additional
$2.0 million to Custom Alloy in the form of a second lien loan with an interest
rate of 11% and a maturity date of December 23, 2019. During the fiscal year
ended October 31, 2019, the Company loaned approximately $1.4 million to RuMe
and received a new warrant. On June 7, 2019, the Company invested approximately
$3.9 million in GTM increasing the second lien loan by $3.5 million and
investing approximately $420,000 for additional common shares. During the
fiscal year ended October 31, 2019, Custom Alloy borrowed approximately $2.1
million on its revolving credit facility with a 15% interest rate and a maturity
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date of April 30, 2020. On July 15, 2019, the Company loaned an additional $1.0
million to HTI increasing its second lien loan to approximately $11.4 million as
of October 31, 2019. On September 10, 2019, the Company invested $1.0 million
in MVC Automotive in the form of additional common equity. On September 26,
2019, the Company loaned approximately $552,000 to Security Holdings, increasing
the senior subordinated loan to approximately $6.0 million as of October 31,
2019.
On November 9, 2018, Custom Alloy repaid its first lien loan in full, including
all accrued interest.
On November 13, 2018, Custom Alloy repaid its $1.4 million second lien loan in
full, including all accrued interest.
On November 27, 2018, the Company funded approximately $3.0 million related to
the MVC Environmental letter of credit, which was called by the beneficiary.
On December 27, 2018, the Company received proceeds of approximately $7.5
million from the PE Fund related to the sale of Plymouth Rock Energy, LLC, a
portfolio company of the PE Fund. The Company's pro-rata share of the PE Fund's
cost basis in the Plymouth Rock Energy, LLC investment totaled approximately
$2.5 million, resulting in a realized gain of approximately $5.0 million. The
Company also received a carried interest payment from the PE Fund of
approximately $173,000 related to the sale, which was recorded as additional
realized gains.
On December 27, 2018, the Company received a dividend of approximately $543,000
from the PE Fund related to Focus Pointe Global.
On February 7, 2019, Vistra Energy and Crius Energy trust ("Crius") announced
that they entered into a definitive agreement pursuant to which Vistra Energy
will acquire Crius for cash consideration of CAN$7.57 per trust unit. On
February 20, 2019, Vistra Energy agreed to increase its acquisition price for
Crius to CAN$8.80 per trust unit, an increase of CAN$1.23 per trust unit.
On April 26, 2019, RuMe made a principal payment on the revolver of $500,000 and
Morey's made a principal payment of approximately $591,000 on its second lien
loan.
On April 30, 2019, Custom Alloy redeemed its series A, B and C preferred shares
and consolidated its second lien loans in exchange for two second lien loans of
approximately $32.5 million and $6.1 million with interest rates of 15% and
maturity dates of April 30, 2022. The Company also funded approximately
$595,000 as part of the transaction related to the $6.1 million second lien
loan. The Company realized a gain of approximately $3.2 million and
approximately $2.3 million of PIK interest and dividends associated with the
transaction. Also on April 30, 2019, the Company provided Custom Alloy a $3.0
million line of credit with a 15% interest rate and a maturity date of April 30,
2020. There was no amount outstanding as of April 30, 2019.
On June 14, 2019, Array Information Technology, Inc. ("Array") made a principal
payment of approximately $114,000 on its second lien loan.
On June 19, 2019, Essner Manufacturing, LP ("Essner") made a principal payment
of approximately $78,000 on its first lien loan.
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On July 1, 2019, Turf Products, LLC ("Turf") made a principal payment of $70,000
on its third lien loan.
On July 15, 2019, the Company's Crius trust units were sold for $6.71 per share
resulting in total proceeds of approximately $22.0 million. The Company
realized a loss of approximately $3.8 million as a result of this transaction.
On July 29, 2019, the Company sold 608,310 shares of Equus Total Return, Inc.
("Equus") common stock for approximately $1.0 million, resulting in a realized
loss of approximately $219,000.
On August 12, 2019, the Company sold 608,310 common shares of Equus totaling
approximately $985,000 in proceeds and resulting in a realized loss of
approximately $268,000.
On August 12, 2019, the Company converted the MVC Environmental loan, unpaid
expenses and accrued interest to additional cost basis in the common stock of
MVC Environmental, resulting in a realized gain of approximately $1.4 million.
On September 13, 2019, the Company sold the common stock of MVC Environmental,
receiving proceeds of $45,000 which resulted in a realized loss of approximately
$14.4 million.
On October 1, 2019, Tin Roof repaid its $3.8 million loan in full, including all
accrued interest. Also during the fiscal year ended October 31, 2019, Tin Roof
made principal payments totaling approximately $99,000.
On October 17, 2019, the Company recorded a $1.6 million realized gain
associated with a settlement, which is expected to be paid in November 2019,
related to a former portfolio company, G3K Display, Inc. The Company incurred
costs of approximately $543,000 related to the settlement.
During the quarter ended January 31, 2019, the Valuation Committee increased the
fair value of the Company's investments in: Black Diamond loan and warrant by
approximately $767,000, Custom Alloy second lien loans, series A preferred
stock, series B preferred stock and series C preferred stock by a net total of
approximately $2.3 million, Dukane loan by $286, Foliofn preferred stock by
$32,000, Highpoint loan by approximately $252, HTI loan by approximately
$80,000, JSC Tekers preferred stock by approximately $82,000, Security Holdings
equity and letter of credit by a net total of $25,000, Turf loan by
approximately $15,000 and the Centile escrow by $49,000. In addition, increases
in the cost basis of the loans to HTI, Legal Solutions, RuMe, Dukane, Morey's,
Highpoint, Array, GTM, Tin Roof, Tuf-Tug and Security Holdings were due to the
capitalization of PIK interest totaling approximately $964,000. The Valuation
Committee also decreased the fair value of the Company's investments in:
Advantage preferred stock by approximately $244,000, Essner loan by
approximately $21,000, Initials loan by approximately $412,000, Legal Solutions
loan by approximately $118,000, MVC Automotive equity by approximately $117,000,
MVC Environmental loan by approximately $875,000 and common stock by
approximately $3.0 million, MVC Private Equity Fund L.P. general partnership
interest and limited partnership interest in the PE Fund by a total of
approximately $1.1 million, RuMe series B-1 preferred stock, guarantee and
letter of credit by a net total of approximately $308,000, Trientis loan by
approximately $77,000, U.S. Tech loan by approximately $23,000 and the U.S. Gas
loan by approximately $797,000.
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During the quarter ended April 30, 2019, the Valuation Committee increased the
fair value of the Company's investments in: Array loan by approximately $62,000,
Black Diamond loan and warrant by a net total of approximately $126,000, Dukane
loan by approximately $10,000, Essner loan by approximately $21,000, Foliofn
preferred stock by $369,000, Highpoint loan by approximately $264, HTI loan by
approximately $65,000, Initials loan by approximately $5,000, MVC Automotive
equity by approximately $747,000, MVC Private Equity Fund L.P. general
partnership interest and limited partnership interest in the PE Fund by a total
of approximately $833,000, Security Holdings equity and letter of credit by a
net total of approximately $3.7 million, Trientis loan by approximately $40,000,
Turf loans by approximately $94,000, U.S. Tech loan by approximately $23,000,
U.S. Gas loan by approximately $357,000 and the Centile escrow by approximately
$29,000. In addition, increases in the cost basis of the loans to HTI, Legal
Solutions, RuMe, Dukane, Morey's, Highpoint, Array, GTM, Tin Roof, Tuf-Tug,
Security Holdings and the Custom Alloy preferred stock were due to the
capitalization of PIK interest/dividends totaling approximately $3.4 million.
The Valuation Committee also decreased the fair value of the Company's
investments in: Advantage preferred stock by approximately $674,000, Custom
Alloy loans by a total of approximately $504,000, JSC Tekers preferred stock by
approximately $48,000, RuMe series B-1 preferred stock and letter of credit by a
total of approximately $1.8 million and the U.S. Spray common stock by $3.1
million.
During the quarter ended July 31, 2019, the Valuation Committee increased the
fair value of the Company's investments in: Centile escrow by approximately
$38,000, Custom Alloy loans by a total of approximately $115,000, Dukane loan by
approximately $1,000, Foliofn preferred stock by $389,000, HTI loan by
approximately $47,000, JSC Tekers preferred stock by approximately $60,000 and
Turf loans by approximately $124,000. In addition, increases in the cost basis
of the loans to HTI, Legal Solutions, RuMe, Dukane, Morey's, Highpoint, Array,
GTM, Tin Roof, Tuf-Tug, Security Holdings, Jedson and Custom Alloy were due to
the capitalization of PIK interest/dividends totaling approximately $780,000.
The Valuation Committee also decreased the fair value of the Company's
investments in: Array loan by approximately $1,000, Black Diamond loan and
warrant by a net total of approximately $8,000, Highpoint loan by approximately
$51,000, Initials loan by approximately $281,000, MVC Automotive equity by
approximately $256,000, MVC Private Equity Fund L.P. general partnership
interest and limited partnership interest in the PE Fund by a total of
approximately $399,000, RuMe series B-1 preferred stock and letter of credit by
a total of approximately $113,000, Security Holdings equity and letter of credit
by a net total of approximately $1.2 million, Trientis loan by approximately
$84,000 and U.S. Gas loan by approximately $1.2 million.
During the quarter ended October 31, 2019, the Valuation Committee increased the
fair value of the Company's investments in: Array loan by $622, Centile escrow
by approximately $50,000, Foliofn preferred stock by $569,000, JSC Tekers
preferred stock by $737,000, MVC Automotive equity by approximately $327,000,
MVC Private Equity Fund L.P. general partnership interest and limited
partnership interest in the PE Fund by a total of approximately $566,000,
Tuf-Tug loan and common stock by a total of approximately $78,000 and Turf loans
by approximately $69,000. In addition, increases in the cost basis of the loans
to HTI, Legal Solutions, RuMe, Dukane, Morey's, Highpoint, Array, GTM, Tuf-Tug,
Security Holdings, Jedson, SMA and Black Diamond were due to the capitalization
of PIK interest/dividends totaling approximately $747,000. The Valuation
Committee also decreased the fair value of the Company's investments in:
Advantage preferred stock by approximately $403,000, Black Diamond loan and
warrant by a net total of approximately $14,000, Custom Alloy loans by a total
of approximately $98,000, Dukane loan by approximately $9,000, Initials loan by
approximately $715,000, RuMe preferred stocks, warrants and letter of
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credit by a net total of approximately $839,000, Security Holdings equity and
letter of credit by a net total of $227,000, Trientis loan by approximately
$86,000, U.S. Gas loan by approximately $857,000 and U.S. Spray common stock by
$500,000.
During the fiscal year ended October 31, 2019, the Valuation Committee increased
the fair value of the Company's investments in: Array loan by approximately
$63,000, Black Diamond loan and warrant by a net total of approximately
$871,000, Custom Alloy second lien loans, series A preferred stock, series B
preferred stock and series C preferred stock by a net total of approximately
$1.8 million, Dukane loan by approximately $1,000, Foliofn preferred stock by
$1.4 million, HTI loan by approximately $192,000, JSC Tekers preferred stock by
approximately $831,000, Security Holdings equity and letter of credit by a net
total of approximately $2.2 million, Tuf-Tug loan and common stock by
approximately $78,000, Turf loans by approximately $302,000, MVC Automotive
equity by approximately $701,000 and the Centile escrow by $166,000. In
addition, increases in the cost basis of the loans to HTI, Legal Solutions,
RuMe, Dukane, Morey's, Highpoint, Array, GTM, Tin Roof, Tuf-Tug, Security
Holdings, Jedson, SMA and the Custom Alloy preferred stock were due to the
capitalization of PIK interest/dividends totaling approximately $5.9 million.
The Valuation Committee also decreased the fair value of the Company's
investments in: Advantage preferred stock by approximately $1.3 million,
Highpoint loan by approximately $51,000, Initials loan by approximately $1.4
million, Legal Solutions loan by approximately $118,000, MVC Environmental loan
and common stock by a total of approximately $3.9 million, RuMe series B-1
preferred stock, guarantee and letter of credit by a net total of approximately
$3.0 million, Trientis loan by approximately $208,000, U.S. Spray common stock
by $3.6 million, U.S. Gas loan by approximately $2.4 million and the MVC Private
Equity Fund L.P. general partnership interest and limited partnership interest
in the PE Fund by a total of approximately $140,000.
At October 31, 2019, the fair value of all portfolio investments, exclusive of
escrow receivables, was $340.2 million with a cost basis of $415.7 million. At
October 31, 2019, the fair value and cost basis of the Legacy Investments were
$6.4 million and $15.0 million, respectively, and the fair value and cost basis
of portfolio investments made by the Company's current management team was
$333.8 million and $400.7 million, respectively. At October 31, 2018, the fair
value of all portfolio investments, exclusive of escrow receivables, was $324.5
million with a cost basis of $409.6 million. At October 31, 2018, the fair
value and cost basis of the Legacy Investments was $5.0 million and $15.0
million, respectively, and the fair value and cost basis of portfolio
investments made by the Company's current management team was $319.5 million and
$394.6 million, respectively.
For the Fiscal Year Ended October 31, 2018
During the fiscal year ended October 31, 2018, the Company made six new
investments, committing capital that totaled approximately $41.5 million.
Pursuant to an exemptive order received by the Company from the SEC (the
"Order"), that allows the Company to co-invest, subject to certain conditions,
with certain affiliated private funds as described in the Order, each of the
Company and the Private Fund co-invested in Essner ($3.7 million investment for
the Company), Black Diamond ($7.5 million investment for the Company), Apex
($15.0 million investment for the Company) and Array ($6.0 million investment
for the Company), Tuf-Tug ($5.6 million investment for the Company) and Tin Roof
($3.7 million investment for the Company).
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During the fiscal year ended October 31, 2018, the Company made follow-on
investments in eight portfolio companies that totaled approximately $20.8
million. On November 8, 2017, the Company loaned an additional $1.5 million to
SCSD in the form of a senior secured loan. The loan has an interest rate of 12%
and a maturity date of November 7, 2020. On December 21, 2017, the Company
loaned approximately $526,000 to Initials increasing the senior subordinated
loan amount to approximately $5.3 million. On December 22, 2017, the Company
loaned $1.4 million to Turf in the form of a third lien loan. The loan has an
interest rate of 10% and a maturity date of August 7, 2020. On February 28,
2018, the Company committed $6.0 million to Custom Alloy in the form of a first
lien loan with an interest rate of 10% and a maturity date of October 31, 2018.
The funded amount as of October 31, 2018, net of repayments, was approximately
$539,000 with no additional borrowings available on the commitment. On
March 19, 2018, the Company invested approximately $68,000 in Trientis for a
warrant. On March 22, 2018, the Company loaned approximately $2.3 million to
MVC Automotive increasing the bridge loan amount to approximately $7.1 million
and extending the maturity date to June 30, 2019. On April 10, 2018, the Company
loaned approximately $308,000 to Security Holdings, increasing the bridge loan
amount to approximately $4.7 million. On May 30, 2018, the Company loaned an
additional $4.8 million to Security Holdings in the form of a senior
subordinated loan and provided a 3.3 million Euro letter of credit. The loan
has an annual interest rate of 12.45% and a maturity date of May 31, 2020.
During the fiscal year ended October 31, 2018, the Company loaned approximately
$3.6 million to RuMe, increasing the subordinated loan amount to approximately
$3.3 million and the revolver balance to approximately $1.5 million.
On November 28, 2017, the Company restructured the Custom Alloy second lien loan
and unsecured subordinated loan. The second lien loan was restructured into a
$3.5 million second lien loan with an interest rate of 10% and a maturity date
of December 31, 2020, 6,500 shares of series B preferred Stock with a 10% PIK
coupon and a maturity date of December 31, 2020 and 17,935 shares of series C
preferred Stock. The unsecured subordinated loan was restructured into 3,617
shares of series A preferred Stock with a 12% PIK coupon and a maturity date of
April 30, 2020. The Company also provided a $2.0 million and $1.4 million
letter of credit.
On November 29, 2017, the Company received a principal payment of $3.0 million
from Dukane resulting in an outstanding balance of approximately $4.4 million as
of October 31, 2018.
On December 29, 2017, the Company received a principal payment of $200,000 from
Vestal.
Effective January 1, 2018, the cost basis of the U.S. Gas second lien loan was
decreased by approximately $3.0 million due to a working capital adjustment,
resulting in a realized loss of approximately $3.0 million. The second lien
loan is still subject to indemnification adjustments.
On February 9, 2018, FDS repaid its loan in full, including all accrued
interest.
On April 4, 2018, Vestal repaid its loan in full, including all accrued
interest.
On April 11, 2018, Morey's made a principal payment of $2.0 million on its
second lien loan.
On July 31, 2018, the Company sold its interest in Centile and received cash
proceeds of approximately $5.8 million at closing. An additional $1.2
million of proceeds are held in escrow for 15 months from the closing. Assuming
the full receipt of all escrow proceeds, the sale of Centile will result in a
realized gain of approximately $3.5 million.
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On October 31, 2018, the Custom Alloy $1.4 million letter of credit was drawn
upon, which resulted in the Company receiving a $1.4 million term note with a
15% interest rate and a maturity date of October 31, 2021.
During the fiscal year ended October 31, 2018 Turf made principal payments
totaling $210,000 on its third lien loan.
During the quarter ended January 31, 2018, the Valuation Committee increased the
fair value of the Company's investments in: Centile equity interest by $295,000,
Custom Alloy second lien loan, series A preferred stock, series B preferred
stock, series C preferred stock and letter of credit by a total of approximately
$638,000, Highpoint loan by approximately $99,000, Initials loan by
approximately $46,000, JSC Tekers preferred stock by approximately $370,000,
Legal Solutions loan by approximately $1,000, MVC Automotive equity interest by
approximately $1.8 million, MVC Environmental letter of credit by approximately
$7,000, MVC Private Equity Fund L.P. general partnership interest and limited
partnership interest in the PE Fund by a total of approximately $394,000, RuMe
guarantee and letter of credit by a total of approximately $57,000 and Security
Holdings equity interest by approximately $812,000. In addition, increases in
the cost basis of the loans to HTI, Legal Solutions, Custom Alloy, RuMe, Dukane,
Morey's, Highpoint and Security Holdings were due to the capitalization of PIK
interest totaling approximately $715,000. The Valuation Committee also
decreased the fair value of the Company's investments in: Advantage preferred
stock by approximately $143,000, Custom Alloy letter of credit by approximately
$70,000, Dukane loan by approximately $30,000, Foliofn preferred stock by
$543,000, HTI loan by approximately $130,000, MVC Environmental loan by
approximately $498,000, RuMe series B-1 preferred stock, series C preferred
stock, common stock and warrants by a total of approximately $1.2 million, Turf
loans by approximately $136,000, U.S. Gas loan by approximately $1.7 million and
SCSD common stock by approximately $134,000.
During the quarter ended April 30, 2018, the Valuation Committee increased the
fair value of the Company's investments in: Advantage preferred stock by
approximately $82,000, Centile equity interest by $196,000, Custom Alloy second
lien loan, series A preferred stock, series B preferred stock, series C
preferred stock and letters of credit by a total of approximately $3.0 million,
Dukane loan by approximately $300, Legal Solutions loan by approximately $900,
MVC Automotive equity interest by approximately $934,000, RuMe guarantee by
approximately $28,000, MVC Private Equity Fund L.P. general partnership interest
and limited partnership interest in the PE Fund by a total of approximately
$167,000 and U.S. Gas loan by approximately $909,000. In addition, increases in
the cost basis of the loans to Trientis, HTI, Legal Solutions, RuMe, Dukane,
Morey's, Highpoint, Initials and Security Holdings were due to the
capitalization of PIK interest totaling approximately $636,000. The Valuation
Committee also decreased the fair value of the Company's investments in: Foliofn
preferred stock by $66,000, HTI loan by approximately $49,000, Initials loan by
approximately $82,000, JSC Tekers Holdings preferred stock by approximately
$176,000, MVC Environmental loan and letter of credit by a total of
approximately $267,000, RuMe series B-1 preferred stock, series C preferred
stock, common stock, letters of credit and warrants by a total of approximately
$1.8 million, Security Holdings equity interest by approximately $2.3 million
and Turf loans by approximately $288,000.
During the quarter ended July 31, 2018, the Valuation Committee increased the
fair value of the Company's investments in: Custom Alloy second lien loan,
series A preferred stock, series B preferred stock, series C preferred stock and
letters of credit by a total of approximately $36,000, Dukane loan by
approximately $300, HTI loan by approximately $242,000, Legal Solutions loan by
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approximately $800, MVC Private Equity Fund L.P. general partnership interest
and limited partnership interest in the PE Fund by a total of approximately $1.9
million, Security Holdings equity interest and letter of credit by a total of
approximately $1.6 million and Turf loans by approximately $53,000. In addition,
increases in the cost basis of the loans to Trientis, HTI, Legal Solutions,
RuMe, Dukane, Morey's, Highpoint, Initials, Array and Security Holdings were due
to the capitalization of PIK interest totaling approximately $894,000. The
Valuation Committee also decreased the fair value of the Company's investments
in: Foliofn preferred stock by $115,000, Initials loan by approximately
$186,000, JSC Tekers Holdings preferred stock by $154,000, MVC Automotive equity
interest by $819,000, MVC Environmental loan and letter of credit by a total of
approximately $4.7 million, RuMe series B-1 preferred stock, series C preferred
stock, common stock, letters of credit and warrants by a total of approximately
$114,000, U.S. Gas loan by approximately $109,000, United States
Technologies, Inc. ("U.S. Tech") loan by $55,000 and the Centile escrow by
approximately $257,000 that was recorded as a realized loss.
During the quarter ended October 31, 2018, the Valuation Committee increased the
fair value of the Company's investments in: Custom Alloy second lien loan,
series A preferred stock, series B preferred stock, series C preferred stock and
letters of credit by a total of approximately $2.4 million, Dukane loan by
approximately $300, Foliofn preferred stock by $310,000, Highpoint loan by
approximately $51,000, Legal Solutions loan by approximately $900, Turf loans by
approximately $52,000 and the Centile escrow by approximately $34,000 that was
recorded as a realized gain. In addition, increases in the cost basis of the
loans to Trientis, HTI, Legal Solutions, RuMe, Dukane, Morey's, Highpoint,
Array, Black Diamond, Tuf-Tug and Security Holdings were due to the
capitalization of PIK interest totaling approximately $928,000. The Valuation
Committee also decreased the fair value of the Company's investments in: HTI
loan by approximately $144,000, Initials loan by approximately $2.2 million, JSC
Tekers Holdings preferred stock by $157,000, MVC Automotive equity interest by
$442,000, MVC Environmental loan and letter of credit by a total of
approximately $966,000, MVC Private Equity Fund L.P. general partnership
interest and limited partnership interest in the PE Fund by a total of
approximately $218,000, RuMe series B-1 preferred stock, series C preferred
stock, common stock, letters of credit and warrants by a total of approximately
$691,000, Security Holdings equity interest and letter of credit by a total of
$747,000, Trientis loan and warrant by a total of approximately $932,000 and the
U.S. Gas loan by approximately $179,000.
During the fiscal year ended October 31, 2018, the Valuation Committee increased
the fair value of the Company's investments in: Centile equity interest by
$491,000, Custom Alloy second lien loan, series A preferred stock, series B
preferred stock and series C preferred stock by a total of approximately $6.0
million, Highpoint loan by approximately $150,000, Legal Solutions loan by
approximately $3,500, MVC Automotive equity interest by approximately $1.5
million and the MVC Private Equity Fund L.P. general partnership interest and
limited partnership interest in the PE Fund by a total of approximately $2.2
million. In addition, increases in the cost basis of the loans to HTI, Legal
Solutions, RuMe, Dukane, Morey's, Highpoint, Initials, Array, Trientis, Black
Diamond, Tuf-Tug and Security Holdings were due to the capitalization of PIK
interest totaling approximately $3.2 million. The Valuation Committee also
decreased the fair value of the Company's investments in: Advantage preferred
stock by approximately $61,000, Dukane loan by approximately $29,000, Foliofn
preferred stock by $414,000, HTI loan by approximately $80,000, Initials loan by
approximately $2.5 million, JSC Tekers preferred stock by approximately
$117,000, MVC Environmental loan and letter of credit by a total of
approximately $6.4 million, RuMe series B-1 preferred stock, series C preferred
stock, common stock, letters of credit and warrants by a total of approximately
$3.7 million, Security Holdings equity interest and letter of credit by a total
of
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$685,000, Trientis loan and warrant by a total of approximately $932,000, Turf
loans by approximately $319,000, U.S. Gas loan by approximately $1.1 million,
SCSD common stock by approximately $134,000, U.S. Tech loan by $55,000 and the
Centile escrow by approximately $223,000 that was recorded as a realized loss.
At October 31, 2018, the fair value of all portfolio investments, exclusive of
escrow receivables, was $324.5 million with a cost basis of $409.6 million. At
October 31, 2018, the fair value and cost basis of investments made by the
Company's former management team pursuant to the prior investment objective
("Legacy Investments") was $5.0 million and $15.0 million, respectively, and the
fair value and cost basis of portfolio investments made by the Company's current
management team was $319.5 million and $394.6 million, respectively. At
October 31, 2017, the fair value of all portfolio investments was $292.5 million
with a cost basis of $363.2 million. At October 31, 2017, the fair value and
cost basis of Legacy Investments was $5.4 million and $15.0 million,
respectively, and the fair value and cost basis of portfolio investments made by
the Company's current management team was $287.1 million and $348.2 million,
respectively.
Portfolio Companies
During the fiscal year ended October 31, 2019, the Company had investments in
the following portfolio companies:
Advantage Insurance Inc.
Advantage, Puerto Rico, is a provider of specialty insurance, reinsurance and
related services to business owners and high net worth individuals.
At October 31, 2018, the Company's investment in Advantage consisted of 750,000
shares of preferred stock at a cost basis of $7.5 million and a fair value of
approximately $8.8 million.
During the fiscal year ended October 31, 2019, the Valuation Committee decreased
the fair value of the preferred stock by approximately $1.3 million.
At October 31, 2019, the Company's investment in Advantage consisted of 750,000
shares of preferred stock with a cost basis of $7.5 million and a fair value of
approximately $7.5 million.
Apex Industrial Technologies, LLC
Apex, Cincinnati, Ohio, is a leading provider of automation vending equipment in
industrial, retail and foodservice environments.
At October 31, 2018, the Company's investment in Apex consisted of a first lien
loan with an outstanding amount of approximately $15.0 million, a cost basis of
approximately $14.9 million and a fair value of approximately $15.0 million.
The first lien loan had an interest rate of 12% and a maturity date of March 9,
2023.
During the fiscal year ended October 31, 2019, the maturity date was changed to
December 31, 2019.
At October 31, 2019, the Company's investment in Apex consisted of a first lien
loan with an outstanding amount of approximately $15.0 million, a cost basis of
approximately $14.9 million and a fair value of approximately $15.0 million.
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Array Information Technology, Inc.
Array, Greenbelt, Maryland, is a leading IT services firm supporting multiple
command and/or control groups within the U.S. Air Force, as well as various
other federal, municipal and commercial customers.
At October 31, 2018, the Company's investment in Array consisted of a second
lien loan with an outstanding amount of approximately $6.1 million, a cost basis
of approximately $6.0 million and a fair value of approximately $6.1 million and
a warrant with a cost basis and fair value of $0. The second lien loan had an
interest rate of 12% cash and 4% PIK and a maturity date of October 3, 2023.
On June 14, 2019, Array made a principal payment of approximately $114,000 on
its second lien loan.
During the fiscal year ended October 31, 2019, the Valuation Committee increased
the fair value of the loan by approximately $63,000.
At October 31, 2019, the Company's investment in Array consisted of a second
lien loan with an outstanding amount of approximately $6.3 million, a cost basis
of approximately $6.2 million and a fair value of approximately $6.3 million and
a warrant with a cost basis and fair value of $0.
Black Diamond Equipment Rental
Black Diamond, Morgantown, West Virginia, is a heavy equipment rental company.
At October 31, 2018, the Company's investment in Black Diamond consisted of a
second lien loan with an outstanding amount of approximately $7.5 million, a
cost basis of approximately $7.1 million and a fair value of approximately $7.2
million and a warrant with a cost basis and fair value of approximately
$401,000. The second lien loan had an interest rate of 12.5% and a maturity
date of June 27, 2022.
During the fiscal year ended October 31, 2019, the Valuation Committee increased
the fair value of the loan by approximately $312,000 and the warrant by
approximately $559,000.
At October 31, 2019, the Company's investment in Black Diamond consisted of a
second lien loan with an outstanding amount of approximately $7.5 million, a
cost basis of approximately $7.2 million and a fair value of approximately $7.6
million and a warrant with a cost basis of approximately $401,000 and a fair
value of approximately $960,000.
Crius Energy Trust
Crius, Toronto, Canada, is a leading retail energy marketer.
At October 31, 2018, the Company's investment in Crius consisted of 3,282,882
equity units at a cost of approximately $25.9 million and a market value of
approximately $15.7 million.
On February 7, 2019, Vistra Energy and Crius announced that they entered into a
definitive agreement pursuant to which Vistra Energy will acquire Crius for cash
consideration of CAN$7.57 per trust unit. On February 20, 2019, Vistra Energy
agreed to increase its acquisition price for Crius to CAN$8.80 per trust unit,
an increase of CAN$1.23 per trust unit.
On July 15, 2019, the Company's Crius trust units were sold for $6.71 per share
resulting in total proceeds of approximately $22.0 million. The Company
realized a loss of approximately $3.8 million as a result of this transaction.
At October 31, 2019, the Company no longer held a direct investment in Crius.
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Custom Alloy Corporation
Custom Alloy, High Bridge, New Jersey, manufactures time sensitive and mission
critical butt-weld pipe fittings and forgings for the natural gas pipeline,
power generation, oil/gas refining and extraction, and nuclear generation
markets.
At October 31, 2018, the Company's investment in Custom Alloy consisted of a
second lien loan with a cost basis of approximately $3.2 million, an outstanding
balance and fair value of approximately $3.5 million, first lien loan with an
outstanding balance, cost basis and fair value of approximately $539,000, term
note with an outstanding balance, cost basis and fair value of approximately
$1.4 million, series A preferred stock with a cost basis of $3.0 million and a
fair value of approximately $3.7 million, series B preferred stock with a cost
basis of approximately $5.7 million and a fair value of approximately $6.4
million, series C preferred stock with a cost basis of approximately $17.9
million and a fair value of approximately $13.9 million. The letter of credit
had a fair value of approximately -$15,000 or a liability of approximately
$15,000. The second lien loan had an interest rate of 10% and a maturity date
of December 31, 2020, the first lien loan had an interest rate of 10% and a
maturity date of October 31, 2018 and the term note had an interest rate of 15%
and a maturity date of October 31, 2021.
On December 21, 2018, the Company loaned an additional $2.0 million to Custom
Alloy in the form of a second lien loan with an interest rate of 11% and a
maturity date of December 23, 2019.
On November 9, 2018, Custom Alloy repaid its first lien loan in full, including
all accrued interest.
On November 13, 2018, Custom Alloy repaid its $1.4 million second lien loan in
full, including all accrued interest.
On April 30, 2019, Custom Alloy redeemed its series A, B and C preferred shares
and consolidated its second lien loans in exchange for two second lien loans of
approximately $32.5 million and $6.1 million with interest rates of 15% and
maturity dates of April 30, 2022. The Company also funded approximately
$595,000 as part of the transaction related to the $6.1 million second lien
loan. The Company realized a gain of approximately $3.2 million and
approximately $2.3 million of PIK interest and dividends associated with the
transaction. Also on April 30, 2019, the Company provided Custom Alloy a $3.0
million line of credit with a 15% interest rate and a maturity date of April 30,
2020. There was no amount outstanding as of April 30, 2019.
During the fiscal year ended October 31, 2019, Custom Alloy borrowed
approximately $2.1 million on its revolving credit facility.
During the fiscal year ended October 31, 2019, the Valuation Committee decreased
the fair values of the $3.5 million second lien loan by approximately $17,000,
the $2.0 million second lien loan by approximately $3,400, the $32.5 million
second lien loan by approximately $411,000, the $6.1 million second lien loan by
approximately $78,000 and increased the fair value of the series A preferred
stock by approximately $177,000, the series B preferred stock by approximately
$403,000 and the series C preferred stock by approximately $1.8 million.
At October 31, 2019, the Company's investment in Custom Alloy consisted of a
second lien loan with a cost basis and outstanding balance of approximately
$32.5 million and a fair value of approximately $32.1 million, a second lien
loan with a cost basis, outstanding balance and a fair value of approximately
$6.1 million and a revolving credit facility with a cost basis, outstanding
balance and a fair value of approximately $2.1 million.
Dukane IAS, LLC
Dukane, St. Charles, Illinois, is a global provider of plastic welding
equipment.
At October 31, 2018, the Company's investment in Dukane consisted of a second
lien loan with an outstanding amount of approximately $4.4 million, a cost basis
of approximately $4.3 million
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and a fair value of approximately $4.4 million. The second lien loan had an
interest rate of 13% and a maturity date of November 17, 2020.
During the fiscal year ended October 31, 2019, the Valuation Committee increased
the fair value of the loan by $1,000.
At October 31, 2019, the Company's investment in Dukane consisted of a second
lien loan with an outstanding amount, a cost basis and a fair value of
approximately $4.5 million.
Essner Manufacturing LP
Essner, Ft. Worth, Texas, manufactures and supplies complex assemblies, machined
parts and precision sheet metal components to aerospace suppliers.
At October 31, 2018, the Company's investment in Essner consisted of a first
lien loan with an outstanding amount of approximately $3.7 million, a cost basis
of approximately $3.6 million and a fair value of approximately $3.7 million.
The first lien loan had an interest rate of 11.5% and a maturity date of
December 20, 2022.
On June 19, 2019, Essner made a principal payment of approximately $78,000 on
its first lien loan.
At October 31, 2019, the Company's investment in Essner consisted of a first
lien loan with an outstanding amount of approximately $3.6 million, a cost basis
of approximately $3.5 million and a fair value of approximately $3.6 million.
Equus Total Return, Inc.
Equus is a publicly traded business development company and regulated investment
company listed on the New York Stock Exchange (NYSE:EQS). Consistent with the
Company's valuation procedures, the Company has been marking this investment to
its market price.
At October 31, 2018, the Company's investment in Equus consisted of 4,444,644
shares of common stock with a cost of approximately $10.0 million and a market
value of approximately $8.7 million.
On July 29, 2019, the Company sold 608,310 shares of Equus common stock for
approximately $1.0 million, resulting in a realized loss of approximately
$219,000.
On August 12, 2019, the Company sold 608,310 common shares of Equus totaling
approximately $985,000 in proceeds and resulting in a realized loss of
approximately $268,000.
At October 31, 2019, the Company's investment in Equus consisted of 3,228,024
shares of common stock with a cost of approximately $7.5 million and a market
value of approximately $4.9 million.
Foliofn, Inc.
Foliofn, Vienna, Virginia, a Legacy Investment, is a financial services
technology company that offers investment solutions to financial services firms
and investors.
At October 31, 2018, the Company's investment in Foliofn consisted of 5,802,259
shares of Series C preferred stock with a cost of $15.0 million and a fair value
of approximately $5.0 million.
During the fiscal year ended October 31, 2019, the Valuation Committee increased
the fair value of the preferred stock by $1.4 million.
At October 31, 2019, the Company's investment in Foliofn consisted of 5,802,259
shares of Series C preferred stock with a cost of $15.0 million and a fair value
of approximately $6.4 million.
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Chris Ferguson, a representative of the Company, serves as a director of
Foliofn.
Global Prairie PBC, Inc.
Global Prairie, Kansas City, Missouri, is a marketing firm focusing on quality
of life sectors (healthcare, environmental, agriculture).
On October 16, 2019, the Company invested $3.0 million in Global Prairie in the
form of a second lien loan with an interest rate of 14% and a maturity date of
April 16, 2025.
At October 31, 2019, the Company's investment in Global Prairie consisted of a
second lien loan with an outstanding amount of approximately $3.0 million, a
cost basis of approximately $2.9 million and a fair value of approximately $3.0
million.
GTM Intermediate Holdings, Inc.
GTM, Anderson, South Carolina, is a leading supplier of proprietary medical
solutions for emergency trauma care.
On December 7, 2018, pursuant to the Order, each of the Company and the Private
Fund co-invested in second lien notes and common stock issued by GTM
Intermediate Holdings, Inc. The Company and the Private Fund invested
approximately $1.5 million and approximately $6.2 million, respectively, in such
notes, with a cash interest rate of 11% plus 1% PIK and a maturity date of
June 7, 2024, and $346,000 and approximately $1.5 million, respectively, in
shares of common stock, which are held through a holding company. In accordance
with the conditions of the Order, the Board, including a majority of the
Independent Directors, approved, in advance, the Company's investment in the
loan and common stock.
On June 7, 2019, the Company invested approximately $3.9 million in GTM
increasing the second lien loan by $3.5 million and investing approximately
$420,000 for additional common shares. The maturity date on the loan was
extended to December 7, 2024.
At October 31, 2019, the Company's investment in GTM consisted of a second lien
loan with an outstanding amount of approximately $5.1 million, a cost basis of
approximately $5.0 million and a fair value of approximately $5.1 million and 2
shares of common stock with a cost basis and fair value of $766,000.
Highpoint Global, LLC
Highpoint, Indianapolis, Indiana, is a government services firm focused on
improving interactions between citizens and government organizations,
particularly the Center for Medicare and Medicaid Services.
At October 31, 2018, the Company's investment in Highpoint consisted of a second
lien loan with an outstanding amount of approximately $5.1 million, a cost basis
of approximately $5.0 million and a fair value of approximately $5.1 million.
The loan had an interest rate of 14% and a maturity date of September 30, 2022.
During the fiscal year ended October 31, 2019, the Valuation Committee decreased
the fair value of the loan by approximately $51,000.
At October 31, 2019, the Company's investment in Highpoint consisted of a second
lien loan with an outstanding amount of approximately $5.2 million, a cost basis
of approximately $5.1 million and a fair value of approximately $5.2 million.
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HTI Technologies and Industries, Inc.
HTI, LaVergne, Tennessee, is a manufacturer of electric motor components and
designer of small motor systems.
At October 31, 2018, the Company's investment in HTI consisted of a second lien
loan with an outstanding amount and cost basis of approximately $10.1 million
and a fair value of approximately $9.9 million. The loan has an interest rate
of 14% and a maturity date of June 21, 2019.
On July 15, 2019, the Company loaned an additional $1.0 million to HTI
increasing its second lien loan to approximately $11.3 million as of July 31,
2019.
During the fiscal year ended October 31, 2019, the interest rate on the second
lien loan was increased to 15.75% and the maturity date was extended to
September 15, 2024.
During the fiscal year ended October 31, 2019, the Valuation Committee increased
the fair value of the loan by $192,000.
At October 31, 2019, the Company's investment in HTI consisted of a second lien
loan with an outstanding amount, cost basis and fair value of approximately
$11.4 million.
Initials, Inc.
Initials, Clarkesville, Georgia, is a direct selling organization specializing
in customized bags, organizational products and fashion accessories.
At October 31, 2018, the Company's investment in Initials consisted of a senior
subordinated loan with an outstanding amount and cost basis of approximately
$5.6 million and a fair value of approximately $2.7 million. The loan has an
interest rate of 15% and matures on June 23, 2020.
During the fiscal year ended October 31, 2019, the Valuation Committee decreased
the fair value of the loan by approximately $1.4 million.
At October 31, 2019, the Company's investment in Initials consisted of a senior
subordinated loan with an outstanding amount and cost basis of approximately
$5.6 million and a fair value of approximately $1.3 million. The Company
reserved in full against all of the accrued interest starting June 23, 2018.
International Precision Components Corporation
IPCC, Lake Forest, Illinois, is a leading plastic injection molder.
On May 10, 2019, the Company invested approximately $8.0 million in IPCC in the
form of a second lien loan with a cash interest rate of 12.0%, 3.5% variable PIK
rate and a maturity date of October 3, 2024.
At October 31, 2019, the Company's investment in IPCC consisted of a second lien
loan with an outstanding amount of approximately $8.0 million, a cost basis of
approximately $7.9 million and a fair value of approximately $8.0 million.
Jedson Engineering, Inc.
Jedson, Cincinnati, Ohio, is a provider of engineering, procurement and
construction management services.
During the fiscal year ended October 31, 2019, the Company invested $6.0 million
in Jedson in the form of a first lien loan with a cash interest rate of 12.0%,
3.0% PIK rate and a maturity date of June 21, 2024.
At October 31, 2019, the Company's investment in Jedson consisted of a first
lien loan with an outstanding amount of approximately $6.0 million, a cost basis
of approximately $5.9 million and a fair value of approximately $6.0 million.
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JSC Tekers Holdings
JSC Tekers, Latvia, is a company focused on real estate management.
At October 31, 2018, the Company's investment in JSC Tekers consisted of
9,159,085 shares of preferred stock with a cost basis of $11.8 million and a
fair value of $4.1 million and 3,201 shares of common stock with a cost basis of
$4,500 and a fair value of $0.
During the fiscal year ended October 31, 2019, the Valuation Committee increased
the fair value of the preferred stock by $831,000.
At October 31, 2019, the Company's investment in JSC Tekers consisted of
9,159,085 shares of preferred stock with a cost basis of $11.8 million and a
fair value of $4.9 million and 3,201 shares of common stock with a cost basis of
$4,500 and a fair value of $0.
Legal Solutions Holdings, Inc.
Legal Solutions, Covina, CA, is a provider of record retrieval services to the
California workers' compensation applicant attorney market.
At October 31, 2018, the Company's investment in Legal Solutions consisted of a
senior subordinated loan with an outstanding balance and cost basis of
approximately $11.8 million and a fair value of approximately $11.9 million.
The senior subordinated loan had an interest rate of 16% and a maturity date of
March 18, 2020.
During the fiscal year ended October 31, 2019, the Valuation Committee decreased
the fair value of the loan by approximately $118,000.
At October 31, 2019, the Company's investment in Legal Solutions consisted of a
senior subordinated loan with an outstanding balance, cost basis and a fair
value of approximately $12.2 million.
Morey's Seafood International LLC
Morey's, Motley, Minnesota, is a manufacturer, marketer and distributor of fish
and seafood products.
At October 31, 2018, the Company's investment in Morey's consisted of a second
lien loan that had an outstanding balance, cost basis and a fair value of $16.5
million. The loan had an interest rate of 13% and a maturity date of August 12,
2022.
On April 26, 2019, Morey's made a principal payment of approximately $591,000 on
its second lien loan.
At October 31, 2019, the loan had an outstanding balance, cost basis and a fair
value of $16.5 million.
MVC Automotive Group GmbH
MVC Automotive, an Austrian-based holding company, owns and operates ten Ford,
Jaguar, Land Rover, Mazda, and Volvo dealerships located in Austria and the
Czech Republic.
At October 31, 2018, the Company's investment in MVC Automotive consisted of an
equity interest with a cost of approximately $51.2 million and a fair value of
approximately $18.9 million and a bridge loan with an outstanding amount, cost
basis and fair value of approximately $7.1 million. The mortgage guarantee for
MVC Automotive was equivalent to approximately $6.2 million at October 31,
2018. This guarantee was taken into account in the valuation of MVC
Automotive. The bridge loan had an interest rate of 6% and a maturity date of
June 30, 2019.
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On September 10, 2019, the Company invested $1.0 million in MVC Automotive in
the form of additional common equity.
During the fiscal year ended October 31, 2019, the maturity date on the bridge
loan was extended to December 31, 2020.
During the fiscal year ended October 31, 2019, the Valuation Committee increased
the fair value of the equity interest by approximately $701,000.
At October 31, 2019, the Company's investment in MVC Automotive consisted of an
equity interest with a cost of approximately $52.2 million and a fair value of
approximately $20.6 million and a bridge loan with an outstanding amount, cost
basis and fair value of approximately $7.1 million. The mortgage guarantee for
MVC Automotive was equivalent to approximately $4.0 million at October 31,
2019. This guarantee was taken into account in the valuation of MVC Automotive.
Michael Tokarz, Chairman of the Company, Scott Foote and Puneet Sanan,
representatives of the Company, serve as directors of MVC Automotive.
MVC Environmental, Inc.
MVC Environmental, a New York-based holding company, owns and operates
intellectual property and environmental service facilities for oil and gas waste
recycling in the Eagle Ford Shale region of Texas.
At October 31, 2018, the Company's investment in MVC Environmental consisted of
common stock with a cost basis of approximately $3.1 million and a fair value of
approximately $0, a senior secured loan with an outstanding balance and cost
basis of $6.9 million and a fair value of approximately $875,000 and a letter of
credit with a fair value of approximately -$2.4 million or a liability of $2.4
million. The loan bears annual interest at a rate of 9% and matures on
December 22, 2020.
On November 27, 2018, the Company funded approximately $3.0 million related to
the MVC Environmental letter of credit, which was called by the beneficiary.
On August 12, 2019, the Company converted the MVC Environmental loan, unpaid
expenses and accrued interest to additional cost basis in the common stock of
MVC Environmental, resulting in a realized gain of approximately $1.4 million.
On September 13, 2019, the Company sold the common stock of MVC Environmental,
receiving proceeds of $45,000, which resulted in a realized loss of
approximately $14.4 million.
During the fiscal year ended October 31, 2019, the Valuation Committee decreased
the fair value of the loan by approximately $875,000 and the common stock by
approximately $3.0 million.
At October 31, 2019, the Company no longer held an investment in MVC
Environmental.
MVC Private Equity Fund, L.P.
MVC Private Equity Fund, L.P., Purchase, New York, is a private equity fund
focused on control equity investments in the lower middle market. MVC GP II, an
indirect wholly-owned subsidiary of the Company, serves as the GP to the PE Fund
and is exempt from the requirement to register with the Securities and Exchange
Commission as an investment adviser under Section 203 of the Investment Advisers
Act of 1940. MVC GP II is wholly-owned by MVCFS, a subsidiary of the Company.
The Company's Board of Directors authorized the establishment of, and investment
in, the PE Fund for a variety of reasons, including the Company's ability to
participate in Non-Diversified Investments made by the PE Fund. As previously
disclosed, the Company is limited in its ability to make Non-Diversified
Investments. For services provided to the PE Fund, the GP and MVC Partners are
together entitled to receive 25% of all management fees and other fees paid by
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the PE Fund and its portfolio companies and up to 30% of the carried interest
generated by the PE Fund. Further, at the direction of the Board of Directors,
the GP retained TTG Advisers to serve as the portfolio manager of the PE Fund.
In exchange for providing those services, and pursuant to the Board of
Directors' authorization and direction, TTG Advisers is entitled to the
remaining 75% of the management and other fees generated by the PE Fund and its
portfolio companies and any carried interest generated by the PE Fund. A
significant portion of the portfolio fees that are paid by the PE Fund's
portfolio companies to the GP and TTG Advisers is subject to recoupment by the
PE Fund in the form of an offset to future management fees paid by the PE Fund.
Given this separate arrangement with the GP and the PE Fund, under the terms of
the Company's Advisory Agreement with TTG Advisers, TTG Advisers is not entitled
to receive from the Company a management fee or an incentive fee on assets of
the Company that are invested in the PE Fund. The PE Fund's term will end on
October 29, 2016; unless the GP, in its sole discretion, extends the term of the
PE Fund for two additional periods of one year each.
On October 29, 2010, through MVC Partners and MVCFS, the Company committed to
invest approximately $20.1 million in the PE Fund. Of the $20.1 million
total commitment, MVCFS, through its wholly-owned subsidiary MVC GP II, has
committed $500,000 to the PE Fund as its general partner. See MVC Partners for
more information on the other portion of the Company's commitment to the PE
Fund. The PE Fund has closed on approximately $104 million of capital
commitments.
During the fiscal year ended October 31, 2012 and thereafter, MVC Partners was
consolidated with the operations of the Company as MVC Partners' limited
partnership interest in the PE Fund is a substantial portion of MVC Partners'
operations.
At October 31, 2018, the limited partnership interest in the PE Fund had a cost
of approximately $11.5 million and a fair value of approximately $20.0 million.
The Company's general partnership interest in the PE Fund had a cost basis of
approximately $292,000 and a fair value of approximately $501,000.
On December 27, 2018, the Company received proceeds of approximately $7.5
million from the PE Fund related to the sale of Plymouth Rock Energy, LLC, a
portfolio company of the PE Fund. The Company's pro-rata share of the PE Fund's
cost basis in the Plymouth Rock Energy, LLC investment totaled approximately
$2.5 million, resulting in a realized gain of approximately $5.0 million. The
Company also received a carried interest payment from the PE Fund of
approximately $173,000 related to the sale, which was recorded as additional
realized gains.
On December 27, 2018, the Company received a dividend of approximately $543,000
from the PE Fund related to Focus Pointe Global.
On October 25, 2019, the PE Fund sold Focus Pointe Holdings, Inc. ("Focus
Pointe"), a portfolio company of the PE Fund. The Company expects to receive
its share of the proceeds and carried interest on November 8, 2019. Please see
Subsequent Events for further information.
During the fiscal year ended October 31, 2019, the Valuation Committee decreased
the fair value of the general partnership interest and limited partnership
interest in the PE Fund by a total of approximately $140,000.
At October 31, 2019, the limited partnership interest in the PE Fund had a cost
of approximately $9.0 million and a fair value of approximately $12.3 million.
The Company's general partnership interest in the PE Fund had a cost basis of
approximately $230,000 and a fair value of approximately $313,000. As of
October 31, 2019, the PE Fund had investments in Gibdock Limited and Advanced
Oilfield Services, LLC.
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Powers Equipment Acquisition Company, LLC
Powers, Warminster, Pennsylvania, is a family owned manufacturer of commercial
refrigeration equipment.
On May 1, 2019, the Company invested $6.5 million in Powers in the form of a
first lien loan with a variable interest rate of 13.5% and a maturity date of
April 30, 2024.
At October 31, 2019, the Company's investment in Powers consisted of a first
lien loan with an outstanding amount of approximately $6.5 million, a cost basis
of approximately $6.4 million and a fair value of approximately $6.5 million.
RuMe, Inc.
RuMe, Denver, Colorado, produces functional and affordable products for the
environmentally and socially-conscious consumer reducing dependence on
single-use products.
At October 31, 2018, the Company's investment in RuMe consisted of 5,297,548
shares of common stock with a cost basis of approximately $924,000 and a fair
value of $0, 4,999,076 shares of series B-1 preferred stock with a cost basis of
approximately $1.0 million and a fair value of approximately $1.7 million,
23,896,634 shares of series C preferred stock with a cost basis and a fair value
of approximately $3.4 million, a revolver with an outstanding balance, cost
basis and fair value of approximately $1.5 million and a subordinated note with
an outstanding balance, cost basis and a fair value of approximately $3.3
million. The warrants have a cost basis of approximately $336,000 and a fair
value of $0, the guarantee was fair valued at approximately -$107,000 or a
liability of approximately $107,000 and the letter of credit was fair valued at
approximately -$273,000 or a liability of approximately $273,000. The
subordinated note and revolver had an interest rate of 10% PIK and a maturity
date of March 31, 2020.
On April 25, 2019, the $1.0 million guarantee and the $2.0 million letter of
credit were refinanced and replaced with a new $3.3 million letter of credit.
The letter of credit had a fair value of approximately -$643,000 or a liability
of $643,000 as of April 30, 2019. The $3.3 million letter of credit is
collateralized with Credit Facility IV.
During the fiscal year ended October 31, 2019, the Company loaned approximately
$1.4 million to RuMe and received a new warrant.
On April 26, 2019, RuMe made a principal payment on the revolver of $500,000.
During the fiscal year ended October 31, 2019, the Valuation Committee decreased
the fair values of the series B-1 preferred stock by approximately $1.7 million,
the series C preferred stock by approximately $1.9 million and the letters of
credit by approximately $507,000 and increased the guarantee by approximately
$23,000 and the warrants by a total of approximately $1.1 million.
At October 31, 2019, the Company's investment in RuMe consisted of 5,297,548
shares of common stock with a cost basis of approximately $924,000 and a fair
value of $0, 4,999,076 shares of series B-1 preferred stock with a cost basis of
approximately $1.0 million and a fair value of $0, 23,896,634 shares of series C
preferred stock with a cost basis of approximately $3.4 million and a fair value
of approximately $1.5 million, a revolver with an outstanding balance, cost
basis and fair value of approximately $2.1 million, another revolver with an
outstanding balance of approximately $404,000 and a cost basis and fair value of
approximately $233,000 and a subordinated note with an outstanding balance, cost
basis and a fair value of approximately $3.6 million. The warrants have a cost
basis of approximately $595,000 and a fair value of $1.4 million and the letter
of credit was fair valued at approximately -$566,000 or a liability of
approximately $566,000.
Shivani Khurana and Christopher Ferguson, representatives of the Company, serve
as directors of RuMe.
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Security Holdings, B.V.
Security Holdings is an Amsterdam-based holding company that owns FIMA, a
Lithuanian security and engineering solutions company.
At October 31, 2018, the Company's investment in Security Holdings consisted of
common equity interest with a cost basis of approximately $51.2 million and a
fair value of approximately $31.3 million, a bridge loan with an outstanding
balance, cost basis and fair value of approximately $4.7 million, a senior
subordinated loan with an outstanding balance, cost basis and fair value of
approximately $5.0 million and a letter of credit with a fair value of
approximately -$87,000 or a liability of $87,000. The bridge loan had an
interest rate of 5% and a maturity date of December 31, 2019 and the senior
subordinated loan had an interest rate of 12.45% and a maturity date of May 31,
2020.
On September 26, 2019, the Company loaned approximately $552,000 to Security
Holdings, increasing the senior subordinated loan to approximately $6.0 million
as of October 31, 2019.
During the fiscal year ended October 31, 2019, the interest rate on the senior
subordinated loan was decreased to 3.1%.
During the fiscal year ended October 31, 2019, the Valuation Committee increased
the fair value of the common equity interest by $2.3 million and decreased the
fair value of the letter of credit by approximately $74,000.
At October 31, 2019, the Company's investment in Security Holdings consisted of
common equity interest with a cost basis of approximately $51.2 million and a
fair value of approximately $33.6 million, a bridge loan with an outstanding
balance, cost basis and fair value of approximately $4.9 million, a senior
subordinated loan with an outstanding balance, cost basis and fair value of
approximately $6.0 million and a letter of credit with a fair value of
approximately -$161,000 or a liability of $161,000.
Puneet Sanan, a representative of the Company, serves as a director of Security
Holdings.
SMA Holdings, Inc.
SMA, Irvine, California, is a strategic consulting firm, which has been serving
the federal contracting and commercial markets for over 35 years.
During the fiscal year ended October 31, 2019, the Company invested $7.0 million
in SMA in the form of a first lien loan with a cash interest rate of 11.0% and a
maturity date of June 26, 2024. The Company also received warrants as part of
this investment.
At October 31, 2019, the Company's investment in SMA consisted of a first lien
loan with an outstanding amount of approximately $7.0 million, a cost basis of
approximately $6.4 million and a fair value of approximately $6.5 million and
warrants with a cost basis and fair value of approximately $505,000.
Tin Roof Software, LLC
Tin Roof, Atlanta, Georgia, provides enterprise software development solutions
and services to a variety of Fortune 500 clients.
At October 31, 2018, the Company's investment in Tin Roof consisted of a second
lien loan with an outstanding balance, a cost basis and a fair value of
approximately $3.7 million. The second lien loan had an interest rate of 14.5%
and a maturity date of April 1, 2024.
During the fiscal year ended October 31, 2019, Tin Roof made principal payments
totaling approximately $99,000.
On October 1, 2019, Tin Roof repaid its $3.8 million loan in full, including all
accrued interest.
At October 31, 2019, the Company no longer held an investment in Tin Roof.
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Trientis GmbH (formerly SGDA Europe B.V.)
Trientis is an Austrian-based holding company that pursues environmental and
remediation opportunities in Romania.
At October 31, 2018, the Company's investment in Trientis consisted of a first
lien loan with an outstanding balance and cost basis of approximately $1.2
million and a fair value of approximately $385,000 and a warrant with a cost
basis of approximately $68,000 and a fair value of $0. The first lien note has
an interest rate of 5%, with a PIK toggle at Trientis's option, and a maturity
date of October 26, 2024.
During the fiscal year ended October 31, 2019, the Valuation Committee decreased
the fair value of the loan by approximately $208,000.
At October 31, 2019, the Company's investment in Trientis consisted of a first
lien loan with an outstanding balance and cost basis of approximately $1.2
million and a fair value of approximately $177,000 and a warrant with a cost
basis of approximately $68,000 and a fair value of $0. The Company reserved in
full against all of the accrued interest starting September 1, 2018.
Tuf-Tug Inc.
Tuf-Tug, Moraine, Ohio, is a designer and manufacturer of fall protection and
rigging gear.
At October 31, 2018, the Company's investment in Tuf-Tug consisted of a second
lien loan with an outstanding balance of approximately $4.9 million, a cost
basis of approximately $4.8 million and a fair value of approximately $4.9
million and 24.6 shares of common stock with a cost basis and fair value of
approximately $750,000. The second lien loan had an interest rate of 13% and a
maturity date of February 24, 2024.
During the fiscal year ended October 31, 2019, the Valuation Committee increased
the fair values of the loan by approximately $50,000 and the common stock by
approximately $28,000.
At October 31, 2019, the Company's investment in Tuf-Tug consisted of a second
lien loan with an outstanding balance of approximately $5.0 million, a cost
basis of approximately $4.9 million and a fair value of approximately $5.0
million and 24.6 shares of common stock with a cost basis of $750,000 and a fair
value of approximately $778,000.
Turf Products, LLC
Turf, Enfield, Connecticut, is a wholesale distributor of golf course and
commercial turf maintenance equipment, golf course irrigation systems and
consumer outdoor power equipment.
At October 31, 2018, the Company's investment in Turf consisted of a senior
subordinated loan and a third lien loan. The loans had an interest rate of 10%
and a maturity date of August 7, 2020. The senior subordinated loan had an
outstanding balance and cost basis of approximately $7.7 million and a fair
value of approximately $7.3 million and the third lien loan had an outstanding
balance and cost basis of approximately $1.2 million and a fair value of
approximately $1.1 million.
During the fiscal year ended October 31, 2019, Turf made principal payments
totaling $140,000 on its third lien loan.
During the fiscal year ended October 31, 2019, the Valuation Committee increased
the fair value of the senior subordinated loans by approximately $302,000.
At October 31, 2019, the senior subordinated loan had an outstanding balance and
cost basis of approximately $7.7 million and a fair value of approximately $7.6
million and the third lien loan had an outstanding balance and cost basis of
approximately $1.1 million and a fair value of approximately $1.0 million.
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United States Technologies, Inc.
U.S. Technologies, Fairlawn, New Jersey, offers diagnostic testing, redesign,
manufacturing, reverse engineering and repair services for malfunctioning
electronic components of machinery and equipment.
At October 31, 2018, the Company's investment in U.S. Technologies consisted of
a senior term loan with an outstanding amount, cost basis and fair value of
approximately $5.5 million. The loan had an interest rate of 10.5% and matures
on July 17, 2020.
At October 31, 2019, the senior term loan had an outstanding amount, cost basis
and fair value of approximately $5.5 million.
U.S. Gas & Electric, Inc.
U.S. Gas, North Miami Beach, Florida, a wholly-owned indirect subsidiary of
Crius, is a licensed Energy Service Company that markets and distributes natural
gas to small commercial and residential retail customers in the state of New
York.
At October 31, 2018, the Company's investment in U.S. Gas, an indirect
subsidiary of Crius, consisted of a second lien loan with an outstanding balance
and cost basis of approximately $37.5 million and a fair value of approximately
$39.5 million. The loan has an interest rate of 9.5% and matures on July 5,
2025.
During the fiscal year ended October 31, 2019, the Valuation Committee decreased
the fair value of the loan by $2.5 million.
On October 18, 2019, Vistra Energy notified the Company that it was asserting an
offset of Company's loan assets of approximately $1.6 million relating to an
indemnification claim obligation attributable to U.S. Gas. The offset is
partially reflected in the fair value of the loan asset as the Company is
considering its response to the claim.
At October 31, 2019, the Company's investment in U.S. Gas, an indirect
subsidiary of Crius, consisted of a second lien loan with an outstanding balance
and cost basis of approximately $37.5 million and a fair value of approximately
$37.0 million.
U.S. Spray Drying Holding Company
SCSD, Huguenot, New York, provides custom spray drying products to the food,
pharmaceutical, nutraceutical, flavor and fragrance industries.
At October 31, 2018, the Company's investment in SCSD consisted of 784 shares of
class B common stock with a cost basis of approximately $5.5 million and a fair
value of approximately $5.4 million. The secured loan and the senior secured
loan each had an outstanding balance, cost basis and fair value of $1.5
million. The secured loan and the senior secured loan each had an interest rate
of 12% and a maturity date of April 30, 2021.
During the fiscal year ended October 31, 2019, the Valuation Committee decreased
the fair value of the common stock by $3.6 million.
At October 31, 2019, the Company's investment in SCSD consisted of 784 shares of
class B common stock with a cost basis of approximately $5.5 million and a fair
value of approximately $1.8 million, a secured loan and senior secured loan each
with an outstanding balance, cost basis and fair value of $1.5 million, totaling
$3.0 million.
Puneet Sanan and Shivani Khurana, representatives of the Company, serve as
directors of SCSD.
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LIQUIDITY AND CAPITAL RESOURCES
Our liquidity and capital resources are derived from our public offering of
securities, our credit facility and cash flows from operations, including
investment sales and repayments and income earned. Our primary use of funds
includes investments in portfolio companies and payments of fees and other
operating expenses we incur. We have used, and expect to continue to use,
proceeds generated from our portfolio investments and/or proceeds from public
and private offerings of securities to finance pursuit of our investment
objective.
At October 31, 2019, the Company had investments in portfolio companies totaling
$340.2 million. Also, on that date, the Company had approximately $10.4 million
in cash equivalents and approximately $1.3 million in cash. The Company
considers all money market and other cash investments purchased with an original
maturity of less than three months to be cash equivalents. U.S. government
securities and cash equivalents are highly liquid. Pending investments in
portfolio companies pursuant to our principal investment strategy, the Company
may make other short-term or temporary investments, including in exchange-traded
funds and private investment funds offering periodic liquidity.
During the fiscal year ended October 31, 2019, the Company made six new
investments, committing capital that totaled approximately $32.4 million.
Pursuant to an exemptive order received by the Company from the SEC (the
"Order"), that allows the Company to co-invest, subject to certain conditions,
with certain affiliated private funds as described in the Order, each of the
Company and the Private Fund co-invested in GTM ($1.9 million investment for the
Company). The Company also invested in Powers ($6.5 million), IPCC ($8.0
million), Jedson ($6.0 million), SMA ($7.0 million) and Global Prairie ($3.0
million).
During the fiscal year ended October 31, 2019, the Company made follow-on
investments in six portfolio companies that totaled approximately $12.5
million. On December 21, 2018, the Company loaned an additional $2.0 million to
Custom Alloy in the form of a second lien loan with an interest rate of 11% and
a maturity date of December 23, 2019. During the fiscal year ended October 31,
2019, the Company loaned approximately $1.4 million to RuMe and received a new
warrant. On June 7, 2019, the Company invested approximately $3.9 million in
GTM increasing the second lien loan by $3.5 million and investing approximately
$420,000 for additional common shares. During the fiscal year ended October 31,
2019, Custom Alloy borrowed approximately $2.1 million on its revolving credit
facility with a 15% interest rate and a maturity date of April 30, 2020. On
July 15, 2019, the Company loaned an additional $1.0 million to HTI increasing
its second lien loan to approximately $11.4 million as of October 31, 2019. On
September 10, 2019, the Company invested $1.0 million in MVC Automotive in the
form of additional common equity. On September 26, 2019, the Company loaned
approximately $552,000 to Security Holdings, increasing the senior subordinated
loan to approximately $6.0 million as of October 31, 2019.
Current balance sheet resources, which include the additional cash resources
from the Credit Facility, are believed to be sufficient to finance current
commitments. Current commitments include:
Commitments to/for Portfolio Companies
At October 31, 2019 and October 31, 2018, the Company's existing commitments to
portfolio companies consisted of the following:
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Portfolio Company Amount Committed Amount Funded as of October 31, 2019
MVC Private Equity Fund LP $ 20.1 million $ 14.6 million
RuMe $ 2.2 million $ 2.1 million
RuMe $ 400,000 $ 400,000
Custom Alloy $ 3.0 million $ 2.1 million
Total $ 25.7 million $ 19.2 million
Portfolio Company Amount Committed Amount Funded as of October 31, 2018
MVC Private Equity Fund LP $ 20.1 million $ 14.6 million
RuMe $ 1.6 million $ 1.5 million
Total $ 21.7 million $ 16.1 million
Guarantees:
At October 31, 2019 and October 31, 2018, the Company had the following
commitments to guarantee various loans and mortgages:
Guarantee Amount Committed Amount Funded as of October 31, 2019
MVC Automotive $ 4.0 million -
Total $ 4.0 million -
Guarantee Amount Committed Amount Funded at October 31, 2018
MVC Automotive $ 6.2 million -
RuMe $ 1.0 million -
Total $ 7.2 million -
ASC 460, Guarantees, requires the Company to estimate the fair value of the
guarantee obligation at its inception and requires the Company to assess whether
a probable loss contingency exists in accordance with the requirements of ASC
450, Contingencies. At October 31, 2019, the Valuation Committee estimated the
combined fair values of the guarantee obligation noted above to be $0 or a
liability of approximately $0.
These guarantees are further described below, together with the Company's other
commitments.
On January 16, 2008, the Company agreed to support a 4.0 million Euro mortgage
for a Ford dealership owned and operated by MVC Automotive through making
financing available to the dealership and agreeing under certain circumstances
not to reduce its equity stake in MVC Automotive. Over time, Erste Bank, the
bank extending the mortgage to MVC Automotive, increased the amount of the
mortgage. The balance of the guarantee as of October 31, 2019 is approximately
3.6 million Euro (equivalent to approximately $4.0 million).
The Company agreed to cash collateralize a $300,000 third party letter of credit
for RuMe, which is now collateralized with Credit Facility IV (defined below)
and still a commitment of the Company as of October 31, 2019. Previously, the
Company guaranteed $1.0 million of RuMe's indebtedness to Colorado Business Bank
and also provided RuMe an additional $2.0 million letter of credit. On
April 25, 2019, the $1.0 million guarantee and the $2.0 million letter of credit
were refinanced and replaced with a new $3.0 million letter of credit. The
letter of credit had a fair value of approximately -$566,000 or a liability of
$566,000 as of October 31, 2019. The $3.0 million letter of credit is
collateralized with Credit Facility IV (defined below).
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On October 29, 2010, through MVC Partners and MVCFS, the Company committed to
invest approximately $20.1 million in the PE Fund, for which an indirect
wholly-owned subsidiary of the Company serves as GP. The PE Fund closed on
approximately $104 million of capital commitments. During the fiscal year ended
October 31, 2012 and thereafter, MVC Partners was consolidated with the
operations of the Company as MVC Partners' limited partnership interest in the
PE Fund is a substantial portion of MVC Partners operations. The investment
period related to the PE Fund has ended. Additional capital may be called for
follow-on investments in existing portfolio companies of the PE Fund or to pay
operating expenses of the PE Fund until the partnership is terminated. On
December 27, 2018, the Company received proceeds of approximately $7.5 million
from the PE Fund related to the sale of Plymouth Rock Energy, LLC, a portfolio
company of the PE Fund. The Company's pro-rata share of the PE Fund's cost
basis in the Plymouth Rock Energy, LLC investment totaled approximately $2.5
million, resulting in a realized gain of approximately $5.0 million. On
October 25, 2019, the PE Fund sold Focus Pointe, a portfolio company of the PE
Fund. The Company expects to receive its share of the proceeds and carried
interest on November 8, 2019. Please see Subsequent Events for further
information. As of October 31, 2019, $14.6 million of the Company's commitment
was funded.
During the fiscal year ended October 31, 2016, the Company agreed to cash
collateralize a $500,000 working capital line of credit for an entity partially
owned by MVC Environmental provided by Branch Banking and Trust Company
("BB&T"). During the fiscal year ended October 31, 2017, the cash collateral
securing the MVC Environmental working capital line of credit was released and a
new credit facility was entered into secured by a $1.0 million letter of
credit. On February 16, 2018, the letter of credit was increased to $3.0
million. On November 27, 2018, the Company funded approximately $3.0 million
related to the letter of credit, which was called by the beneficiary.
On February 28, 2018, the Company committed $6.0 million to Custom Alloy in the
form of a first lien loan with an interest rate of 10% and a maturity date of
October 31, 2018. On November 9, 2018, Custom Alloy repaid its first lien loan
in full, including all accrued interest. The loan is no longer a commitment of
the Company as of October 31, 2019.
During the fiscal year ended October 31, 2018, the Company provided RuMe a $1.6
million line of credit with a 10% interest rate and a maturity date of March 31,
2021. The outstanding balance as of October 31, 2018 was approximately $1.5
million. During the fiscal year ended October 31, 2019, the line of credit was
increased to $2.2 million. The outstanding balance as of October 31, 2019 was
approximately $2.1 million, including capitalized PIK interest. Also during the
fiscal year ended October 31, 2019, the Company provided RuMe a $400,000
revolver with a 10% interest rate and a maturity date of February 28, 2020. The
outstanding balance of the revolver as of October 31, 2019 was approximately
$404,000, including capitalized PIK interest.
During the fiscal year ended October 31, 2018, the Company provided Custom Alloy
a $2.0 million and a $1.4 million letter of credit as part of a restructuring.
The $2.0 million letter of credit matured on November 27, 2018 and is no longer
a commitment of the Company. On October 31, 2018, the $1.4 million letter of
credit was drawn, which resulted in the Company receiving a $1.4 million term
note with a 15% interest rate and a maturity date of October 31, 2021. On
November 13, 2018, Custom Alloy repaid its $1.4 million second lien loan in
full, including all accrued interest. The loan is no longer a commitment of the
Company as of October 31, 2019.
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During the fiscal year ended October 31, 2018, the Company provided Security
Holdings a 3.3 million Euro letter of credit. During the fiscal year ended
October 31, 2019, the letter of credit was increased to 4.8 million Euro. The
letter of credit had a fair value of approximately -$161,000 or a liability of
$161,000 as of October 31, 2019. The letter of credit is collateralized with
Credit Facility IV (defined below).
On April 30, 2019, the Company provided Custom Alloy a $3.0 million line of
credit with a 15% interest rate and a maturity date of April 30, 2020. During
the fiscal year ended October 31, 2019, the Company funded $2.1 million, which
is the balance outstanding as of October 31, 2019.
As of October 31, 2019, the total fair value associated with potential
obligations related to guarantees and letters of credit was approximately
-$727,000 or a liability of $727,000.
Commitments of the Company
On July 31, 2013, the Company entered into a one-year, $50 million revolving
credit facility ("Credit Facility II") with BB&T. On January 31, 2014, Credit
Facility II was increased to a $100 million revolving credit facility. On
December 1, 2015, Credit Facility II was renewed and expired on May 31, 2016, at
which time all outstanding amounts under it were due and repaid. On June 30,
2016, Credit Facility II was renewed and reduced to a $50 million revolving
credit facility, which expired on February 28, 2017, as of which time all
outstanding amounts under it were due and repaid. On February 28, 2017, Credit
Facility II was renewed and increased to a $100 million revolving credit
facility and expired on August 31, 2017. On August 31, 2017, Credit Facility II
was renewed and decreased to a $25 million revolving credit facility, which was
to expire on August 31, 2018. There was no change to the interest rate or
unused fee on the revolving credit facility. The Company incurred closing costs
associated with this transaction of $62,500. On August 10, 2018, Credit
Facility II was renewed to August 30, 2019 and on August 30, 2019, Credit
Facility II was extended to August 31, 2020. The Company incurred closing costs
associated with each of these transaction of $50,000 with no change in terms
other than the expiration date. At October 31, 2018 and October 31, 2019, there
was $25.0 million and $0, respectively, outstanding on Credit Facility II.
Credit Facility II is used to provide the Company with better overall financial
flexibility in managing its investment portfolio. Borrowings under Credit
Facility II bear interest at LIBOR plus 125 basis points. In addition, the
Company is also subject to a 25 basis point commitment fee for the average
amount of Credit Facility II that is unused during each fiscal quarter. The
Company paid closing fees, legal and other costs associated with these
transactions. These costs are amortized over the life of the facility.
Borrowings under Credit Facility II will be secured by cash, short-term and
long-term U.S. Treasury securities and other governmental agency securities. As
of October 31, 2019, the Company was in compliance with all covenants related to
Credit Facility II.
On December 9, 2015, the Company entered into a three-year, $50 million
revolving borrowing base credit facility ("Credit Facility III") with Santander
Bank N.A. as a lender and lead agent and Wintrust Bank as a lender and
syndication agent. Credit Facility III was to expire on December 9, 2018.
Credit Facility III can, under certain conditions, be increased up to $85
million. The new facility bears an interest rate of LIBOR plus 3.75% or the
prime rate plus 1% (at the Company's option), and includes a 1% closing fee of
the commitment amount and a 0.75% unused fee. The compensating balance for the
revolving credit facility is $5.0 million, which is reflected as restricted cash
or cash equivalents on the Company's Consolidated Balance Sheets. On February
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26, 2018, in connection with the U.S. Gas Sale, Credit Facility III was amended,
effective as of July 5, 2017, to exclude from pledged collateral the U.S. Gas
second lien loan. On May 7, 2018, the terms of Credit Facility III were amended
to, among other things: (i) increase the limit for unsecured indebtedness and
certain unsecured guaranty obligations of portfolio companies of the Company to
$10,000,000 and (ii) increase the limit on permitted investments of the Company
with respect to certain debt, equity and follow-on investments to $28,500,000.
All other material terms of Credit Facility III remained unchanged. As of
October 31, 2018, there was no outstanding balance on Credit Facility III and
the Company was in compliance with all covenants related to Credit Facility
III. On December 7, 2018, Credit Facility III was renewed until March 9, 2019.
On January 29, 2019, Credit Facility III was terminated. As of October 31,
2019, Credit Facility III was no longer a commitment of the Company.
On November 15, 2017, the Company completed a public offering of $100,000,000
aggregate principal amount of its 6.25% senior notes due November 30, 2022
("Senior Notes II"). In addition, on November 20, 2017, the underwriters
exercised an over-allotment option to purchase an additional $15 million in
aggregate principal amount of Senior Notes II (together with the offering on
November 15, the "Offering"). The Senior Notes II have an interest rate of
6.25% per year payable quarterly on January 15, April 15, July 15, and
October 15 of each year. After deducting underwriting fees and discounts and
expenses, the Offering resulted in net proceeds to the Company of approximately
$111.4 million. The Offering expenses incurred are amortized over the term of
the Senior Notes II. Proceeds from the offering were used to repay the Senior
Notes in full, including all accrued interest. As of October 31, 2019, the
Senior Notes II had a total outstanding amount of $115.0 million, net of
deferred financing fees the balance was approximately $112.7 million, with a
market value of approximately $116.7 million.
On January 29, 2019, the Company entered into a three year, $35 million
revolving credit facility ("Credit Facility IV") with People's United Bank,
National Association as lender and lead agent. Credit Facility IV can, under
certain conditions, be increased up to $85 million. Credit Facility IV will
expire on January 29, 2022, at which time all outstanding amounts under Credit
Facility IV will be due and payable. Borrowings under the Credit Facility bear
interest at a rate of LIBOR plus 2.85%, or the prime rate plus 0.5% at the
Company's discretion. In addition, the Company was subject to (i) a closing fee
of 1% of the commitment amount paid at closing, (ii) a one-time structuring fee
in the amount of $100,000 paid at closing, (iii) an unused line fee, which is
payable monthly, of 0.75% if the Company draws less than $25 million on Credit
Facility IV or 0.60% if the Company draws more than $25 million on Credit
Facility IV, and (iv) an annual administrative agent fee in the amount of
$100,000 in 2019 and $200,000 in each year thereafter. The compensating balance
for the revolving credit facility is $5.0 million, which is reflected as
restricted cash equivalents on the Company's Consolidated Balance Sheets. On
June 19, 2019, in order to increase the size of the Credit Facility IV, the
credit facility was amended to add Bank Leumi USA as an additional lender. The
amendment increased the size of Credit Facility IV by $15.0 million to $50.0
million. All other material terms of the Credit Facility remain unchanged. In
addition, the Company was subject to a closing fee of 1% of the additional
commitment amount of $15.0 million to be paid at closing. As of October 31,
2019, there was $15.1 million outstanding on Credit Facility IV and the Company
was in compliance with the maximum balance sheet leverage covenant related to
Credit Facility IV.
The Company enters into contracts with portfolio companies and other parties
that contain a variety of indemnifications. The Company's maximum exposure under
these arrangements is
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unknown. However, the Company has not experienced claims or losses pursuant to
these contracts and believes the risk of loss related to indemnifications to be
remote.
SUBSEQUENT EVENTS
On November 1, 2019, U.S. Gas made a principal payment of approximately $32.8
million on its second lien loan.
On November 4, 2019, the Company received net proceeds of approximately $1.0
million related to the G3K Displays, Inc. settlement.
On November 5, 2019, the Company received proceeds of approximately $1.0 million
related to the Centile escrow.
On November 7, 2019, Legal Solutions made a $2.1 million principal payment on
its loan.
On November 8, 2019, the Company received proceeds of approximately $2.7 million
from the PE Fund related to the sale of Focus Pointe, a portfolio company of the
PE Fund. The Company's pro-rata share of the PE Fund's cost basis in the Focus
Pointe investment totaled approximately $1.9 million, resulting in a realized
gain of approximately $800,000. The Company also received a carried interest
payment from the PE Fund of approximately $48,000 related to the sale, which was
recorded as additional realized gains.
On November 8, 2019, the Company received proceeds of approximately $291,000
from the PE Fund related to tax refunds received by the PE Fund related to
Plymouth Rock Energy, LLC. The additional proceeds were recorded as realized
gains. The Company also received a carried interest payment from the PE Fund of
approximately $11,000 related to these proceeds, which was recorded as
additional realized gains.
On November 14, 2019, the Company loaned $50,000 to RuMe on its line of credit,
increasing the balance to approximately $2.1 million.
On November 25, 2019, the Company loaned approximately $1.1 million to Security
Holdings, increasing its senior subordinated loan outstanding amount to
approximately $7.1 million.
On December 13, 2019, the Company loaned approximately $1.6 million to Jedson,
increasing the first lien loan to approximately $7.6 million.
On December 13, 2019, the Company loaned approximately $1.0 million to Security
Holdings, increasing its senior subordinated loan outstanding amount to
approximately $8.1 million.
On January 1, 2020, Array repaid its second lien loan in full, including all
accrued interest totaling approximately $6.4 million. The Company also received
approximately $28,000 for the sale of the warrant, which was recorded as a
realized gain.
On January 10, 2020, Essner repaid its first lien loan in full, including all
accrued interest totaling approximately $3.6 million.
On January 10, 2020, the Company loaned approximately $3.8 million to Apex,
increasing the first lien loan to approximately $18.8 million. The maturity
date of the loan was extended to May 15, 2020. The Company also received a
warrant as part of this investment.
SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Company in the preparation of its consolidated financial statements:
The preparation of consolidated financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
consolidated financial statements. Actual results could differ from those
estimates.
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Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting
Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers"
(Topic 606). ASU 2014-09 addresses the reporting of revenue by most entities and
will replace most existing revenue recognition guidance in U.S. GAAP when it
becomes effective. In August 2015, the FASB issued ASU 2015-14 that defers the
effective date of ASU 2014-09 for public business entities for annual reporting
periods beginning after December 15, 2017, including interim periods therein.
Early application is not permitted for public business entities. On
December 27, 2016, the FASB issued ASU 2016-20 to make various amendments to
Topic 606, going into effect for years beginning after December 15, 2017. The
standard impacted the fair value of the PE Fund's LP interest due to the
exclusion of the Company's portion of the carried interest associated with the
PE Fund. This update has had no material impact on our financial statements.
In August 2014, FASB issued ASU 2014-15, "Presentation of Financial Statements -
Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's
Ability to Continue as a Going Concern" ("ASU 2014-15"). The standard requires
management to evaluate, at each interim and annual reporting period, whether
there are conditions or events that raise substantial doubt about the entity's
ability to continue as a going concern within one year after the date the
financial statements are issued, and provide related disclosures. ASU 2014-15 is
effective for annual periods ending after December 15, 2016, and for annual and
interim periods thereafter, and early adoption is permitted. This update has had
no impact on our financial statements.
In June 2016, FASB issued ASU 2016-13, Financial Instruments-Credit Losses
(Topic 326): Measurement of Credit Losses on Financial Instruments. The
amendments require a financial asset (or a group of financial assets) measured
at amortized cost basis to be presented at the net amount expected to be
collected. In addition, ASU 2016-13 requires credit losses relating to
available-for-sale debt securities to be recorded through an allowance for
credit losses. The amendments in ASU 2016-13 broaden the information that an
entity must consider in developing its expected credit loss estimate for assets
measured either collectively or individually. The new standard is effective for
fiscal years, and for interim periods within those fiscal years, beginning after
December 15, 2019. The Company does not expect the adoption of ASU 2016-13 to
have a material impact on our financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows -
Classification of Certain Cash Receipts and Cash Payments (Topic 230). The
amendments provide guidance on eight specific cash flow issues in how certain
cash receipts and cash payments are presented and classified in the statement of
cash flows with the objective of reducing the existing diversity in practice.
The amendments are effective for all entities for fiscal years, and interim
periods within those fiscal years, beginning after December 15, 2017. Early
adoption is permitted. This update has had no material impact on our financial
statements.
In October 2016, the FASB issued ASU 2016-17, to amend the consolidation
guidance on how a reporting entity that is the single decision maker of a VIE
should treat indirect interests in the entity held through related parties that
are under common control with the reporting entity when determining whether it
is the primary beneficiary of that VIE. The ASU is effective for public business
entities for fiscal years beginning after December 15, 2016, including interim
periods within those fiscal years. This update has had no impact on our
financial statements.
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In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic
230): Restricted Cash. The amendments in this Update require that a statement
of cash flows explain the change during the period in the total of cash, cash
equivalents, and amounts generally described as restricted cash or restricted
cash equivalents. The ASU is effective for public business entities for fiscal
years beginning after December 15, 2017, including interim periods within those
fiscal years. This update has had no material impact on our financial
statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic
820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value
Measurements. The amendments require new disclosures of changes in unrealized
gains and losses in other comprehensive income for recurring Level 3 fair value
of instruments held at balance sheet date and the range and weighted average of
significant unobservable inputs for recurring and nonrecurring Level 3 fair
values. Certain disclosures are being eliminated such as the valuation process
required for Level 3 fair value measurements, the policy for timing of transfers
between levels and amounts of and reason for transfers between Levels 1 and 2.
The ASU is effective for public business entities for fiscal years and interim
periods beginning after December 15, 2019. The Company does not expect the
adoption of ASU 2018-13 to have a material impact on our financial statements.
In October 2018, the FASB issued ASU No. 2018-17, Consolidation (Topic 810):
Targeted Improvements to related Party Guidance for Variable Interest Entities.
The guidance supersedes the private company alternative for common control
leasing arrangements issued in 2014 and expands it to all qualifying common
control arrangements. Also under the guidance, a private company could make an
accounting policy election to not apply VIE guidance to legal entities under
common control (including common control leasing arrangements) when certain
criteria are met. Additionally, a private company electing the alternative is
required to provide detailed disclosures about its involvement with, and
exposure to, the legal entity under common control. The ASU also amends the
guidance for determining whether a decision-making fee is a variable interest.
The amendments require organizations to consider indirect interests held through
related parties under common control on a proportional basis rather than as the
equivalent of a direct interest in its entirety (as currently required in GAAP).
The ASU is effective for public business entities for fiscal years and interim
periods beginning after December 15, 2019. The Company does not expect the
adoption of ASU 2018-17 to have a material impact on our financial statements.
Tax Status and Capital Loss Carryforwards
As a RIC, the Company is not subject to federal income tax to the extent that it
distributes all of its investment company taxable income and net realized
capital gains for its taxable year (see Notes 12 "Tax Matters" and Note 13
"Income Taxes" of our notes to the consolidated financial statements). This
allows us to attract different kinds of investors than other publicly held
corporations. The Company is also exempt from excise tax if it distributes at
least (1) 98% of its ordinary income during each calendar year, (2) 98.2% of its
capital gains realized in the period from November 1 of the prior year through
October 31 of the current year, and (3) all such ordinary income and capital
gains for previous years that were not distributed during those years. On
October 31, 2019, the Company had a capital loss carryforward of approximately
$9.3 million. The Company also had approximately $75.4 million in unrealized
losses as of October 31, 2019.
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Valuation of Portfolio Securities
Pursuant to the requirements of the 1940 Act and in accordance with the
Accounting Standards Codification ("ASC"), Fair Value Measurements and
Disclosures ("ASC 820"), we value our portfolio securities at their current
market values or, if market quotations are not readily available, at their
estimates of fair values. Because our portfolio company investments generally do
not have readily ascertainable market values, we record these investments at
fair value in accordance with our Valuation Procedures adopted by the Board of
Directors, which are consistent with ASC 820. As permitted by the SEC, the
Board of Directors has delegated the responsibility of making fair value
determinations to its Valuation Committee, subject to the Board of Directors'
supervision and pursuant to our Valuation Procedures. Our Board of Directors
may also hire independent consultants to review our Valuation Procedures or to
conduct an independent valuation of one or more of our portfolio investments.
In this regard, the Company has engaged an independent valuation firm to perform
valuation services for certain portfolio debt investments.
Pursuant to our Valuation Procedures, the Valuation Committee (which is
comprised of three Independent Directors) determines fair values of portfolio
company investments on a quarterly basis (or more frequently, if deemed
appropriate under the circumstances). In doing so, the Committee considers the
recommendations of TTG Advisers and input and reviews by third party consultants
retained to support the Company's valuation process. The Company has also
adopted other enhanced processes related to valuations of controlled/affiliated
portfolio companies. Any changes in valuation are recorded in the consolidated
statements of operations as "Net unrealized appreciation (depreciation) on
investments."
Currently, our NAV per share is calculated and published on a quarterly basis.
The Company calculates our NAV per share by subtracting all liabilities from the
total value of our portfolio securities and other assets and dividing the result
by the total number of outstanding shares of our common stock on the date of
valuation. Fair values of foreign investments reflect exchange rates, as
applicable, in effect on the last business day of the quarter end. Exchange
rates fluctuate on a daily basis, sometimes significantly. Exchange rate
fluctuations following the most recent fiscal year end are not reflected in the
valuations reported in this Annual Report. See Item 1A Risk Factor,
"Investments in foreign debt or equity may involve significant risks in addition
to the risks inherent in U.S. investments."
At October 31, 2019, approximately 92.6% of total assets represented investments
in portfolio companies recorded at fair value ("Fair Value Investments").
Under most circumstances, at the time of acquisition, Fair Value Investments are
carried at cost (absent the existence of conditions warranting, in management's
and the Valuation Committee's view, a different initial value). During the
period that an investment is held by the Company, its original cost may cease to
approximate fair value as the result of market and investment specific factors.
No pre-determined formula can be applied to determine fair value. Rather, the
Valuation Committee analyzes fair value measurements based on the value at which
the securities of the portfolio company could be sold in an orderly disposition
over a reasonable period of time between willing parties, other than in a forced
or liquidation sale. The liquidity event whereby the Company ultimately exits
an investment is generally the sale, the merger, or the recapitalization of a
portfolio company or by a public offering of its securities.
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Valuation Methodology
There is no one methodology to determine fair value and, in fact, for any
portfolio security, fair value may be expressed as a range of values, from which
the Company derives a single estimate of fair value. To determine the fair
value of a portfolio security, the Valuation Committee analyzes the portfolio
company's financial results and projections, publicly traded comparable
companies when available, comparable private transactions when available,
precedent transactions in the market when available, third-party real estate and
asset appraisals if appropriate and available, discounted cash flow analysis, if
appropriate, as well as other factors. The Company generally requires, where
practicable, Portfolio Companies to provide annual audited and more regular
unaudited financial statements, and/or annual projections for the upcoming
fiscal year.
The fair value of our portfolio securities is inherently subjective. Because of
the inherent uncertainty of fair valuation of portfolio securities and escrow
receivables that do not have readily ascertainable market values, our estimate
of fair value may significantly differ from the value that would have been used
had a ready market existed for the securities. Such values also do not reflect
brokers' fees or other selling costs, which might become payable on disposition
of such investments.
ASC 820 provides a framework for measuring the fair value of assets and
liabilities and provides guidance regarding a fair value hierarchy, which
prioritizes information used to measure value. In determining fair value, the
Valuation Committee primarily uses the level 3 inputs referenced in ASC 820.
ASC 820 defines fair value in terms of the price that would be received upon the
sale of an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. The price used to measure
the fair value is not adjusted for transaction costs while the cost basis of our
investments may include initial transaction costs. Under ASC 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. The principal market is the market in
which the reporting entity would sell or transfer the asset with the greatest
volume and level of activity for the asset to which the reporting entity has
access to as of the measurement date. If no market for the asset exists or if
the reporting entity does not have access to the principal market, the reporting
entity should use a hypothetical market.
Our investments are carried at fair value in accordance with ASC 820.
Unrestricted minority-owned publicly traded securities for which market
quotations are readily available are valued at the closing market quote on the
valuation date and majority-owned publicly traded securities and other privately
held securities are valued as determined in good faith by the Valuation
Committee of the Board of Directors. For legally or contractually restricted
securities of companies that are publicly traded, the value is based on the
closing market quote on the valuation date minus a discount for the
restriction. At October 31, 2019, we did not own restricted or unrestricted
securities of any publicly traded company in which we have a majority-owned
interest, but did own two securities in which we have a minority interest.
If a security is publicly traded, the fair value is generally equal to the
market value based on the closing price on the principal exchange on which the
security is primarily traded, unless the security is restricted and in such a
case, a discount is applied for the restriction.
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For equity securities of Portfolio Companies, the Valuation Committee estimates
the fair value based on market and/or income approach with value then attributed
to equity or equity like securities using the enterprise value waterfall
("Enterprise Value Waterfall") valuation methodology. Under the Enterprise
Value Waterfall valuation methodology, the Valuation Committee estimates the
enterprise fair value of the portfolio company and then waterfalls the
enterprise value over the portfolio company's securities in order of their
preference relative to one another. To assess the enterprise value of the
portfolio company, the Valuation Committee weighs some or all of the traditional
market valuation methods and factors based on the individual circumstances of
the portfolio company in order to estimate the enterprise value. The
methodologies for performing assets may be based on, among other things:
valuations of comparable public companies, recent sales of private and public
comparable companies, discounting the forecasted cash flows of the portfolio
company, third party valuations of the portfolio company, considering offers
from third parties to buy the company, estimating the value to potential
strategic buyers and considering the value of recent investments in the equity
securities of the portfolio company, and third-party asset and real estate
appraisals. For non-performing assets, the Valuation Committee may estimate the
liquidation or collateral value of the portfolio company's assets. The
Valuation Committee also takes into account historical and anticipated financial
results.
The Company does not utilize hedge accounting and instead, when applicable,
marks its derivatives to market on the Company's consolidated statement of
operations.
In assessing enterprise value, the Valuation Committee considers the mergers and
acquisitions ("M&A") market as the principal market in which the Company would
sell its investments in portfolio companies under circumstances where the
Company has the ability to control or gain control of the board of directors of
the portfolio company ("Control Companies"). This approach is consistent with
the principal market that the Company would use for its portfolio companies if
the Company has the ability to initiate a sale of the portfolio company as of
the measurement date, i.e., if it has the ability to control or gain control of
the board of directors of the portfolio company as of the measurement date. In
evaluating if the Company can control or gain control of a portfolio company as
of the measurement date, the Company takes into account its equity securities on
a fully diluted basis, as well as other factors.
For non-Control Companies, consistent with ASC 820, the Valuation Committee
considers a hypothetical secondary market as the principal market in which it
would sell investments in those companies. The Company also considers other
valuation methodologies such as the Option Pricing Method and liquidity
preferences when valuing minority equity positions of a portfolio company.
For loans and debt securities of non-Control Companies (for which the Valuation
Committee has identified the hypothetical secondary market as the principal
market), the Valuation Committee determines fair value based on the assumptions
that a hypothetical market participant would use to value the security in a
current hypothetical sale using a market yield ("Market Yield") valuation
methodology. In applying the Market Yield valuation methodology, the Valuation
Committee determines the fair value based on such factors as third party broker
quotes (if available) and market participant assumptions, including synthetic
credit ratings, estimated remaining life, current market yield and interest rate
spreads of similar securities as of the measurement date.
Estimates of average life are generally based on market data of the average life
of similar debt securities. However, if the Valuation Committee has information
available to it that the debt
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security is expected to be repaid in the near term, the Valuation Committee
would use an estimated life based on the expected repayment date.
The Valuation Committee determines fair value of loan and debt securities of
Control Companies based on the estimate of the enterprise value of the portfolio
company. To the extent the enterprise value exceeds the remaining principal
amount of the loan and all other debt securities of the company, the fair value
of such securities is generally estimated to be their cost. However, where the
enterprise value is less than the remaining principal amount of the loan and all
other debt securities, the Valuation Committee may discount the value of such
securities to reflect an impairment.
For the Company's or its subsidiary's investment in the PE Fund, for which an
indirect wholly-owned subsidiary of the Company serves as the general partner
(the "GP") of the PE Fund, the Valuation Committee relies on the GP's
determination of the fair value of the PE Fund which will be generally valued,
as a practical expedient, utilizing the net asset valuations provided by the GP,
which will be made: (i) no less frequently than quarterly as of the Company's
fiscal quarter end and (ii) with respect to the valuation of PE Fund investments
in portfolio companies, will be based on methodologies consistent with those set
forth in the Company's valuation procedures. In making its determinations, the
GP considers and generally relies on TTG Advisers' recommendations. The
determination of the net asset value of the Company's or its subsidiary's
investment in the PE Fund will follow the methodologies described for valuing
interests in private investment funds ("Investment Vehicles") described below.
Additionally, when both the Company and the PE Fund hold investments in the same
portfolio company, the GP's Fair Value determination shall be based on the
Valuation Committee's determination of the Fair Value of the Company's portfolio
security in that portfolio company.
As permitted under GAAP, the Company's interests in private investment funds are
generally valued, as a practical expedient, utilizing the net asset valuations
provided by management of the underlying Investment Vehicles, without
adjustment, unless TTG Advisers is aware of information indicating that a value
reported does not accurately reflect the value of the Investment Vehicle,
including any information showing that the valuation has not been calculated in
a manner consistent with GAAP. Net unrealized appreciation (depreciation) of
such investments is recorded based on the Company's proportionate share of the
aggregate amount of appreciation (depreciation) recorded by each underlying
Investment Vehicle. The Company's proportionate investment interest includes
its share of interest and dividend income and expense, and realized and
unrealized gains and losses on securities held by the underlying Investment
Vehicles, net of operating expenses and fees. Realized gains and losses on
distributions from Investment Vehicles are generally recognized on a first in,
first out basis.
The Company applies the practical expedient to interests in Investment Vehicles
on an investment by investment basis, and consistently with respect to the
Company's entire interest in an investment. The Company may adjust the
valuation obtained from an Investment Vehicle with a premium, discount or
reserve if it determines that the net asset value is not representative of fair
value.
If the Company intends to sell all or a portion of its interest in an Investment
Vehicle to a third-party in a privately negotiated transaction near the
valuation date, the Company will consider offers from third parties to buy the
interest in an Investment Vehicle in valuations, which may be discounted for
both probability of close and time.
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When the Company receives nominal cost warrants or free equity securities
("nominal cost equity") with a debt security, the Company typically allocates
its cost basis in the investment between debt securities and nominal cost equity
at the time of origination. If the Company is not reimbursed for investment or
transaction related costs at the time an investment is made, the Company
typically capitalizes those costs to the cost basis of the investment.
Interest income, adjusted for amortization of premium and accretion of discount
on a yield to maturity methodology, is recorded on an accrual basis to the
extent that such amounts are expected to be collected. Origination and/or
closing fees associated with investments in portfolio companies are accreted
into income over the respective terms of the applicable loans. Upon the
prepayment of a loan or debt security, any unamortized original issue discount
or market discount is recorded as interest income. Prepayment premiums are
recorded on loans when received as interest income. Dividend income, if any, is
recognized on an accrual basis on the ex-dividend date to the extent that the
Company expects to collect such amounts.
For loans, debt securities, and preferred securities with contractual
payment-in-kind interest or dividends, which represent contractual
interest/dividends accrued and added to the loan balance or liquidation
preference that generally becomes due at maturity, the Company will not ascribe
value to payment-in-kind interest/dividends, if the portfolio company valuation
indicates that the payment-in-kind interest is not collectible. However, the
Company may ascribe value to payment-in-kind interest if the health of the
portfolio company and the underlying securities are not in question. All
payment-in-kind interest that has been added to the principal balance or
capitalized is subject to ratification by the Valuation Committee. For interest
or deferred interest receivables purchased by the Company at a discount to their
outstanding amount, the Company amortizes the discount using the effective yield
method and records it as interest income over the life of the loan. The Company
will not ascribe value to the interest or deferred interest, if the Company has
determined that the interest is not collectible.
Escrows from the sale of a portfolio company are generally valued at an amount,
which may be expected to be received from the buyer under the escrow's various
conditions and discounted for both risk and time.
ASC 460, Guarantees, requires the Company to estimate the fair value of the
guarantee obligation at its inception and requires the Company to assess whether
a probable loss contingency exists in accordance with the requirements of ASC
450, Contingencies. The Valuation Committee typically will look at the pricing
of the security in which the guarantee provided support for the security and
compare it to the price of a similar or hypothetical security without guarantee
support. The difference in pricing will be discounted for time and risk over
the period in which the guarantee is expected to remain outstanding.
Investment Classification
We classify our investments by level of control. As defined in the 1940 Act,
"Control Investments" are investments in those companies that we are deemed to
"Control." "Affiliate Investments" are investments in those companies that are
"Affiliated Companies" of us, as defined in the 1940 Act, other than Control
Investments. "Non-Control/Non-Affiliate Investments" are those that are neither
Control Investments nor Affiliate Investments. Generally, under the 1940 Act,
we are deemed to control a company in which we have invested if we own 25% or
more of the voting securities of such company or have greater than 50%
representation on its board. We are
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deemed to be an affiliate of a company in which we have invested if we own 5% or
more and less than 25% of the voting securities of such company.
Investment Transactions and Related Operating Income
Investment transactions and related revenues and expenses are accounted for on
the trade date (the date the order to buy or sell is executed). The cost of
securities sold is determined on a first-in, first-out basis, unless otherwise
specified. Dividend income and distributions on investment securities is
recorded on the ex-dividend date. The tax characteristics of such distributions
received from our portfolio companies will be determined by whether or not the
distribution was made from the investment's current taxable earnings and profits
or accumulated taxable earnings and profits from prior years. Interest income,
which includes accretion of discount and amortization of premium, if applicable,
is recorded on the accrual basis to the extent that such amounts are expected to
be collected. Fee income includes fees for guarantees and services rendered by
the Company or its wholly-owned subsidiary to portfolio companies and other
third parties such as due diligence, structuring, transaction services,
monitoring services, and investment advisory services. Guaranty fees are
recognized as income over the related period of the guaranty. Due diligence,
structuring, and transaction services fees are generally recognized as income
when services are rendered or when the related transactions are completed.
Monitoring and investment advisory services fees are generally recognized as
income as the services are rendered. Any fee income determined to be loan
origination fees is recorded as income at the time that the investment is made
and any original issue discount and market discount are capitalized and then
amortized into income using the effective interest method. Upon the prepayment
of a loan or debt security, any unamortized original issue discount or market
discount is recorded as interest income. For investments with PIK interest and
dividends, we base income and dividend accrual on the valuation of the PIK notes
or securities received from the borrower. If the portfolio company indicates a
value of the PIK notes or securities that is not sufficient to cover the
contractual interest or dividend, we will not accrue interest or dividend income
on the notes or securities.
Cash Equivalents
For the purpose of the Consolidated Balance Sheets and Consolidated Statements
of Cash Flows, the Company considers all money market and all highly liquid
temporary cash investments purchased with an original maturity of less than
three months to be cash equivalents. The Company places its cash and cash
equivalents with financial institutions and cash held in bank accounts may
exceed the Federal Deposit Insurance Corporation ("FDIC") insured limit. As of
October 31, 2019, the Company had approximately $5.4 million in cash
equivalents, approximately $5.0 million in restricted cash equivalents and
approximately $1.3 million in cash totaling approximately $11.7 million. Of the
$1.3 million in cash and the $5.4 million in cash equivalents, approximately
$1.0 million and $99,000, respectively, was held by MVC Cayman. As of
October 31, 2018, the Company had approximately $783,000 in cash equivalents,
approximately $5.3 million in restricted cash and approximately $9.8 million in
cash totaling approximately $15.9 million. Of the $9.8 million in cash and
$783,000 in cash equivalents, approximately $1.0 million and $100,000,
respectively, was held by MVC Cayman.
Restricted Cash and Cash Equivalents
Cash and cash equivalent accounts that are not available to the Company for
day-to-day use and are legally restricted are classified as restricted cash and
cash equivalents. Restricted cash and cash
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equivalents are carried at cost, which approximates fair value. As of
October 31, 2018, there was a $300,000 letter of credit for RuMe provided by a
third party financial institution that MVC collateralized with cash, that was
classified as restricted cash on the Company's Consolidated Balance Sheets and
was not a commitment as of October 31, 2019. Also, as of October 31, 2018 and
October 31, 2019, the Company had restricted cash or cash equivalents of $5.0
million related to the compensating balance requirement for Credit Facility III
and Credit Facility IV, respectively.
Restricted Securities
The Company invests in privately-placed restricted securities that may be resold
in transactions exempt from registration or to the public if the securities are
registered. Disposal of these securities may involve time-consuming
negotiations and expense, and a prompt sale at an acceptable price may be
difficult.
Distributions to Shareholders
Distributions to shareholders are recorded on the ex-dividend date.
Income Taxes
It is the policy of the Company to meet the requirements for qualification as a
RIC under Subchapter M of the Code. As a RIC, the Company is not subject to
income tax to the extent that it distributes all of its investment company
taxable income and net realized capital gains for its taxable year. The Company
is also exempt from excise tax if it distributes at least 98% of its income and
98.2% of its capital gains during each calendar year.
Our consolidated operating subsidiary, MVCFS, is subject to federal and state
income tax. We use the liability method in accounting for income taxes.
Deferred tax assets and liabilities are recorded for temporary differences
between the tax basis of assets and liabilities and their reported amounts in
the financial statements, using statutory tax rates in effect for the year in
which the differences are expected to reverse. A valuation allowance is
provided against deferred tax assets when it is more likely than not that some
portion or all of the deferred tax asset will not be realized.
ASC 740, Income Taxes, provides guidance for how uncertain tax positions should
be recognized, measured, presented and disclosed in the financial statements.
ASC 740 requires the evaluation of tax positions taken or expected to be taken
in the course of preparing the Company's tax returns to determine whether the
tax positions are "more-likely-than-not" of being sustained by the applicable
tax authority. Tax positions deemed to meet a "more-likely-than-not" threshold
would be recorded as a tax benefit or expense in the current period. The Company
recognizes interest and penalties, if any, related to unrecognized tax benefits
as income tax expense in the consolidated statement of operations. During the
fiscal year ended October 31, 2019, the Company did not incur any interest or
penalties. Although we file federal and state tax returns, our major tax
jurisdiction is federal for the Company and MVCFS. The fiscal years 2015, 2016,
2017 and 2018 for the Company and MVCFS remain subject to examination by
federal, state and local tax authorities.
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