SIERRA INCOME CORPORATION The following discussion and analysis should be read in conjunction with our financial statements and related notes and other financial information appearing elsewhere in this annual report on Form 10-K. Except as otherwise specified, references to "we," "us," "our," or the "Company," refers toSierra Income Corporation . "SIC Advisors " or "Adviser" refers toSIC Advisors LLC , our investment adviser.SIC Advisors is a wholly owned subsidiary ofMedley LLC , which is controlled by Medley Management Inc., an asset management firm ("MDLY"), which in turn is controlled byMedley Group LLC , an entity wholly-owned by the senior professionals ofMedley LLC . "Medley" refers, collectively, to the activities and operations ofMedley Capital LLC ,Medley LLC , Medley Management Inc.,Medley Group LLC ,SIC Advisors , associated investment funds and their respective affiliates. Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements, which relate to future events or our performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties, including, but not limited to, statements as to:
• our future operating results;
• our business prospects and the prospects of our portfolio companies;
• changes in laws and regulations, changes in political, economic or industry
conditions, and changes in the interest rate environment or
other conditions affecting the financial and capital markets, including
with respect to changes resulting from or in response to, or potentially
even the absence of changes as a result of, the impact of the COVID-19
pandemic;
• risks associated with possible disruptions in our operations or the economy
generally including the current economic downturn as a result of the impact
of the COVID-19 pandemic;
• the risk that, if the current period of capital markets disruption and
instability continues for an extended period of time, that our stockholders
may not receive distributions, if any, or at historical levels and that a
portion of our distribution in the future may be a return of capital;
• the effect of investments that we expect to make;
• our contractual arrangements and relationships with third parties;
• actual and potential conflicts of interest with
affiliates;
• the dependence of our future success on the general economy and its effect
on the industries in which we invest;
• the ability of our portfolio companies to achieve their objectives;
• the use of borrowed money to finance a portion of our investments;
• the adequacy of our financing sources and working capital;• the timing of cash flows, if any, from the operations of our portfolio
companies;
• the ability of
monitor and administer our investments;
• the ability of
talented professionals;
• our ability to maintain our qualification as a RIC and as a BDC;
• the effect of changes in laws or regulations affecting our operations; and
• uncertainties associated with the impact from the COVID-19 pandemic,
including: its impact on the global and
the global and
outbreak in
economic impact of that outbreak; the effect of the COVID-19 pandemic on
our business prospects and the operational and financial performance of our
portfolio companies, including our and their ability to achieve their
respective objectives; the effect of the disruptions caused by the COVID-19
pandemic on our ability to continue to effectively manage our business and
our use of borrowed money to finance a portion of our investments
Such forward-looking statements may include statements preceded by, followed by
or that otherwise include the words "trend," "opportunity," "pipeline,"
"believe," "comfortable," "expect," "anticipate," "current," "intention,"
"estimate," "position," "assume," "potential," "outlook," "continue," "remain,"
"maintain," "sustain," "seek," "achieve," and similar expressions, or future or
conditional verbs such as "will," "would," "should," "could," "may," or similar
expressions. The forward-looking statements contained in this quarterly report
involve risks and uncertainties. Our actual results could differ materially from
those implied or expressed in the forward-looking statements for any reason,
including due to the factors set forth in "Risk Factors" in this quarterly
report on Form 10-Q and in Item 1A "Risk Factors" in Part 1 of our Annual Report
on Form 10-K for the fiscal year ended December 31, 2020 .
We have based the forward-looking statements included in this report on
information available to us on the date of this report, and we assume no
obligation to update any such forward-looking statements. Actual results could
differ materially from those anticipated in our forward-looking statements, and
future results could differ materially from historical performance. Although we
undertake no obligation to revise or update any forward-looking statements,
whether as a result of new information, future events or otherwise, you are
advised to consult any additional disclosures that we may make directly to you
or through reports that we have filed or in the future may file with the SEC ,
including quarterly reports on Form 10-Q, annual reports on Form 10-K, and
current reports on Form 8-K.
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Table of Contents Recent COVID-19 Developments OnMarch 11, 2020 , theWorld Health Organization declared the novel coronavirus ("COVID-19") as a pandemic, and, onMarch 13, 2020 ,the United States declared a national emergency with respect to COVID-19. The outbreak of COVID-19 has severely impacted global economic activity and caused significant volatility and negative pressure in financial markets. The global impact of the COVID-19 outbreak has been rapidly evolving and has led to, and for an unknown period of time will continue to lead to, disruptions in local, regional, national and global markets and economies affected thereby, includingthe United States . Even after the COVID-19 pandemic subsides, theU.S. economy and most other major global economies may continue to experience a recession, and we anticipate our business and operations could be materially adversely affected by a prolonged recession inthe United States and other major markets. We have been closely monitoring, and will continue to monitor, the COVID-19 pandemic and its impact on all aspects of our business, including how it will impact our portfolio companies, employees, due diligence and underwriting processes, and financial markets. In addition, as a result of the adverse effects of the COVID-19 pandemic and the related disruption and financial distress, certain portfolio companies may seek to modify their loans from us, which could reduce the amount or extend the time for payment of principal, reduce the rate or extend the time of payment of interest, and/or increase the amount of PIK interest we receive with respect to such investment, among other things. The effects of the COVID-19 pandemic have also impeded, and may continue to impede, the ability of certain of our portfolio companies to raise additional capital and/or pursue asset sales or otherwise execute strategic transactions, which could have a material adverse effect on the valuation of our investments in such companies. Portfolio companies operating in certain industries may be more susceptible to these risks than other portfolio companies in other industries in light of the effects of the COVID-19 pandemic. Given the rapid development and fluidity of this situation, we cannot estimate the long-term impact of COVID-19 on our business, future results of operations, financial position or cash flows at this time. Further, the operational and financial performance of the portfolio companies in which we make investments may be significantly impacted by COVID-19, which may in turn impact the valuation of our investments. We believe our portfolio companies have taken, and continue to take, immediate actions to effectively and efficiently respond to the challenges posed by COVID-19 and related orders imposed by state and local governments, including developing liquidity plans supported by internal cash reserves, and shareholder support. The extent to which our operations may be impacted by the COVID-19 pandemic will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including guidance fromU.S. and international authorities, including federal, state and local public health authorities. Furthermore, the impacts of a potential worsening of global economic conditions and the continued disruptions to and volatility in the financial markets remain unknown. COVID-19 presents material uncertainty and risks with respect to the underlying value of the Company's portfolio companies, the Company's business, financial condition, results of operations and cash flows, such as the potential negative impact to financing arrangements, increased costs of operations, changes in law and/or regulation, and uncertainty regarding government and regulatory policy. We have evaluated subsequent events fromJune 30, 2021 through the filing date of this quarterly report on Form 10-Q. However, as the discussion in this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations relates to the Company's financial statements for the quarterly period endedJune 30, 2021 , the analysis contained herein may not fully account for impacts relating to the COVID-19 pandemic. In that regard, for example, as ofJune 30, 2021 , the Company valued its portfolio investments in conformity withU.S. GAAP based on the facts and circumstances known by the Company at that time, or reasonably expected to be known at that time. Due to the overall volatility that the COVID-19 pandemic has caused during the time that followed ourJune 30, 2021 valuation, any valuations conducted now or in the future in conformity withU.S. GAAP could result in a lower fair value of our portfolio. The impact to our results going forward will depend to a large extent on future developments and new information that may emerge regarding the duration of COVID-19 and the actions taken by authorities and other entities to contain the coronavirus or treat its impact, all of which are beyond our control. Accordingly, the Company cannot predict the extent to which its financial condition and results of operations will be affected at this time.
Overview
We are an externally managed non-diversified closed-end management investment company that has elected to be treated as a BDC under the 1940 Act. We are externally managed bySIC Advisors , which is an investment adviser registered with theSEC under the Advisers Act.SIC Advisors is responsible for sourcing potential investments, conducting due diligence on prospective investments, analyzing investment opportunities, structuring investments and monitoring our portfolio on an ongoing basis. In addition, we have elected, and intend to qualify annually to be treated, forU.S. federal income tax purposes, as a RIC under Subchapter M of the Code. Under our Investment Advisory Agreement, we paySIC Advisors a base management fee as well as an incentive fee based on our investment performance. Also, under the Administration Agreement, we reimburse Medley for the allocable portion of overhead and other expenses incurred byMedley Capital LLC in performing its obligations under the Administration Agreement, including our allocable portion of the costs of compensation and related expenses of our Chief Compliance Officer, Chief Financial Officer and their respective staffs. We intend to meet our investment objective by primarily lending to, and investing in, the debt of privately ownedU.S. middle market companies, which we define as companies with annual revenue between$50 million and$1 billion . We intend to focus primarily on making investments in first lien senior secured debt, second lien secured debt, and to a lesser extent, subordinated debt, of middle market companies in a broad range of industries. We expect that the majority of our debt investments will bear interest at floating interest rates, but our portfolio may also include fixed-rate investments. We will originate transactions sourced throughSIC Advisors' existing network, and, to a lesser extent, expect to acquire debt securities through the secondary market. We may make equity investments in companies that we believe will generate appropriate risk adjusted returns, although we do not expect such investments to be a substantial portion of our portfolio. 2
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The level of our investment activity depends on many factors, including the amount of debt and equity capital available to prospective portfolio companies, the level of merger, acquisition and refinancing activity for such portfolio companies, the availability of credit to finance transactions, the general economic environment and the competitive environment for the types of investments we make. The precise timing of our investment activity will depend on the availability of investment opportunities that are consistent with our investment objectives and strategies. As a BDC, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in "qualifying assets," including securities of private or thinly traded publicU.S. companies, cash, cash equivalents,U.S. government securities and high-quality debt investments that mature in one year or less. In addition, we are only allowed to borrow money such that our asset coverage, as defined in the 1940 Act, equals at least 200% (or 150% if certain requirements under the 1940 Act are met) after such borrowing, with certain limited exceptions. To maintain our RIC tax treatment, we must meet specified source-of-income and asset diversification requirements. To be eligible for RIC tax treatment under Subchapter M forU.S. federal income tax purposes, we must distribute at least 90% of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, for the taxable year. Revenues We generate revenue in the form of interest on the debt securities that we hold and distributions and capital gains on other interests that we acquire in our portfolio companies. We expect that the senior debt we invest in will generally have stated terms of three to ten years and that the subordinated debt we invest in will generally have stated terms of five to ten years. Our senior and subordinated debt investments bear interest at a fixed or floating rate. Interest on debt securities is generally payable monthly, quarterly or semiannually. In addition, some of our investments provide for deferred interest payments or PIK interest. The principal amount of the debt securities and any accrued but unpaid interest generally will become due at the maturity date. In addition, we may generate revenue in the form of commitment and other fees in connection with transactions. OIDs and market discounts or premiums will be capitalized, and we will accrete or amortize such amounts as interest income. We will record prepayment premiums on loans and debt securities as fee income. Dividend income, if any, will be recognized on an accrual basis to the extent that we expect to collect such amounts.
Expenses
Our primary annual operating expenses consist of the payment of advisory fees and the reimbursement of expenses under our Investment Advisory Agreement withSIC Advisors and our Administration Agreement withMedley Capital LLC . We bear other expenses, which include, among other things:
• corporate, organizational and offering expenses relating to offerings of
our common stock, subject to limitations included in our Investment
Advisory Agreement;
• the cost of calculating our NAV, including the related fees and cost of
any third-party valuation services;
• the cost of effecting sales and repurchases of shares of our common
stock and other securities;
• fees payable to third parties relating to, or associated with,
monitoring our financial and legal affairs, making investments, and
valuing investments, including fees and expenses associated with
performing due diligence reviews of prospective investments;• interest payable on debt, if any, incurred to finance our investments;
• transfer agent and custodial fees;
• fees and expenses associated with marketing efforts subject to
limitations included in the Investment Advisory Agreement;
• federal and state registration fees and any stock exchange listing fees;
• federal, state and local taxes;
• independent directors' fees and expenses, including travel expenses;
• costs of director and stockholder meetings, proxy statements,
stockholders' reports and notices;
• costs of fidelity bonds, directors and officers/errors and omissions
liability insurance and other types of insurance;
• direct costs, including those relating to printing of stockholder
reports and advertising or sales materials, mailing, long distance
telephone and staff subject to limitations included in the Investment
Advisory Agreement;
• fees and expenses associated with independent audits and outside legal
costs, including compliance with the Sarbanes-Oxley Act of 2002, the
1940 Act and applicable federal and state securities laws;
• brokerage commissions for our investments;
• all other expenses incurred by us or
administering our investment portfolio, including expenses incurred by
Investment Advisory Agreement; and
• the reimbursement of the compensation of our Chief Financial Officer and
Chief Compliance Officer and their respective staffs, whose compensation
is paid by
reimbursement amount is annually approved by our independent director
committee and subject to the limitations included in our Administration
Agreement.
Administrative Services
We reimburse Medley Capital LLC for the administrative expenses necessary for
its performance of services to us. However, such reimbursement is made at an
amount equal to the lower of Medley Capital LLC's actual costs or the amount
that we would be required to pay for comparable administrative services in the
same geographic location. Also, such costs will be reasonably allocated to us on
the basis of assets, revenues, time records or other reasonable methods. We will
not reimburse Medley Capital LLC for any services for which it receives a
separate fee or for rent, depreciation, utilities, capital equipment or other
administrative items allocated to a controlling person of Medley Capital LLC .
On April 23, 2021 , the Company entered into the Expense Limitation Agreement
with Medley Capital LLC , the Company's administrator, pursuant to which, Medley
Capital LLC agreed that the amount of expenses payable and reimbursable by the
Company under the Administration Agreement will be capped at $2.2 million for
the fiscal year ending December 31, 2021 . For the avoidance of doubt, other than
the cap contemplated by the Expense Limitation Agreement, the Expense Limitation
Agreement does not amend the allocation of costs and expenses that are payable
or reimbursable by the Company under the Administration Agreement. Following the
quarter ending December 31, 2021 , unless otherwise extended by the Company and
Medley Capital LLC , the Expense Limitation Agreement will terminate and the
original terms of the Administration Agreement will be in full force and effect.
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Portfolio and Investment Activity
The following table shows the amortized cost and the fair value of our
investment portfolio as of
Amortized Cost Percentage Fair Value Percentage
Senior secured first lien term loans $ 391,803,346 56.5 % $ 340,020,040 53.9 %
Senior secured second lien term loans 89,818,435 13.0 88,498,230 14.0
Subordinated notes 60,457,435 8.7 54,568,511 8.6
Sierra Senior Loan Strategy JV I LLC 110,050,000 15.9 85,775,721 13.6
Equity/warrants 41,107,263 5.9 62,484,225 9.9
Total $ 693,236,479 100.0 % $ 631,346,727 100.0 %
As of June 30, 2021 , our income-bearing investment portfolio, which
represented 86.7% of our total portfolio, had a weighted average yield based
upon the cost of our investment portfolio of 7.8%, and 2.3% of our
income-bearing portfolio bore interest based on fixed rates, while 97.7% of our
income-bearing portfolio bore interest at floating rates, such as LIBOR.
As of June 30, 2021 , the Company held loans it has made directly to 68 investee
companies with aggregate principal amounts of $575.7 million . As of December 31,
2020 , the Company held loans it has made directly to 67 investee companies with
aggregate principal amounts of $541.1 million . During the three and six months
ended June 30, 2021 , the Company made 10 and 36 loans to investee companies,
respectively, with aggregate principal amounts of $43.3 million and $81.8
million , respectively. During the three and six months ended June 30, 2020 , the
Company made 19 and 31 loans to investee companies, respectively, with aggregate
principal amounts of $33.2 million and $68.3 million , respectively.
The following table shows the amortized cost and the fair value of our
investment portfolio as of
Amortized Cost Percentage Fair Value Percentage
Senior secured first lien term loans $ 369,385,810 52.7 % $ 315,490,601 52.3 %
Senior secured first lien notes 8,473,750 1.2 8,548,755 1.4
Senior secured second lien term loans 103,081,287 14.7 93,794,917 15.5
Subordinated notes 65,561,840 9.4 50,039,500 8.3
Sierra Senior Loan Strategy JV I LLC 110,050,000 15.7 81,788,964 13.5
Equity/warrants 44,451,252 6.3 54,323,743 9.0
Total $ 701,003,939 100.0 % $ 603,986,480 100.0 %
As of December 31, 2020 , our income-bearing investment portfolio, which
represented 87.2% of our total portfolio, had a weighted average yield based
upon the cost of our investment portfolio of approximately 8.0%, and 3.5% of our
income-bearing portfolio bore interest based on fixed rates, while 96.5% of our
income-bearing portfolio bore interest at floating rates, such as LIBOR.
The following table shows weighted average current yield to maturity based on
fair value as of
June 30, 2021 December 31, 2020
Weighted Weighted
Average Average
Percentage Current Percentage Current
of Total Yield for Total of Total Yield for Total
Investments Investments(1) Investments Investments(1)
Senior secured
first lien term
loans 53.9 % 8.5 % 52.7 % 9.3 %
Senior secured
first lien
notes - - 1.2 11.0 %
Senior secured
second lien
term loans 14.0 11.1 % 14.7 10.9 %
Subordinated
notes 8.6 10.2 % 9.4 8.8 %
Sierra Senior
Loan Strategy
JV I LLC 13.6 8.4 % 15.7 9.0 %
Equity/warrants 9.9 12.5 % 6.3 6.0 %
Total 100.0 % 9.1 % 100.0 % 9.5 %
(1) The weighted average current yield for total investments does not represent
the total return to our stockholders.
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The following table shows the portfolio composition by industry classification
based on fair value as of
Industry Classification Amortized Cost Percentage Fair Value Percentage
Multi-Sector Holdings $ 169,631,708 24.5 % $ 140,344,232 22.2 %
High Tech Industries 88,071,141 12.7 88,996,742 14.1
Services: Business 67,002,170 9.7 66,688,199 10.6
Healthcare & Pharmaceuticals 59,028,667 8.5 48,320,180 7.6
Construction & Building 49,492,098 7.1 46,427,176 7.3
Consumer Goods: Durable 20,137,444 2.9 32,699,525 5.2
Aerospace & Defense 34,388,965 5.0 31,921,162 5.0
Banking, Finance, Insurance & Real Estate 18,509,706 2.7 27,403,505 4.3
Automotive 27,866,568 4.0 26,424,424 4.2
Hotel, Gaming & Leisure 36,945,037 5.3 24,765,792 3.9
Environmental Industries 12,031,568 1.7 21,568,052 3.4
Containers, Packaging & Glass 16,931,649 2.4 16,950,627 2.7
Services: Consumer 9,704,227 1.4 9,937,562 1.6
Chemicals, Plastics & Rubber 10,047,621 1.5 9,275,302 1.5
Forest Products & Paper 6,395,222 0.9 8,100,597 1.3
Media: Diversified & Production 15,412,995 2.2 7,531,034 1.2
Transportation: Cargo 6,448,180 0.9 6,451,966 1.0
Transportation: Consumer 6,853,763 1.0 5,425,489 0.9
Metals & Mining 3,545,379 0.5 3,545,421 0.6
Retail 9,793,881 1.4 2,976,677 0.5
Capital Equipment 2,459,249 0.4 2,454,024 0.4
Energy: Oil & Gas 20,813,748 3.0 1,707,715 0.3
Wholesale 1,682,536 0.3 1,389,202 0.2
Beverage & Food 42,957 0.0 42,122 0.0
Total $ 693,236,479 100.0 % $ 631,346,727 100.0 %
The following table shows the portfolio composition by industry classification
based on fair value as of
Industry Classification Amortized Cost Percentage Fair Value Percentage
Multi-Sector Holdings $ 174,660,001 24.9 % $ 131,792,864 21.8 %
Services: Business 79,260,551 11.3 73,716,395 12.2
High Tech Industries 75,519,344 10.8 71,792,022 11.9
Healthcare & Pharmaceuticals 68,599,968 9.8 58,275,198 9.6
Consumer Goods: Durable 32,045,028 4.6 41,016,292 6.8
Construction & Building 42,928,750 6.1 38,356,358 6.4
Banking, Finance, Insurance & Real Estate 27,848,664 4.0 37,620,161 6.2
Aerospace & Defense 33,558,896 4.8 29,723,725 4.9
Hotel, Gaming & Leisure 36,326,705 5.2 24,013,769 4.0
Automotive 18,886,756 2.7 17,404,476 2.9
Containers, Packaging & Glass 15,206,840 2.2 15,120,424 2.5
Environmental Industries 5,041,430 0.7 10,052,691 1.7
Services: Consumer 9,700,000 1.4 9,725,000 1.6
Chemicals, Plastics & Rubber 10,060,861 1.4 9,063,498 1.5
Forest Products & Paper 6,477,887 0.9 7,770,704 1.3
Media: Diversified & Production 15,474,145 2.2 6,780,000 1.1
Transportation: Cargo 6,877,294 1.0 6,770,781 1.1
Transportation: Consumer 7,975,416 1.1 6,068,082 1.0
Metals & Mining 3,492,436 0.5 3,492,479 0.6
Energy: Oil & Gas 20,868,832 3.0 2,625,018 0.4
Wholesale 2,212,919 0.3 1,746,044 0.3
Retail 7,934,347 1.1 1,012,358 0.2
Beverage & Food 46,869 0.0 48,141 0.0
Total $ 701,003,939 100.0 % $ 603,986,480 100.0 %
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SIC Advisors regularly assesses the risk profile of our portfolio investments and rates each of them based on the categories set forth below, which we refer to asSIC Advisors' investment credit rating. Investment credit ratings are assigned to each of the investments in our portfolio that are directly held by the Company, but exclude any off-balance sheet interests of the Company: Investment Credit Rating Definition 1 Investments that are performing above expectations.
2 Investments that are performing within expectations, with risks that are
neutral or favorable compared to risks at the time of origination or
purchase. All new loans are rated '2'.
3 Investments that are performing below expectations and that require closer
monitoring, but where no loss of interest, dividend or principal is
expected. Companies rated '3' may be out of compliance with financial
covenants, however, loan payments are generally not past due.
4 Investments that are performing below expectations and for which risk has
increased materially since origination or purchase. Some loss of interest
or dividend is expected, but no loss of principal. In addition to the
borrower being generally out of compliance with debt covenants, loan
payments may be past due (but generally not more than 180 days past due).
5 Investments that are performing substantially below expectations and whose
risks have increased substantially since origination or purchase. Most or
all of the debt covenants are out of compliance and payments are
substantially delinquent. Some loss of principal is expected.
The following table shows the distribution of our investment portfolio, not
including cash and cash equivalents, on the 1 to 5 investment credit rating
scale at fair value as of
June 30, 2021 December 31, 2020
Investment Investments at Investments at
Credit Rating Fair Value Percentage Fair Value Percentage
1 $ 73,108,650 11.7 % $ 51,481,987 8.5 %
2 409,818,847 64.9 410,310,087 67.9
3 116,910,784 18.5 110,668,216 18.3
4 21,884,519 3.5 13,500,546 2.3
5 9,623,927 1.5 18,025,644 3.0
Total $ 631,346,727 100.0 % $ 603,986,480 100.0 %
The COVID-19 pandemic has impacted our investment ratings as of June 30, 2021 ,
causing downgrades of certain portfolio companies. As the COVID-19 pandemic
continues to evolve, we are continuing to maintain close communications with our
portfolio companies to proactively assess and manage potential risks across our
investment portfolio. We have also increased oversight and analysis of credits
in vulnerable industries in an attempt to improve loan performance and reduce
credit risk.
--------------------------------------------------------------------------------Results of Operations
The following table shows operating results for the three and six months endedJune 30, 2021 and 2020: For the Three Months Ended For the Six Months Ended June 30, June 30, 2021 2020 2021 2020
Total investment income
9,183,784 26,467,117 16,916,669 36,820,128
Income Tax Expense 685,309 - 1,938,320 -
Net investment
income/(loss) 5,112,469 (14,767,663 ) 8,051,228 (13,943,863 )
Net realized gain/(loss)
from investments (4,173,319 ) (8,265,767 ) (4,102,524 ) (8,048,288 )
Net change in unrealized
appreciation/(depreciation)
on investments 20,105,791 32,004,115 35,126,515 (88,519,105 )
Change in provision for
deferred taxes on
unrealized gain on
investments (2,632,090 ) (293,783 ) (1,824,121 ) (52,848 )
Net increase/(decrease) in
net assets resulting from
operations $ 18,412,851 $ 8,676,902 $ 37,251,098 $ (110,564,104 )
Investment Income
Total investment income increased $3,282,108 , or 28.1%, to $14,981,562 for the
three months ended June 30, 2021 , compared to $11,699,454 for the three months
ended June 30, 2020 . Total investment income consisted primarily of portfolio
interest and dividends, which increased $3,319,077 , or 29.5%, to $14,561,572 for
the three months ended June 30, 2021 , compared to $11,242,495 for the three
months ended June 30, 2020 . This increase was primarily attributable to an
increase in dividend income from certain portfolio investments.
Total investment income increased $4,029,952 , or 17.6%, to $26,906,217 for the
six months ended June 30, 2021 , compared to $22,876,265 for the six months ended
June 30, 2020 . Total investment income consisted primarily of portfolio interest
and dividends, which increased $5,057,569 , or 24.0%, to $26,123,802 for the six
months ended June 30, 2021 , compared to $21,066,233 for the six months ended
June 30, 2020 . This increase was primarily attributable to an increase
in dividend income from certain portfolio investments.
As of June 30, 2021 , certain investments in eleven portfolio companies were on
non-accrual status with a combined cost of $81,560,703 , or 11.8% of the cost of
the Company's portfolio, and a combined fair value of $31,438,283 or 5.0% of the
fair value of the Company's portfolio. As of June 30, 2020 , certain investments
in sixteen portfolio companies were on non-accrual status with a combined cost
of $135,486,131 , or 17.1% of the cost of the Company's portfolio, and a combined
fair value of $32,257,556 , or 5.5% of the fair value of the Company's portfolio.
As of June 30, 2020 , certain investments in one portfolio company were on
partial non-accrual status with a cost of $793,067 , or 0.1% of the cost of the
Company's portfolio, and a fair value of $634,384 , or 0.1% of the fair value of
the Company's portfolio.
Fee income increased $96,789 , or 30.9%, to $409,724 for the three months ended
June 30, 2021 , compared to $312,935 for the three months ended June 30, 2020 ,
primarily due to an increase in fees associated with loan originations and loan
amendments. Fee income increased $331,849 , or 76.4%, to $766,482 for the six
months ended June 30, 2021 , compared to $434,633 for the six months ended June
30, 2020 , primarily due to an increase in fees associated with loan originations
and loan amendments.
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Table of Contents Operating Expenses The following table shows operating expenses for the three and six months endedJune 30, 2021 and 2020: For the Three Months Ended For the Six Months Ended June 30, June 30, 2021 2020 2021 2020 Base management fees$ 3,025,363 $ 2,944,745 $ 6,091,760 $ 6,196,196 Interest and financing expenses 1,397,723 3,454,940 3,084,782 7,742,603 General and administrative expenses 2,238,942 8,307,229 3,850,569 10,278,197 Administrator expenses 582,279 669,025 1,225,899 1,390,657 Offering costs 5,156 1,914 5,156 5,157 Professional fees 1,934,321 11,089,264 2,658,503 11,207,318 Total expenses$ 9,183,784 $ 26,467,117 $ 16,916,669 $ 36,820,128 Total expenses decreased$17,283,333 , or 65.3%, to$9,183,784 for the three months endedJune 30, 2021 , as compared to$26,467,117 for the three months endedJune 30, 2020 , primarily due to a decrease in interest and financing expenses and a decrease in general and administrative expenses and professional fees related to the one-time expense of deferred transaction costs. Total expenses decreased$19,903,459 , or 54.1%, to$16,916,669 for the six months endedJune 30, 2021 , as compared to$36,820,128 for the six months endedJune 30, 2020 , primarily due to a decrease in interest and financing expenses and a decrease in general and administrative expenses and professional fees related to the one-time expense of deferred transaction costs. Base management fees increased$80,618 , or 2.7%, to$3,025,363 for the three months endedJune 30, 2021 , as compared to$2,944,745 for the three months endedJune 30, 2020 , primarily due to an increase in our gross assets. Base management fees decreased$104,436 , or 1.7%, to$6,091,760 for the six months endedJune 30, 2021 , as compared to$6,196,196 for the six months endedJune 30, 2020 , primarily due to a decrease in our gross assets. Interest and financing expenses decreased$2,057,217 , or 59.5%, to$1,397,723 for the three months endedJune 30, 2021 , as compared to$3,454,940 for the three months endedJune 30, 2020 , primarily due to the wind-down and termination of the ING Credit Facility (as defined below) fromMay 2020 throughJuly 2020 , as well as the repayment of$55,800,000 of the outstanding balance of its Alpine Credit Facility. Interest and financing expenses decreased$2,057,217 , or 59.5%, to$1,397,723 for the six months endedJune 30, 2021 , as compared to$3,454,940 for the six months endedJune 30, 2020 , primarily due to the wind-down and termination of the ING Credit Facility (as defined below) fromMay 2020 throughJuly 2020 , as well as the repayment of$55,800,000 of the outstanding balance of its Alpine Credit Facility. General and administrative expenses decreased$6,068,287 , or 73.0%, to$2,238,942 for the three months endedJune 30, 2021 , as compared to$8,307,229 for the three months endedJune 30, 2020 , primarily due to a decrease in expenses related to the expensing of previously deferred transaction costs related to the termination of the previously contemplated mergers. General and administrative expenses decreased$6,427,628 , or 62.5%, to$3,850,569 for the six months endedJune 30, 2021 , as compared to$10,278,197 for the six months endedJune 30, 2020 , primarily due to a decrease in expenses related to the expensing of previously deferred transaction costs related to the termination of the previously contemplated mergers. Professional fees decreased$9,154,943 or 82.6% to$1,934,321 for the three months endedJune 30, 2021 , as compared to$11,089,264 for the three months endedJune 30, 2020 , primarily due to a decrease in expenses related to the expensing of previously deferred transaction costs related to the termination of the previously announced merger transaction. Professional fees decreased$8,548,815 or 76.3% to$2,658,503 for the six months endedJune 30, 2021 , as compared to$11,207,318 for the six months endedJune 30, 2020 , primarily due to a decrease in expenses related to the expensing of previously deferred transaction costs related to the termination of the previously announced merger transaction.
Net Realized Gains/Losses on Investments
We measure realized gains or losses by the difference between the net proceeds from the disposition and the amortized cost basis of an investment, without regard to unrealized gains or losses previously recognized. For the three and six months endedJune 30, 2021 , we recognized net realized loss on investments of$4,173,319 and$4,102,524 primarily due to the sale of investments. For the three and six months endedJune 30, 2020 , we recognized net realized loss on investments of$8,265,767 and$8,048,288 primarily due to the sale of investments.
Net Unrealized Appreciation/Depreciation on Investments
Net change in unrealized appreciation/depreciation on investments reflects the net change in the fair value of our investments including the provision for deferred taxes. For the three and six months endedJune 30, 2021 , we recorded a net change in unrealized appreciation, net of tax, of$17,473,701 and$33,302,394 respectively. The unrealized appreciation for the three and six months endedJune 30, 2021 resulted from positive market and credit-related adjustments. For the three and six months endedJune 30, 2020 , we recorded a net change in unrealized depreciation, net of tax, of$31,710,332 and$88,571,953 respectively. The unrealized depreciation was, in part, due to negative credit-related adjustments that caused a reduction in fair value of certain watch-list securities and portfolio investments on non-accrual status. In part, the net change in unrealized depreciation reflected widening credit spreads as market participants expected a higher yield on similar investments given the significant market volatility generated by the COVID-19 pandemic and, to some extent, other factors such as specific industry concerns, uncertainty about the duration of business shutdowns and near-term liquidity needs of certain of our portfolio investments.
Changes in Net Assets from Operations
For the three and six months endedJune 30, 2021 , we recorded a net increase in net assets resulting from operations of$18,412,851 and$37,251,098 , respectively. Based on 102,380,357 and 102,575,026 weighted average common shares outstanding for the three and six months endedJune 30, 2021 , our per share net increase in net assets resulting from operations was$0.18 and$0.36 respectively. For the three and six months endedJune 30, 2020 , we recorded a net increase in net assets resulting from operations of$8,676,902 and a net decrease in in net assets resulting from operations of$110,564,104 Based on 102,856,314 and 102,785,734 weighted average common shares outstanding for the three and six months endedJune 30, 2020 , our per share net increase in net assets resulting from operations was$0.08 and our per share net decrease in net assets resulting from operations was$1.08 .
Financial Condition, Liquidity and Capital Resources
As a BDC, we distribute substantially all of our net income to our stockholders
and have an ongoing need to raise additional capital for investment purposes. To
fund growth, we have a number of alternatives available to increase capital,
including increasing debt, and funding from operational cash flow.
Our liquidity and capital resources historically have been generated primarily
from the net proceeds of our public offering of common stock, use of our credit
facilities.
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As ofJune 30, 2021 andDecember 31, 2020 , we had$54.1 million and$65.3 million , respectively, in cash and cash equivalents. In the future, we may generate cash from future offerings of securities, future borrowings and cash flows from operations, including interest earned from the temporary investment of cash inU.S. government securities and other high-quality debt investments that mature in one year or less. Our primary use of funds is to make investments in our targeted asset classes, cash distributions to our stockholders, and other general corporate purposes. In order to satisfy the Code requirements applicable to us as a RIC, we intend to distribute to our stockholders substantially all of our taxable income, but we may also elect to periodically spillover certain excess undistributed taxable income from one tax year into the next tax year. In addition, as a BDC, we generally are required to meet a coverage ratio of total assets to total senior securities, which include borrowings and any preferred stock we may issue in the future, of at least 200% (or 150% if certain requirements under the 1940 Act are met) at the time of the borrowing or issuance of preferred stock. This requirement limits the amount that we may borrow. The following table shows our net borrowings as ofJune 30, 2021 andDecember 31, 2020 : June 30, 2021 December 31, 2020 Total Balance Unused Total Balance Unused Commitment Outstanding Commitment Commitment Outstanding Commitment Alpine Credit Facility 124,200,000 124,200,000 - 180,000,000 145,000,000 35,000,000 Total before deferred financing costs 124,200,000 124,200,000 - 180,000,000 145,000,000 35,000,000 Unamortized deferred financing costs - - - - (659,266 ) - Total borrowings outstanding, net of deferred financing costs$ 124,200,000 $ 124,200,000 $ -$ 180,000,000 $ 144,340,734 $ 35,000,000 ING Credit Facility OnAugust 12, 2016 , the Company amended its existing senior secured syndicated revolving credit facility (the "ING Credit Facility" as amended from time to time as described below) pursuant to a Senior Secured Revolving Credit Agreement (the "Revolving Credit Agreement" as amended from time to time as described below) with certain lenders party thereto from time to time andING Capital LLC , as administrative agent. The ING Credit Facility was secured by substantially all of the Company's assets, subject to certain exclusions as further set forth in an Amended and Restated Guarantee, Pledge and Security Agreement (the "Security Agreement") entered into in connection with the Revolving Credit Agreement, among the Company, the subsidiary guarantors party thereto,ING Capital LLC , as Administrative Agent, each Financial Agent and Designated Indebtedness Holder party thereto andING Capital LLC , as Collateral Agent. The ING Credit Facility also included usual and customary representations, covenants and events of default for senior secured revolving credit facilities of this nature. OnMay 15, 2020 , the Company entered into Amendment No. 4 to the Revolving Credit Agreement to among other things, (i) shorten the maturity date fromMarch 31, 2021 toSeptember 30, 2020 , (ii) accelerate the amortization of the Revolving Credit Agreement, and (iii) provide for the prepayment of the outstanding loans under the Revolving Credit Agreement in an aggregate principal amount of not less than$20 million . OnJuly 22, 2020 , the Company paid all remaining outstanding obligations under the Revolving Credit Agreement. OnJuly 31, 2020 (the "Termination Date"), the Company terminated the commitments on the Credit Agreement. The Company was also required to pay a commitment fee to the lenders based on the daily unused portion of the aggregate commitments under the ING Credit Facility. The commitment fee was (i) 1.50% if the used portion of the aggregate commitments is less than or equal to 40%, (ii) 0.75% if the used portion of the aggregate commitments is greater than 40% and less than or equal to 65% or (iii) 0.50% if the used portion of the aggregate commitments is greater than 65%. The ING Credit Facility provided that the Company may use the proceeds of theING Credit Facility for general corporate purposes, including making investments in accordance with the Company's investment objective and strategy. Borrowings under the Revolving Credit Agreement were subject to, among other things, a minimum borrowing base. Substantially all of the Company's assets were pledged as collateral under the Revolving Credit Agreement. The ING Credit Facility required the Company to, among other things (i) make representations and warranties regarding the collateral as well the Company's business and operations, (ii) agree to certain indemnification obligations, and (iii) agree to comply with various affirmative and negative covenants. The documents for the Revolving Credit Agreement also included default provisions, such as the failure to make timely payments under the Revolving Credit Agreement, the occurrence of a change in control, and the failure by the Company to materially perform under the operative agreements governing the Revolving Credit Agreement, which, if not complied with, could have accelerated repayment under the Revolving Credit Agreement, thereby materially and adversely affecting the Company's liquidity, financial condition and results of operations. In connection with the security interest established under the Security Agreement, the Company,ING Capital LLC , in its capacity as collateral agent, andState Street Bank and Trust Company , in its capacity as the Company's custodian, entered into a control agreement dated as ofDecember 4, 2013 , in order to, among other things, perfect the security interest granted pursuant to the Security Agreement in, and provide for control over, the related collateral. As a result of the termination of the Revolving Credit Agreement, the Security Agreement was terminated effective as of the Termination Date.
Alpine Credit Facility
OnSeptember 29, 2017 , the Company's wholly-owned, special purpose financing subsidiary, Alpine, amended its existing revolving credit facility (the "Alpine Credit Facility") pursuant to an Amended and Restated Loan Agreement (the "Loan Agreement") withJPMorgan Chase Bank, National Association ("JPMorgan"), as administrative agent and lender, the Financing Providers from time to time party thereto,SIC Advisors , as the portfolio manager, and the Collateral Administrator, Collateral Agent and Securities Intermediary party thereto. The Loan Agreement was amended to, among other things, (i) extend the reinvestment period untilDecember 29, 2020 , (ii) extend the scheduled termination date untilMarch 29, 2022 , (iii) decrease the applicable margin for advances to 2.85% per annum and (iv) increase the compliance condition for net advances to 55% of net asset value. Alpine's obligations to JPMorgan under the Alpine Credit Facility are secured by a first priority security interest in a significant portion of the assets of Alpine, including its portfolio of loans. The obligations of Alpine under the Alpine Credit Facility are non-recourse to the Company. OnNovember 18, 2020 , Alpine entered into Amendment No.1 to the Loan Agreement to, among other things, (i) extend the reinvestment period fromDecember 29, 2020 toMay 18, 2021 , (ii) increase the applicable margin for advances from 2.85% to 3.10% per annum, (iii) reduce the amount of maximum borrowings in an aggregate principal amount from$300,000,000 to$180,000,000 on a committed basis, (iv) require the Company to maintain a minimum a cash balance of$20,000,000 in Alpine, and (v) decrease the compliance condition for net advances from 55% to 52.5% of net asset value. The maturity date under the Loan Agreement did not change and therefore any amounts borrowed, as well as all accrued and unpaid interest thereunder, will be due and payable onMarch 29, 2022 . In connection with the Amendment, the Company repaid$35,000,000 of the outstanding balance under the Loan Agreement onNovember 18, 2020 , reducing the outstanding balance from$180,000,000 to$145,000,000 . The Alpine Credit Facility ended its reinvestment period onMay 18, 2021 and has entered its amortization period. As ofJune 30, 2021 andDecember 31, 2020 , Alpine's borrowings under the Alpine Credit Facility totaled$124,200,000 and$145,000,000 , respectively, and were recorded as part of revolving credit facilities payable on our Consolidated Statements of Assets and Liabilities. 8
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The Alpine Credit Facility provided for borrowings in an aggregate principal amount up to$180,000,000 on a committed basis. Borrowings outstanding under the Alpine Credit Facility are subject to compliance with a NAV coverage ratio with respect to the current value of Alpine's portfolio and various portfolio criteria must be satisfied. Pricing under the Alpine Credit Facility for each one month calculation period is based on LIBOR for an interest period of one month, plus a spread of 3.10% per annum. If LIBOR is unavailable, pricing will be determined at the prime rate offered by JPMorgan or the federal funds effective rate, plus a spread of 3.10% per annum. Interest is payable monthly in arrears. Borrowings of Alpine are considered borrowings of the Company for purposes of complying with the asset coverage requirements under the 1940 Act, applicable to BDCs. Pursuant to a Sale and Contribution Agreement entered into between the Company and Alpine (the "Sale Agreement") in connection with the Alpine Credit Facility, the Company may sell loans or contribute cash or loans to Alpine from time to time and will retain a residual interest in any assets contributed through its ownership of Alpine or will receive fair market value for any assets sold to Alpine. In certain circumstances the Company may be required to repurchase certain loans sold to Alpine. In addition to the acquisition of loans pursuant to the Sale Agreement, Alpine may purchase additional assets from various sources. Alpine has appointedSIC Advisors to manage its portfolio of assets pursuant to the terms of a Portfolio Management Agreement betweenSIC Advisors and Alpine. As ofJune 30, 2021 the carrying amount of the Company's borrowings under the Alpine Credit Facility approximated the fair value of the Company's debt obligation. The fair value of the Company's debt obligation is determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Company's borrowings under the Alpine Credit Facility is estimated based upon market interest rates of the Company's borrowings or entities with similar credit risk, adjusted for nonperformance risk, if any. As ofJune 30, 2021 and 2020, the Alpine Credit Facility would be deemed to be Level 3, as defined in Note 4. Contractual Obligations
The following table shows our payment obligations for repayment of debt, which
total our contractual obligations at
Payment Due By Period
Less than More than
Total 1 Year 1 - 3 Years 3 - 5 Years 5 Years
Alpine Credit Facility $ 124,200,000 $ 124,200,000 $ - $ - $ -
Total Contractual Obligations $ 124,200,000 $ 124,200,000 $ - $ - $ -
We have entered into certain contracts under which we have material future
commitments. On April 5, 2012 , we entered into the Investment Advisory Agreement
with SIC Advisors in accordance with the 1940 Act. The Investment Advisory
Agreement became effective as of April 17, 2012 , the date that we met the
minimum offering requirement. Pursuant to the 1940 Act, the initial term of the
Investment Advisory Agreement was for two years from its effective date, with
one-year renewals subject to approval by our board of directors, a majority of
whom must be independent directors. Most recently, on April 15, 2021 , the board
of directors approved the renewal of the Investment Advisory Agreement for an
additional one-year term, which will expire on April 17, 2022 . SIC Advisors
serves as our investment adviser in accordance with the terms of the Investment
Advisory Agreement. Payments under our Investment Advisory Agreement in each
reporting period consist of (i) a management fee equal to a percentage of the
value of our gross assets and (ii) an incentive fee based on our performance.
On April 5, 2012 , we entered into the Administration Agreement with Medley
Capital LLC with an initial term of two years, pursuant to which Medley Capital
LLC furnishes us with administrative services necessary to conduct our
day-to-day operations. The Administration Agreement became effective as of April
17, 2012 , the date that we met the minimum offering requirement. Pursuant to its
terms, and unless earlier terminated as described below, the Administration
Agreement will remain in effect from year-to-year if approved annually by a
majority of our directors who are not "interested persons" (as defined in
Section 2(a)(19) of the 1940 Act) of the Company or Medley Capital LLC , and
either the holders of a majority of our outstanding voting securities or our
board of directors. Most recently, on April 15, 2021 , the board of directors
approved the renewal of the Administration Agreement for an additional one-year
term, which will expire on April 17, 2022 . Medley Capital LLC is reimbursed for
administrative expenses it incurs on our behalf in performing its obligations.
Such costs are reasonably allocated to us on the basis of assets, revenues, time
records or other reasonable methods. We do not reimburse Medley Capital LLC for
any services for which it receives a separate fee or for rent, depreciation,
utilities, capital equipment or other administrative items allocated to a
controlling person of Medley Capital LLC .
If any of our contractual obligations discussed above are terminated, our costs
may increase under any new agreements that we enter into as replacements. We
would also likely incur expenses in locating alternative parties to provide the
services we expect to receive under the investment advisory agreement and
administration agreement. Any new investment advisory agreement would also be
subject to approval by our stockholders.
Off-Balance Sheet Arrangements
OnMarch 27, 2015 , the Company and GALIC entered into a limited liability company operating agreement to co-manage Sierra JV. All portfolio and other material decisions regarding Sierra JV must be submitted to Sierra JV's board of managers, which is comprised of four members, two of whom are selected by the Company and the other two are selected by GALIC. The Company has concluded that it does not operationally control Sierra JV. As the Company does not operationally control Sierra JV, it does not consolidate the operations of Sierra JV within the consolidated financial statements. As a practical expedient, the Company uses NAV to determine the fair value of its investment in Sierra JV; therefore, this investment has been presented as a reconciling item within the fair value hierarchy (see Note 4). 9
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As ofJune 30, 2021 andDecember 31, 2020 , Sierra JV had total capital commitments of$124.6 million , with the Company providing$110.1 million and GALIC providing$14.5 million . As ofJune 30, 2021 andDecember 31, 2020 , approximately$124.5 million was funded relating to these commitments of which$110.1 million was from the Company. The Company does not have the right to withdraw any of their respective capital commitment, unless in connection with a transfer of its membership interests. The Company may transfer full membership interests as long as it is approved by all members and transferred in a transaction exempt from the registration requirements of the Securities Act or applicable state securities laws.
Sierra JV entered into a Senior Secured Revolving Credit Facility Agreement, as
amended (the "JV Facility") with Deutsche Bank, AG,
On
On
OnOctober 28, 2019 , the JV Facility reinvestment period was further extended fromOctober 28, 2019 toMarch 31, 2020 and the interest rate was modified from bearing an interest rate of LIBOR (with a 0.00% floor) + 2.50% per annum to LIBOR (with a 0.00% floor) + 2.75% per annum. OnMarch 31, 2020 , the total commitment under the JV Facility was reduced to$240.0 million from$250.0 million and the reinvestment period was extended fromMarch 31, 2020 toApril 30, 2020 . OnApril 30, 2020 , the total commitment under the JV Facility was reduced to$200.0 million from$240.0 million , the reinvestment period was extended fromApril 30, 2020 toJuly 31, 2020 and the maturity date was extended toJuly 31, 2023 . OnJuly 29, 2020 , the total commitment under the JV Facility was reduced to$175.0 million from$200.0 million , the reinvestment period was extended fromJuly 31, 2020 toApril 30, 2021 and the maturity date was extended toApril 30, 2024 . Additionally, the interest rate was modified from bearing an interest rate of LIBOR (with a 0.00% floor) + 2.75% per annum to LIBOR (with a 0.50% floor) + 3.25% per annum.
The JV Facility ended its reinvestment period on
The JV Facility is secured substantially by all of Sierra JV's assets, subject
to certain exclusions set forth in the JV Facility. As of
The Company has determined that Sierra JV is an investment company under ASC 946, however in accordance with such guidance, the Company will generally not consolidate its investment in a company other than a wholly owned investment company subsidiary or a controlled operating company whose business consists of providing services to the Company. Accordingly, the Company does not consolidate its interest in Sierra JV. Distributions We have elected, and intend to qualify annually, to be treated forU.S. federal income tax purposes, as a RIC under Subchapter M of the Code. To maintain RIC tax treatment, we must, among others things, distribute at least 90% of our net ordinary income and net short-term capital gains in excess of net long-term capital losses, if any, to our stockholders. In order to avoid certainU.S. federal excise taxes imposed on RICs, we must distribute during each calendar year an amount at least equal to the sum of: (i) 98% of our ordinary income for the calendar year, (ii) 98.2% of our capital gains in excess of capital losses for the one-year period generally ending onOctober 31 of the calendar year (unless an election is made by us to use our taxable year) and (iii) any ordinary income and net capital gains for preceding years that were not distributed during such years and on which we paid noU.S. federal income tax. While we intend to distribute any income and capital gains in the manner necessary to minimize imposition of the 4%U.S. federal excise tax, sufficient amounts of our taxable income and capital gains may not be distributed to avoid entirely the imposition of the tax. In that event, we will be liable for the tax only on the amount by which we do not meet the foregoing distribution requirement. We currently intend to distribute net capital gains (i.e., net long-term capital gains in excess of net short-term capital losses), if any, at least annually out of the assets legally available for such distributions. However, we may decide in the future to retain such capital gains for investment and elect to treat such gains as deemed distributions to you. If this happens, you will be treated forU.S. federal income tax purposes as if you had received an actual distribution of the capital gains that we retain and reinvested the net after tax proceeds in us. In this situation, you would be eligible to claim a tax credit (or, in certain circumstances, a tax refund) equal to your allocable share of the tax we paid on the capital gains deemed distributed to you. We can offer no assurance that we will continue to achieve results that will permit the payment of any cash distributions and, if we issue senior securities, we may be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the terms of any of our borrowings. OnJuly 31, 2020 , our board of directors temporarily suspended the monthly distributions on the shares of the Company's common stock. OnOctober 22, 2020 , our board of directors determined to reinstate the monthly distributions on the shares of the Company's common stock. Any distributions to our stockholders paid by the Company is subject to our board of directors' discretion and applicable legal restrictions and take into account our results of operations, our general financial condition, general economic conditions, or other factors prohibit us from declaring a distribution. Any distributions to our stockholders will be declared out of assets legally available for distribution. From time to time, but not less than quarterly, we will review our accounts to determine whether distributions to our stockholders are appropriate. We have not established limits on the amount of funds we may use from available sources to make distributions. From the commencement of our offering throughSeptember 30, 2016 , a portion of our distributions were comprised in part of expense support payments made bySIC Advisors that were subject to repayment by us within three years of the date of such support payment. Our distributions may exceed our earnings, which we refer to as a return of capital. As a result, a portion of the distributions we make may represent a return of capital. Our use of the term "return of capital" merely means distributions in excess of our earnings and as such may constitute a return on your individual investments and does not mean a return on capital. Therefore stockholders are advised that they should be aware of the differences with our use of the term "return of capital" and "return on capital." 10
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The following table reflects the cash distributions per share that the Company has declared or paid to its stockholders during 2021 and 2020. Stockholders of record as of each respective record date were entitled to receive the distribution. Record Date Payment Date Amount per share
0.03500
March 30, 2020 March 31, 2020 0.03500
October 29, 2020 October 30, 2020 0.01000
November 27, 2020 November 30, 2020 0.01000
December 30, 2020 December 31, 2020 0.01000
January 28, 2021 January 29, 2021 0.01000
February 25, 2021 February 26, 2021 0.01000
March 30, 2021 March 31, 2021 0.01000
April 29, 2021 April 30, 2021 0.01000
May 28, 2021 May 31, 2021 0.01000
June 29, 2021 June 30, 2021 0.01000
We have adopted an "opt in" DRIP pursuant to which common stockholders may elect
to have the full amount of any cash distributions reinvested in additional
shares of our common stock. As a result, if we declare a cash distribution,
stockholders that have "opted in" to our DRIP will have their distribution
automatically reinvested in additional shares of our common stock rather than
receiving cash dividends. Stockholders who receive distributions in the form of
shares of common stock will be subject to the same federal, state and local tax
consequences as if they received cash distributions.
Each year a statement on Internal Revenue Service Form 1099-DIV (or such
successor form) identifying the source of the distribution (i.e., paid from
ordinary income, paid from net capital gain on the sale of securities, or a
return of capital) will be mailed to our stockholders. The tax basis of shares
must be reduced by the amount of any return of capital distributions, which will
result in an increase in the amount of any taxable gain (or a reduction in any
deductible loss) on the sale of shares.
Related Party Transactions
We have entered into an Investment Advisory Agreement withSIC Advisors in which our senior management holds an equity interest and are party to the Incentive Fee Waiver Agreement withSIC Advisors (as described and for periods set forth in "Management Fee"). Members of our senior management also serve as principals of other investment managers affiliated withSIC Advisors that do, and may in the future, manage investment funds, accounts or other investment vehicles with investment objectives similar to ours. We have entered into an Administration Agreement withMedley Capital LLC , pursuant to whichMedley Capital LLC furnishes us with administrative services necessary to conduct our day-to-day operations.Medley Capital LLC is reimbursed for administrative expenses it incurs on our behalf. We do not reimburseMedley Capital LLC for any services for which it receives a separate fee or for rent, depreciation, utilities, capital equipment or other administrative items allocated to a controlling person ofMedley Capital LLC .Medley Capital LLC is an affiliate ofSIC Advisors . We have entered into a license agreement withSIC Advisors under whichSIC Advisors has agreed to grant us a non-exclusive, royalty-free license to use the name "Sierra" for specified purposes in our business. Under the license agreement, we will have a right to use the "Sierra" name, subject to certain conditions, for so long asSIC Advisors or one of its affiliates remains our investment adviser. Other than with respect to this limited license, we will have no legal right to the "Sierra" name. In addition, we entered into the Expense Limitation Agreement withMedley Capital LLC (as described and for the period set forth in "Administrative Services").
Management Fee
We pay
The base management fee is calculated at an annual rate of 1.75% of our gross assets and is payable quarterly in arrears. The incentive fee consists of:
• An incentive fee on net investment income ("subordinated incentive fee
on income") is calculated and payable quarterly in arrears and is based
upon pre-incentive fee net investment income for the immediately
preceding quarter. No subordinated incentive fee on income is payable in
any calendar quarter in which pre-incentive fee net investment income
does not exceed a quarterly return to stockholders of 1.75% per quarter
on our net assets at the end of the immediately preceding fiscal
quarter, or the preferred quarterly return. All pre-incentive fee net
investment income, if any, that exceeds the preferred quarterly return,
but is less than or equal to 2.1875% of net assets at the end of theimmediately preceding fiscal quarter in any quarter, will be payable to
on income as the catch up. It is intended to provide an incentive fee of
20% on pre-incentive fee net investment income when pre-incentive fee
net investment income exceeds 2.1875% of net assets at the end of the
immediately preceding quarter in any quarter. For any quarter in which
our pre-incentive fee net investment income exceeds 2.1875% of netassets at the end of the immediately preceding quarter, the subordinated
incentive fee on income shall equal 20% of the amount of pre-incentive
fee net investment income, because the preferred return and catch up
will have been achieved.
• A capital gains incentive fee will be earned on realized investments and
shall be payable in arrears as of the end of each calendar year during
which the Investment Advisory Agreement is in effect. If the Investment
Advisory Agreement is terminated, the fee will become payable as of the
effective date of such termination. The capital gains incentive fee is
based on our realized capital gains on a cumulative basis frominception, computed net of all realized capital losses and unrealized
capital depreciation on a cumulative basis, which we refer to as "net
realized capital gains." The capital gains incentive fee equals 20% ofnet realized capital gains, less the aggregate amount of any previously
paid capital gains incentive fee.
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OnApril 23, 2021 , the Company entered into the Incentive Fee Waiver Agreement withSIC Advisors , pursuant to whichSIC Advisors agreed to waive (i) 50% of any incentive fee on income payable toSIC Advisors for any fiscal quarter during the period beginning with the fiscal quarter endingSeptember 30, 2021 and the fiscal quarter endingJune 30, 2022 , and (ii) 50% of any incentive fee on capital gains payable toSIC Advisors for the fiscal year endingDecember 31, 2021 . For the avoidance of doubt, the Incentive Fee Waiver Agreement does not amend the calculation of the incentive fees as set forth in the Investment Advisory Agreement. Other than the waiver contemplated by the Incentive Fee Waiver Agreement, the terms of the Investment Advisory Agreement will remain in full force and effect. Following (i) the fiscal quarter endingJune 30, 2022 with respect to the waiver granted bySIC Advisors on any incentive fee payable on income, and (ii) the fiscal year endingDecember 31, 2021 with respect to the waiver granted bySIC Advisors on any incentive fee payable on capital gains, unless otherwise extended by the Company andSIC Advisors , the Incentive Fee Waiver Agreement will terminate and the original terms of the Investment Advisory Agreement will be in full force and effect. Under the terms of the Investment Advisory Agreement,SIC Advisors bears all organizational and offering expenses on our behalf. SinceJune 2, 2014 , the date that we raised$300 million in gross proceeds in connection with the sale of shares of our common stock,SIC Advisors was no longer obligated to bear, pay or otherwise be responsible for any ongoing organizational and offering expenses on our behalf, and we were responsible for paying or otherwise incurring all such organizational and offering expenses. Pursuant to the terms of the Investment Advisory Agreement, we had agreed to reimburseSIC Advisors for any such organizational and offering expenses incurred bySIC Advisors not to exceed 1.25% of the gross subscriptions raised by us over the course of the offering period, which was initially scheduled to terminate two years from the initial offering date, unless extended. OnJuly 2, 2018 , the Company's board of directors determined to terminate the Company's offering effective as ofJuly 31, 2018 . Pursuant to the Investment Advisory Agreement,SIC Advisors implements the Company's business strategy on a day-to-day basis and performs certain services for the Company, subject to oversight by the Company's board of directors.SIC Advisors is responsible for, among other duties, determining investment criteria, sourcing, analyzing and executing investment transactions, asset sales, financings and performing asset management duties. Under the Investment Advisory Agreement, the Company has agreed to paySIC Advisors a management fee for investment advisory and management services consisting of a base management fee and an incentive fee. Critical Accounting Policies This discussion of our expected operating plans is based upon our expected consolidated financial statements, which will be prepared in accordance withU.S. generally accepted accounting principles ("GAAP"). The preparation of these consolidated financial statements will require our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ. In addition to the discussion below, we will describe our critical accounting policies in the notes to our future consolidated financial statements. Valuation of Investments We apply fair value accounting to all of its financial instruments in accordance with the 1940 Act and ASC Topic 820 - Fair Value Measurements and Disclosures ("ASC 820"). ASC 820 defines fair value, establishes a framework used to measure fair value and requires disclosures for fair value measurements. In accordance with ASC 820, we have categorized its financial instruments carried at fair value, based on the priority of the valuation technique, into a three-level fair value hierarchy as identified below and discussed in Note 4.
• Level 1 - Quoted prices are available in active markets for identical
investments as of the reporting date. Publicly listed equities and
publicly listed derivatives will be included in Level 1. In addition,
securities sold, but not yet purchased and call options will be included
in Level 1. We will not adjust the quoted price for these investments,
even in situations where we hold a large position and a sale could
reasonably affect the quoted price.
• Level 2 - Pricing inputs are other than quoted prices in active markets,
which are either directly or indirectly observable as of the reporting
date, and fair value is determined through the use of models or other
valuation methodologies. In certain cases, debt and equity securities
are valued on the basis of prices from an orderly transaction between
market participants provided by reputable dealers or pricing services.
In determining the value of a particular investment, pricing services
may use certain information with respect to transactions in such
investments, quotations from dealers, pricing matrices, market
transactions in comparable investments, and various relationships
between investments. Investments which are generally expected to beincluded in this category include corporate bonds and loans, convertible
debt indexed to publicly listed securities, and certain over-the-counter
derivatives.
• Level 3 - Pricing inputs are unobservable for the investment and include
situations where there is little, if any, market activity for the
investment. The inputs into the determination of fair value require
significant judgment or estimation. Investments that are expected to be
included in this category are our private portfolio companies.
Fair value is a market-based measure considered from the perspective of the
market participant who holds the financial instrument rather than an entity
specific measure. Therefore, when market assumptions are not readily available,
our own assumptions are set to reflect those that management believes market
participants would use in pricing the financial instrument at the measurement
date.
Investments for which market quotations are readily available are valued at such
market quotations, which are generally obtained from an independent pricing
service or multiple broker-dealers or market makers. We weight the use of
third-party broker quotes, if any, in determining fair value based on our
understanding of the level of actual transactions used by the broker to develop
the quote and whether the quote was an indicative price or binding offer.
However, debt investments with remaining maturities within 60 days that are not
credit impaired are valued at cost plus accreted discount, or minus amortized
premium, which approximates fair value. Investments for which market quotations
are not readily available are valued at fair value as determined by our board of
directors based upon input from management and third party valuation firms.
Because these investments are illiquid and because there may not be any directly
comparable companies whose financial instruments have observable market values,
these loans are valued using a fundamental valuation methodology, consistent
with traditional asset pricing standards, that is objective and consistently
applied across all loans and through time.
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We use third-party valuation firms to assist the board of directors in the valuation of its portfolio investments. The valuation reports generated by the third-party valuation firms consider the evaluation of financing and sale transactions with third parties, expected cash flows and market based information, including comparable transactions, performance multiples, and movement in yields of debt instruments, among other factors. Based on market data obtained from the third-party valuation firms, we use a combined market yield analysis and an enterprise model of valuation. In applying the market yield analysis, the value of our loans are determined based upon inputs such as the coupon rate, current market yield, interest rate spreads of similar securities, the stated value of the loan, and the length to maturity. In applying the enterprise model, we use a waterfall analysis which takes into account the specific capital structure of the borrower and the related seniority of the instruments within the borrower's capital structure into consideration. To estimate the enterprise value of the portfolio company, we weigh some or all of the traditional market valuation methods and factors based on the individual circumstances of the portfolio company in order to estimate the enterprise value. The methodologies for performing investments 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. For non-performing investments, we may estimate the liquidation or collateral value of the portfolio company's assets and liabilities using an expected recovery model. We may estimate the fair value of warrants based on a model such as the Black-Scholes model or simulation models or a combination thereof.
We undertake a multi-step valuation process each quarter when valuing investments for which market quotations are not readily available, as described below:
• our quarterly valuation process begins with each portfolio investment
being initially valued by the valuation professionals;
• conclusions are then documented and discussed with senior management;
and
an independent valuation firm engaged by our board of directors prepares
an independent valuation report for approximately one third of the
portfolio investments each quarter on a rotating quarterly basis on non
• fiscal year-end quarters, such that each of these investments will be
valued by an independent valuation firm at least twice per annum when
combined with the fiscal year-end review of all the investments by
independent valuation firms.
In addition, all of our investments are subject to the following valuation process:
• management reviews preliminary valuations and their own independent
assessment;
• the audit committee of our board of directors reviews the preliminary
valuations of senior management and independent valuation firms; and
• our board of directors discusses valuations and determines the fair
value of each investment in our portfolio in good faith based on the
input of SIC Advisors , the respective independent valuation firms and
the audit committee.
Due to the inherent uncertainty of determining the fair value of investments
that do not have a readily available market value, the fair value of our
investments may differ significantly from the values that would have been used
had a readily available market value existed for such investments, and the
differences could be material. In addition, changes in the market environment
(including the impact of COVID-19 on the financial market), portfolio company
performance, and other events may occur over the lives of the investments that
may cause the gains or losses ultimately realized on these investments to be
materially different than the valuations currently assigned.
Our investments in subordinated notes are carried at fair value, which is based
on a discounted cash flow model. The discounted cash flow model models both the
underlying collateral ("assets") and the liabilities of the CLO capital
structure. The discounted cash flow model uses a set of assumptions including
projected default rates, recovery rates, reinvestment rates and prepayment rates
in order to arrive at estimated cash flows of the assets. The discounted cash
flow model distributes the asset cash flows to the liability structure based on
the payment priorities and discounts them back using appropriate market discount
rates based on discount rates for comparable CLOs. The assumptions are based on
available market data as well as management estimates. Additional data is used
to validate the results from the discounted cash flow method, such as analysis
of relevant data observed in the CLO market, review of quotes, where available,
recent acquisitions and observable transactions in the subordinated notes, among
other factors.
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Table of Contents Revenue Recognition We record interest income on an accrual basis to the extent that we expect to collect such amounts. For loans and debt securities with contractual PIK interest, which represents contractual interest accrued and added to the principal balance, we generally will not accrue PIK interest for accounting purposes if the portfolio company valuation indicates that such PIK interest is not collectible. We do not accrue as a receivable interest on loans and debt securities or accounting purposes if we have reason to doubt our ability to collect such interest. Original issue discounts, market discounts, or premiums are accreted or amortized using the effective interest method as interest income. We record prepayment premiums on loans and debt securities as fee income. Dividend income, if any, is recognized on an accrual basis to the extent that we expect to collect such amount.
Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation
We measure net realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized. Payment-in-Kind Interest We have investments in our portfolio that contain a PIK interest provision. Any PIK interest is added to the principal balance of such investments and is recorded as income, if the portfolio company valuation indicates that such PIK interest is collectible. In order to maintain RIC tax treatment, substantially all of this income must be paid out to stockholders in the form of dividends, even if we have not collected any cash.
We have elected, and intend to qualify annually, to be treated forU.S. federal income tax purposes as a RIC under Subchapter M of the Code. As a RIC, we generally will not have to pay corporate-levelU.S. federal income taxes on any ordinary income or capital gains that we distribute to our stockholders from our tax earnings and profits. To obtain and maintain our RIC tax treatment, we must, among other things, meet specified source-of-income and asset diversification requirements and distribute annually at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. Recent Developments OnJuly 27, 2021 , our board of directors declared a series of monthly distributions for July, August andSeptember 2021 in the amount of$0.01 per share. Stockholders of record as of each respective monthly record date will be entitled to receive the distribution. Below are the details for each respective distribution: Record Date Payment Date Amount per share July 29, 2021 July 30, 2021 $ 0.01 August 30, 2021 August 31, 2021 0.01 September 29, 2021 September 30, 2021 0.01 As previously reported, onMarch 7, 2021 ,Medley LLC , the parent of the Company's investment adviser and administrator, commenced a voluntary case (the "Chapter 11 Case") under chapter 11 of title 11 of the United States Code in theUnited States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court "). The Chapter 11 Case is captioned In reMedley LLC , No, 21-10526 (KBO) (Bankr. D. Del.Mar. 7, 2021 ). In connection with the Chapter 11 Case, onAugust 11, 2021 the Company entered into a commitment letter (the "Commitment Letter") among the Company,Medley LLC ,Medley Capital LLC , andSIC Advisors , pursuant to which the Company has agreed to contribute$2.1 million , subject to certain conditions, to an employee compensation and retention plan (the "Compensation Plan") to be established byMedley Capital LLC . The Compensation Plan is an element of a Term Sheet datedJuly 21, 2021 (the "Term Sheet") filed byMedley LLC with theBankruptcy Court as Docket No. 276 in the Chapter 11 Case. Pursuant to the Commitment Letter, the Company's contribution is to be made in three equal installments of$700,000 inSeptember 2021 ,December 2021 , andJanuary 2022 , and the contributions are to be used solely to fund payments to employees ofMedley Capital LLC under the Compensation Plan. To the extent any such employee forfeits a compensation payment to which he or she would otherwise be entitled or is obligated to return a payment received, the Company is entitled to recoup the amount in its sole discretion. The Company's obligations under the Commitment Letter are subject to review and approval of definitive documents relating to the Compensation Plan, conditionally approved by theBankruptcy Court for purposes of solicitation of votes, in form and substance consistent with the Compensation Plan included as an exhibit to the Term Sheet. The Company may terminate the Commitment Letter by written notice toMedley LLC ,Medley Capital LLC , andSIC Advisors upon the occurrence of certain events, including, but not limited to, the entry by theBankruptcy Court of an order materially inconsistent with the Term Sheet; the failure by theBankruptcy Court to have entered an appropriate order byNovember 30, 2021 ; or the failure bySIC Advisors to comply with any covenant or agreement in the Investment Advisory Agreement datedApril 5, 2012 betweenSIC Advisors and the Company. 14
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