10-Q 1 triton172254_10q.htm FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2017

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION  

Washington, D.C. 20549

 

 

FORM 10-Q  

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended June 30, 2017

 

OR  

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from to

 

Commission File Number 814-00908

 

Triton Pacific Investment Corporation, Inc.

 (Exact name of registrant as specified in its charter)

Maryland 45-2460782

(State or other jurisdiction of 

incorporation or organization)

(I.R.S. Employer 

Identification No.)

 

6701 Center Drive West, Suite 1450  

Los Angeles, CA 90045 

(Address of principal executive offices)

 

(310) 943-4990 

(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

       
Large accelerated filer Accelerated filer
       
Non-accelerated filer ☒       (Do not check if a smaller reporting company) Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

As of August 14, 2017, the Registrant had 1,244,581.30 shares of Class A common stock, $0.001 par value, outstanding.

  

 

 

 

 

 

TABLE OF CONTENTS

 

Part I—Financial Information 3
   
Item 1: Financial Statements 3
   
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations 26
   
Item 3: Quantitative and Qualitative Disclosures About Market Risk 44
   
Item 4: Controls and Procedures 45
   
Part II—Other Information 45
   
Item 1: Legal Proceedings 45
   
Item 1A: Risk Factors 45
   
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 45
   
Item 3: Defaults Upon Senior Securities 45
   
Item 4: Mine Safety Disclosures 45
   
Item 5: Other Information 45
   
Item 6: Exhibits 46
   
SIGNATURES 47

 

2 

 

 

Part I—Financial Information

 

Item 1: Financial Statements

 

Triton Pacific Investment Corporation, Inc. 

CONSOLIDATED StatementS of Financial Position

 

   June 30
2017
(unaudited)
   December 31,
2016
 
ASSETS        
         
Affiliate Investments, at fair value (amortized cost - $1,916,389 and $1,896,901, respectively)  $598,916   $1,875,202 
Non-affiliate Investments, at fair value (amortized cost - $10,223,353 and $8,705,606, respectively)   10,223,864    8,728,971 
Cash   4,675,017    3,788,901 
Principal and interest receivable   32,720    19,305 
Prepaid expenses   6,579    46,052 
Reimbursement due from Adviser (see Note 4)   288,618    106,583 
           
TOTAL ASSETS  $15,825,714   $14,565,014 
           
LIABILITIES AND NET ASSETS          
           
LIABILITIES          
Payable for investments purchased  $738,750   $1,061,625 
Accounts payable and accrued liabilities   248,642    225,000 
Stockholder distributions payable   4,074    16,574 
Due to related parties (see Note 4)   10,551    33,113 
TOTAL LIABILITIES   1,002,017    1,336,312 
           
COMMITMENTS AND CONTINGENCIES (see Note 9)          
           
NET ASSETS          
Common stock, $0.001 par value, 75,000,000 shares authorized, 1,205,407.57 and 976,407.17 shares issued and outstanding respectively   1,205    976 
Capital in excess of par value   16,387,302    13,255,764 
Accumulated undistributed net realized gains       21,925 
Accumulated overdistributed net investment income   (247,848)   (51,629)
Accumulated unrealized appreciation (depreciation) on investments   (1,316,962)   1,666 
TOTAL NET ASSETS   14,823,697    13,228,702 
           
TOTAL LIABILITIES AND NET ASSETS  $15,825,714   $14,565,014 
           
Net asset value per share of common stock at period end  $12.30   $13.55 

 

The accompanying notes are an integral part of these statements.

  

3 

 

 

Triton Pacific Investment Corporation, Inc. 

CONSOLIDATED Statements of Operations 

THREE AND SIX MONTHS ENDED JUNE 30, 2017 AND 2016 

(Unaudited)

 

   Three months ended
June 30,
   Six months ended
June 30,
 
   2017   2016   2017   2016 
INVESTMENT INCOME                    
Interest from affiliate investments  $9,870   $9,296   $19,488   $18,453 
Interest from non-control/ non-affiliate investments   168,260    88,086    338,406    159,510 
Fee income from non-control/ non-affiliate investments   7,500        11,284    249 
                     
Total investment income   185,630    97,382    369,178    178,212 
                     
OPERATING EXPENSES                    
Management fees   82,793    53,179    162,695    96,333 
Capital gains incentive fees (see Notes 2 and 4)   (18,773)   14,910    (334)   20,344 
Administrator expense   71,213    81,170    142,977    163,492 
Professional fees   58,982    54,566    115,852    71,566 
Insurance expense   19,736    13,810    39,472    27,621 
Other operating expenses   4,678    4,208    10,074    5,916 
                     
Total operating expenses   218,629    221,843    470,736    385,272 
                     
Expense reimbursement and management fee offsets from Adviser       (206,933)   (80,847)   (364,928)
                     
Net expenses   218,629    14,910    389,889    20,344 
                     
Net investment (loss)/ income   (32,999)   82,472    (20,711)   157,868 
                     
REALIZED AND UNREALIZED GAIN/(LOSS)                    
Net realized gain on non-affiliated investments   51,950    (1,167)   64,565    (1,167)
Net increase (decrease) in unrealized appreciation on affiliate investments   (1,324,904)       (1,261,840)   53,879 
Net (decrease)/ increase in unrealized (depreciation)/ appreciation on non-control/ non-affiliate investments   (85,919)   74,549    (56,789)   47,843 
                     
Total net realized and unrealized gain (loss) on investments   (1,358,873)   73,382    (1,254,064)   100,555 
                     
NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS  $(1,391,872)  $155,854   $(1,274,775)  $258,423 
                     
PER SHARE INFORMATION - Basic and Diluted                    
Net increase (decrease) in net assets resulting from operations per share  $(1.21)  $0.20   $(1.18)  $0.38 
                     
Weighted average common shares outstanding - basic and diluted   1,147,150    763,860    1,082,365    685,847 

 

The accompanying notes are an integral part of these statements.

 

4 

 

 

Triton Pacific Investment Corporation, Inc. 

CONSOLIDATED StatementS of CHANGES IN NET ASSETS 

SIX MONTHS ended JUNE 30, 2017 AND 2016 

(Unaudited)

  

   Six months ended
June 30,
 
   2017   2016 
Operations        
Net investment income (loss)  $(20,711)  $157,868 
Net realized gain (loss) on investments   64,565    (1,167)
Net increase (decrease) in unrealized appreciation (depreciation) on investments   (1,318,629)   101,722 
Net increase (decrease) in net assets resulting from operations   (1,274,775)   258,423 
Stockholder distributions (see Note 5)          
Distributions from net investment income   (214,388)   (185,980)
Distributions from net realized gain on investments   (47,607)    
Net decrease in net assets resulting from stockholder distributions   (261,995)   (185,980)
Capital share transactions          
Issuance of common stock (see Note 3)   3,136,564    3,660,998 
Reinvestment of stockholder distributions (see Note 3)   139,098    99,893 
Repurchase of shares of common stock   (143,897)    
Net increase in net assets resulting from capital share transactions   3,131,765    3,760,891 
           
Total increase in net assets   1,594,995    3,833,334 
Net assets at beginning of period   13,228,702    7,326,653 
Net assets at end of period  $14,823,697   $11,159,987 
Accumulated overdistributed net investment income  $(247,848)  $(54,477)
Accumulated undistributed net realized gains  $   $1,025 

  

The accompanying notes are an integral part of these statements.

 

5 

 

 

Triton Pacific Investment Corporation, Inc. 

CONSOLIDATED Statements of CASH FLOWS 

SIX MONTHS ENDED JUNE 30, 2017 AND 2016 

(Unaudited)

 

   Six months ended
June 30,
 
   2017   2016 
CASH FLOWS FROM OPERATING ACTIVITIES          
Net (decrease)/ increase in net assets resulting from operations  $(1,274,775)  $258,423 
Adjustments to reconcile net (decrease)/ increase in net assets resulting from operations to net cash used by operating activities          
Purchases of investments   (4,049,500)   (1,743,500)
Proceeds from sales and repayments of investments   2,612,752    149,789 
Net realized gain (loss) from investments   (64,564)   1,167 
Net increase (decrease) in unrealized appreciation (depreciation) on investments   1,318,628    (101,722)
Accretion of discount   (16,435)   (7,315)
Net increase in paid-in-kind interest   (19,488)   (18,456)
Increases and decreases in assets and liabilities          
Principal and interest receivable   (13,415)   (13,886)
Prepaid expenses   39,473    27,621 
Reimbursement due from Adviser   (182,035)   (26,993)
Payable for investments purchased   (322,875)   336,000 
Accounts payable and accrued liabilities   23,642    68,000 
Due to related parties   (22,562)   8,136 
NET CASH USED BY OPERATING ACTIVITIES   (1,971,154)   (1,062,736)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Issuance of common stock   3,136,564    3,660,998 
Payments on repurchases of shares of common stock   (143,897)    
Stockholder distributions   (122,897)   (86,087)
Increases in distributions payable   (12,500)   3,198 
NET CASH PROVIDED BY FINANCING ACTIVITIES   2,857,270    3,578,109 
           
NET INCREASE IN CASH   886,116    2,515,373 
           
CASH - BEGINNING OF PERIOD  $3,788,901   $1,812,341 
           
CASH - END OF PERIOD  $4,675,017   $4,327,714 
           
Supplemental schedule of non-cash investing activities          
Reinvestment of stockholder distributions  $139,098   $99,893 

  

The accompanying notes are an integral part of these statements.

 

6 

 

 

TRITON PACIFIC INVESTMENT CORPORATION, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

AS OF JUNE 30, 2017

(UNAUDITED)

 

Portfolio Company  Footnotes  Industry  Rate (b)  Floor  Maturity Principal Amount/ Number of Shares  Amortized Cost(f)  Fair Value(c) 
Senior Secured Loans—First Lien—49.83%                            
Associated Asphalt Partners LLC     Transportation: Cargo  L+5.25% (6.48%)  1.23%  3/30/2024  500,000  $497,579  $508,125 
LSF9 Atlantis Holdings, LLC     Telecommunications  L+6.00% (7.06%)  1.06%  5/1/2023  500,000   495,058   505,730 
California Pizza Kitchen, Inc.     Beverage, Food & Tobacco  L+6.00% (7.30%)  1.30%  8/19/2022  347,375   344,385   347,882 
CareCentrix, Inc.     Healthcare & Pharmaceuticals  L+5.00% (6.30%)  1.30%  7/8/2021  196,500   192,935   197,237 
Coronado Group LLC     Metals & Mining  L+7.00% (8.30%)  1.30%  6/6/2023  500,000   485,123   491,250 
CRCI Holdings, Inc.     Business Services  L+5.50% (6.80%)  1.30%  8/31/2023  328,248   325,169   330,710 
Deluxe Entertainment Services Group, Inc.     Media: Diversified and Production  L+5.50% (6.62%)  1.12%  2/28/2020  345,462   337,088   345,680 
FHC Health Systems, Inc.     Healthcare & Pharmaceuticals  L+4.00% (5.23%)  1.23%  12/23/2021  122,187   121,435   114,398 
Flavors Holdings, Inc. Tranche B     Beverage, Food & Tobacco  L+5.75% (7.05%)  1.30%  4/3/2020  107,813   105,330   101,883 
GK Holdings, Inc.     Business Services  L+6.00% (7.30%)  1.30%  1/20/2021  121,875   121,312   117,914 
GTCR Valor Companies, Inc.     Business Services  L+6.00% (7.23%)  1.23%  6/16/2023  346,500   334,306   348,992 
IG Investments Holdings, LLC     Business Services  L+4.00% (5.30%)  1.30%  10/29/2021  346,412   344,934   349,985 
InfoGroup Inc.     Business Services  L+5.00% (6.15%)  1.15%  3/28/2023  498,750   493,951   498,750 
Jackson Hewitt, Inc.     Business Services  L+7.00% (8.17%)  1.17%  7/30/2020  192,000   189,379   184,320 
Moran Foods, LLC     Beverage, Food & Tobacco  L+6.00% (7.23%)  1.23%  12/5/2023  348,250   338,615   344,332 
Paradigm Acquisition Corp.     Healthcare & Pharmaceuticals  L+5.00% (6.21%)  1.21%  6/2/2022  122,500   121,001   122,768 
Polycom, Inc.     High Tech Industries  L+5.25% (6.48%)  1.23%  9/27/2023  310,304   297,798   314,669 
Pre-Paid Legal Services, Inc     Consumer Services  L+5.25% (6.50%)  1.25%  7/1/2019  320,191   319,473   323,092 
Raley’s     Beverage, Food & Tobacco  L+5.25% (6.48%)  1.23%  5/18/2022  290,895   290,895   293,076 
SITEL Worldwide Corporation     Business Services  L+5.50% (6.69%)  1.19%  9/20/2021  196,500   195,847   196,827 
Strike, LLC     Energy: Oil & Gas  L+8.00% (9.30%)  1.30%  11/30/2022  341,250   331,810   349,781 
TIBCO Software, Inc.     High Tech Industries  L+4.50% (5.73%)  1.23%  12/4/2020  122,193   120,628   123,022 
Travel Leaders Group, LLC     Hotel, Gaming & Leisure  L+5.25% (6.48%)  1.23%  1/25/2024  349,125   347,486   351,089 
TruGreen Limited Partnership     Consumer Services  L+5.50% (6.63%)  1.13%  4/13/2023  346,500   342,141   349,965 
Verdesian Life Sciences LLC     Wholesale Trade-Nondurable Goods  L+5.00% (6.17%)  1.17%  7/1/2020  208,335   207,061   175,522 
Total Senior Secured Loans—First Lien                 $7,409,164  $7,300,737  $7,386,999 
                             
Senior Secured Loans—Second Lien—19.14%                            
Flavors Holdings, Inc.     Beverage, Food & Tobacco  L+10.00% (11.30%)  1.30%  10/7/2021  125,000   121,978   92,969 
FullBeauty Brands Holding     High Tech Industries  L+9.00% (10.23%)  1.23%  10/13/2023  250,000   218,583   105,000 
GK Holdings, Inc.     Business Services  L+10.25% (11.55%)  1.30%  1/21/2022  125,000   123,377   120,000 
Inmar     Business Services  L+8.00% (9.17%)  1.17%  5/1/2025  500,000   492,629   496,500 
Neustar, Inc.     High Tech Industries  L+8.00% (9.00%)  1.00%  2/28/2025  750,000   738,750   761,250 
NPC International, Inc.     Beverage, Food & Tobacco  L+7.50 (8.72%)  1.22%  3/28/2025  500,000   497,656   507,500 
Oxbow Carbon LLC     Metals & Mining  L+7.00 (8.23%)  1.23%  1/19/2020  250,000   238,732   251,563 
Rocket Software, Inc.     Business Services  L+9.50% (10.80%)  1.30%  10/14/2024  500,000   490,910   502,083 
Total Senior Secured Loans—Second Lien                 $3,000,000  $2,922,616  $2,836,865 

 

The accompanying notes are an integral part of these statements.

 

7

 

  

Portfolio Company  Footnotes  Industry   Rate (b)  Floor   Maturity  Principal Amount/ Number of Shares  Amortized Cost(f)  Fair Value(c) 
Subordinated Convertible Debt—0.00%                               
Javlin Capital LLC Subordinated Convertible Note  (a) (e)  Specialty Finance   6.00%      3/31/2020   666,389   666,389    
Total Subordinated Convertible Debt                    $666,389  $666,389  $ 
                                
Equity/Other—4.04%                               
ACON IWP Investors I, L.L.C.  (a)  Healthcare & Pharmaceuticals               500,000   500,000   598,916 
Javlin Capital LLC Class C-2 Preferred Units  (a) (d) (e)  Specialty Finance               750,000   750,000    
Total Equity/Other                     1,250,000  $1,250,000  $598,916 
                                
TOTAL INVESTMENTS—73.01%                        $12,139,742  $10,822,780 
OTHER ASSETS IN EXCESS OF LIABILITIES—26.99%                         $4,000,917 
NET ASSETS - 100.0%                            $14,823,697 

 

 

(a)Affiliated investment as defined by the 1940 Act, whereby the Company owns between 5% and 25% of the portfolio company’s outstanding voting securities and the investments are not classified as controlled investments. Affiliated funds that are managed by an affiliate of Triton Pacific Adviser, LLC also hold investments in this security.  The aggregate fair value of non-controlled, affiliated investments at June 30, 2017 represented 4.04% of the Company’s net assets. Fair value as of December 31, 2016 along with transactions during the period ended June 30, 2017 in affiliated investments were as follows):

 

    Six months ended June 30, 2017    
Non-controlled, Affiliated Investments  Fair Value at December 31, 2016  Gross Additions
(Cost)*
  Gross Reductions (Cost)**  Fair Value at
June 30, 2017
  Net Realized
Gain (Loss)
  Interest & Dividends
Credited to Income
 
ACON IWP Investors I, L.L.C.  $691,072  $  $  $598,916  $  $ 
Javlin Capital, LLC, Convertible Note   646,901   19,488            19,488 
Javlin Capital, LLC, C-2 Preferred Units   537,229                
Total  $1,875,202  $19,488  $  $598,916  $  $19,488 

 

* Gross additions include increases in the cost basis of investments resulting from new portfolio investments, PIK interest, the amortization of unearned income, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company into this category from a different category.

** Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company out of this category into a different category.

(b)Certain variable rate securities in the Company’s portfolio bear interest at a rate determined by a publicly disclosed base rate spread. As of June 30, 2017, the three-month London Interbank Offered Rate, or LIBOR, was 1.29861%.

(c)Fair value and market value are determined by the Company’s board of directors (see Note 7.)

(d)Security held within TPJ Holdings, Inc., a wholly-owned subsidiary of the Company. See Note 2 for a dicussion on the basis of consolidation.

(e)The investment is not a qualifying asset under the Investment Company Act of 1940, as amended. A business development company may not acquire any asset other than a qualifying asset, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the business development company’s total assets. As of June 30, 2017, 100% of the Company’s total assets represented qualifying assets.

(f)See Note 5 for a discussion of the tax cost of the portfolio.

 

The accompanying notes are an integral part of these statements.

 

8

 

 

TRITON PACIFIC INVESTMENT CORPORATION, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

AS OF DECEMBER 31, 2016

 

Portfolio Company  Footnotes  Industry   Rate(b)  Base Rate Floor   Maturity   Principal Amount/ Number of Shares   Amortized Cost(f)   Fair Value(c) 
Senior Secured Loans—First Lien—51.11%                               
California Pizza Kitchen, Inc.     Beverage, Food & Tobacco   L+6.00% (7.00%)   1.0%  8/19/2022  $349,125  $345,842  $348,326 
CareCentrix, Inc.     Healthcare & Pharmaceuticals   L+5.00% (6.00%)   1.0%  7/8/2021   197,500   193,575   196,266 
CRCI Holdings, Inc.     Business Services   L+5.50% (6.50%)   1.0%  8/31/2023   349,125   345,794   349,851 
Curo Health Services Holdings, Inc.     Healthcare & Pharmaceuticals   L+5.50% (6.50%)   1.0%  2/7/2022   122,813   121,909   123,785 
Deluxe Entertainment Services Group, Inc.     Media: Diversified and Production   L+6.00% (7.00%)   1.0%  2/28/2020   350,000   340,080   347,375 
FHC Health Systems, Inc.     Healthcare & Pharmaceuticals   L+4.00% (5.00%)   1.0%  12/23/2021   122,812   121,970   119,742 
Flavors Holdings, Inc. Tranche B     Beverage, Food & Tobacco   L+5.75% (6.75%)   1.0%  4/3/2020   110,938   107,998   90,414 
GK Holdings, Inc.     Business Services   L+5.50% (6.50%)   1.0%  1/20/2021   122,500   121,847   121,888 
Global Healthcare Exchange, LLC     Healthcare & Pharmaceuticals   L+4.25% (5.25%)   1.0%  8/15/2022   148,132   148,140   149,583 
GTCR Valor Companies, Inc.     Business Services   L+6.00% (7.00%)   1.0%  6/16/2023   348,250   335,050   345,856 
IG Investments Holdings, LLC     Business Services   L+5.00% (6.00%)   1.0%  10/29/2021   348,187   346,539   351,146 
Imagine Print Solutions, LLC     Business Services   L+6.00% (7.00%)   1.0%  3/30/2022   248,125   244,986   252,467 
Jackson Hewitt, Inc.     Business Services   L+7.00% (8.00%)   1.0%  7/30/2020   196,000   193,020   189,385 
Mister Car Wash, Inc.     Automotive Repair, Services, and Parking   L+4.25% (5.25%)   1.0%  8/20/2021   121,875   121,036   122,459 
Moran Foods, LLC     Beverage, Food & Tobacco   L+6.00% (7.00%)   1.0%  12/5/2023   350,000   339,619   350,000 
Paradigm Acquisition Corp.     Healthcare & Pharmaceuticals   L+5.00% (6.00%)   1.0%  6/2/2022   123,125   121,537   122,560 
Polycom, Inc.     High Tech Industries   L+6.50% (7.50%)   1.0%  9/27/2023   338,479   324,979   341,441 
Pre-Paid Legal Services, Inc     Consumer Services   L+5.25% (6.25%)   1.0%  7/1/2019   350,000   349,125   351,750 
Raley’s     Beverage, Food & Tobacco   L+6.25% (7.25%)   1.0%  5/18/2022   295,823   295,823   299,151 
Ranpak Corp.     Paper and Allied Products   L+3.25% (4.25%)   1.0%  10/1/2021   114,506   114,297   115,294 
SITEL Worldwide Corporation     Business Services   L+5.50% (6.50%)   1.0%  9/20/2021   197,500   196,488   197,994 
SiteOne Landscape Supply LLC     Business Services   L+4.50% (5.50%)   1.0%  9/20/2021   347,379   344,506   350,094 
SolarWinds, Inc.     High Tech Industries   L+4.50% (5.50%)   1.0%  2/3/2023   248,750   236,913   252,237 
Strike, LLC     Energy: Oil & Gas   L+3.75% (10.75%)   7.0%  11/30/2022   350,000   339,692   346,500 
TIBCO Software, Inc.     High Tech Industries   L+5.50% (6.50%)   1.0%  12/4/2020   122,813   121,067   123,555 
TruGreen Limited Partnership     Consumer Services   L+5.50% (6.50%)   1.0%  4/13/2023   348,250   343,532   353,909 
Verdesian Life Sciences LLC     Wholesale Trade-Nondurable Goods   L+5.00% (6.00%)   1.0%  7/1/2020   221,546   220,054   198,285 
Vivid Seats Ltd.     Consumer Services   L+5.75% (6.75%)   1.0%  10/12/2022   250,000   245,197   250,000 
Total Senior Secured Loans—First Lien                    $6,793,553  $6,680,615  $6,761,313 
                                
Senior Secured Loans—Second Lien—14.87%                               
Cheddar’s Casual Café, Inc.     Retail   L+9.75% (10.75%)   1.0%  1/4/2023   750,000   712,500   712,500 
Flavors Holdings, Inc.     Beverage, Food & Tobacco   L+10.00% (11.00%)   1.0%  10/7/2021   125,000   121,619   75,000 
FullBeauty Brands Holding     High Tech Industries   L+9.00% (10.00%)   1.0%  10/13/2023   250,000   218,269   173,750 
GK Holdings, Inc.     Business Services   L+9.50% (10.50%)   1.0%  1/21/2022   125,000   123,197   126,250 
Oxbow Carbon LLC     Metals & Mining   L+7.00 (8.00%)   1.0%  1/19/2020   250,000   237,142   245,625 
Rocket Software, Inc.     Business Services   L+9.50% (10.50%)   1.0%  10/14/2024   500,000   490,281   508,595 
SCS Holdings I Inc.     High Tech Industries   L+9.50% (10.50%)   1.0%  10/13/2023   125,000   121,983   125,938 
Total Senior Secured Loans—Second Lien                    $2,125,000  $2,024,991  $1,967,658 
                                
Subordinated Convertible Debt—4.89%                               
Javlin Capital LLC Subordinated Convertible Note  (a) (e)  Specialty Finance   6.00%      3/31/2020   646,901   646,901   646,901 
Total Subordinated Convertible Debt                    $646,901  $646,901  $646,901 
                                
Equity/Other—9.29%                               
ACON IWP Investors I, L.L.C.  (a)  Healthcare & Pharmaceuticals               500,000   500,000   691,072 
Javlin Capital LLC Class C-2 Preferred Units  (a) (d) (e)  Specialty Finance               214,286   750,000   537,229 
Total Equity/Other                     714,286  $1,250,000  $1,228,301 
                                
TOTAL INVESTMENTS—80.16%                        $10,602,507  $10,604,173 
OTHER ASSETS IN EXCESS OF LIABILITIES—19.84%                            $2,624,529 
NET ASSETS - 100.00%                            $13,228,702 

 

 

(a)Affiliated investment as defined by the 1940 Act, whereby the Company owns between 5% and 25% of the portfolio company’s outstanding voting securities and the investments are not classified as controlled investments. Affiliated funds that are managed by an affiliate of Triton Pacific Adviser, LLC also hold investments in this security. The aggregate fair value of non-controlled, affiliated investments at December 31, 2016 represented 14.23% of the Company’s net assets. Fair value as of December 31, 2016 along with transactions during the period ended December 31, 2015 in affiliated investments were as follows:

   

      Year Ended December 31, 2016    
Non-controlled, Affiliated Investments  Fair Value at December 31, 2015  Gross Additions (Cost)*  Gross Reductions (Cost)**  Fair Value at December 31, 2016  Net Realized Gain (Loss)  Interest & Dividends Credited to Income 
ACON IWP Investors I, L.L.C.  $738,266  $  $  $691,072  $  $ 
Javlin Capital, LLC, Convertible Note   609,219   37,682      646,901      37,682 
Javlin Capital, LLC, C-2 Preferred Units   750,000         537,229       
Total  $2,097,485  $37,682  $  $1,875,202  $  $37,682 

 

* Gross additions include increases in the cost basis of investments resulting from new portfolio investments, PIK interest, the amortization of unearned income, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company into this category from a different category.

** Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company out of this category into a different category.

(b)The majority of the investments bear interest at a rate that may be determined by reference to London Interbank Offered Rate (“LIBOR” or “L”) or Prime Rate (“Prime” or “P”) which reset daily, monthly, quarterly, or semiannually. For each such investment, the Company has provided the spread over LIBOR or Prime and the current contractual interest rate in effect at December 31, 2016. Certain investments are subject to a LIBOR or Prime interest rate floor. As of December 31, 2016, the three-month London Interbank Offered Rate, or LIBOR, was 0.99789%.

(c)Fair value and market value are determined by the Company’s board of directors (see Note 7.)

(d)Security held within TPJ Holdings, Inc., a wholly-owned subsidiary of the Company. See Note 2 for a discussion on the basis of consolidation.

(e)The investment is not a qualifying asset under the Investment Company Act of 1940, as amended. A business development company may not acquire any asset other than a qualifying asset, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the business development company’s total assets. As of December 31, 2016, 91.87% of the Company’s total assets represented qualifying assets.

(f)See Note 5 for a discussion of the tax cost of the portfolio.

 

The accompanying notes are an integral part of these statements.

 

9

 

 

Triton Pacific Investment Corporation, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

 

NOTE 1 – DESCRIPTION OF BUSINESS

 

Triton Pacific Investment Corporation, Inc. (the “Company”), incorporated in Maryland on April 29, 2011, is publicly registered, non-traded fund focused on private equity, structured as a business development company, that primarily makes structured equity and debt investments in small to mid-sized private U.S. companies. Structured equity refers to derivative investment products, including convertible notes and warrants, designed to facilitate highly customized risk-return objectives. Pursuant to the Articles of Incorporation, the Company is authorized to issue 75,000,000 shares of common stock with a par value of $0.001 per share. Additionally, the Company is authorized to issue 25,000,000 shares of preferred stock with a par value of $0.001 per share. The Company is currently offering for sale a maximum of $300,000,000 of shares of common stock on a “best efforts” basis pursuant to a registration statement on Form N-2 filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the “Offering”). On June 25, 2014, the Company met its minimum offering requirement of $2,500,000 and released all shares held in escrow.

 

The Company invests either alone or together with other private equity sponsors. The Company is an externally managed, non-diversified closed-end investment company that has elected to be treated as a business development company, or BDC, under the Investment Company Act of 1940, or the Company Act. As a BDC, the Company is required to comply with certain regulatory requirements. The Company has elected to be treated for U.S. federal income tax purposes, and intends to annually qualify as a regulated investment company, or RIC, under Subchapter M of the Internal Revenue code of 1986, as amended, or the Code. The Company has one wholly-owned subsidiary through which it holds interest in a non-controlled, affiliated portfolio company. The consolidated financial statements include both the Company’s accounts and the accounts of its wholly-owned subsidiary. All significant intercompany transactions have been eliminated in consolidation. The Company’s consolidated subsidiary is subject to U.S. federal and state income taxes. No taxes were accrued or paid by the wholly-owned subsidiary for the three and six months ended June 30, 2017 and 2016.

 

Triton Pacific Adviser, LLC (“Adviser”) serves as the Investment Adviser and TFA Associates, LLC (“TFA”) serves as the Administrator. Each of these entities are affiliated with Triton Pacific Group, Inc., a private equity investment management firm, and its subsidiary Triton Pacific Capital Partners, LLC, a private equity investment fund management company, each focused on debt and equity investments for small to mid-sized private companies.

 

The Adviser was formed in Delaware as a private investment management firm and is registered as an investment adviser with the Securities and Exchange Commission (“SEC”) under the Investment Advisers Act of 1940, or the Advisers Act. The Adviser oversees the management of the Company’s activities and is responsible for making the investment decisions for the portfolio.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information, including accounting for investment companies under ASC Topic 946, and the rules and regulations of the Securities and Exchange Commission for interim financial statements. These financial statements reflect all adjustments and accruals of a normal recurring nature that, in the opinion of management, are necessarily indicative of results expected for any future period. These interim, unaudited financial statements and related notes should be read in conjunction with the financial statements and related notes included in the Company’s annual report on Form 10-K for the year ended December 31, 2016.

 

Management Estimates and Assumptions. The preparation of unaudited financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

10 
 

 

Cash. All cash balances are maintained with high credit quality financial institutions which are members of the Federal Deposit Insurance Corporation. The Company maintains cash balances that may exceed federally insured limits.

 

Valuation of Portfolio Investments. The Company determines the net asset value of its investment portfolio each quarter. Securities that are publicly-traded are valued at the reported closing price on the valuation date. Securities that are not publicly-traded are valued at fair value as determined in good faith by the Company’s board of directors. In connection with that determination, the Adviser provides the Company’s board of directors with portfolio company valuations which are based on relevant inputs which may include indicative dealer quotes, values of like securities, recent portfolio company financial statements and forecasts, and also may include valuations prepared by third-party valuation services.

 

Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosure, or ASC Topic 820, issued by the Financial Accounting Standards Board, clarifies the definition of fair value and requires companies to expand their disclosure about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. ASC Topic 820 defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 also establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, which includes inputs such as quoted prices for similar securities in active markets and quoted prices for identical securities where there is little or no activity in the market; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

 

With respect to investments for which market quotations are not readily available, the Company undertakes a multi-step valuation process each quarter, as described below:

 

  the Company’s quarterly valuation process begins with the Adviser’s management team providing a preliminary valuation of each portfolio company or investment to the Company’s board of directors, which valuation may be obtained from an independent valuation firm or Adviser, if applicable;
  preliminary valuation conclusions are then documented and discussed with the Company’s board of directors;
  the Company’s board of directors reviews the preliminary valuation and the Adviser’s management team, together with its independent valuation firm, if applicable, responds and supplements the preliminary valuation to reflect any comments provided by the board of directors; and
  the Company’s board of directors discusses valuations and determines the fair value of each investment in the Company’s portfolio in good faith based on various statistical and other factors, including the input and recommendation of the Adviser and any third-party valuation firm, if applicable.

 

Determination of fair value involves subjective judgments and estimates. Accordingly, these notes to the Company’s financial statements refer to the uncertainty with respect to the possible effect of such valuations and any change in such valuations on the Company’s financial statements. Below is a description of factors that the Company’s board of directors may consider when valuing the Company’s debt and equity investments.

 

Valuation of fixed income investments, such as loans and debt securities, depends upon a number of factors, including prevailing interest rates for like securities, expected volatility in future interest rates, call features, put features and other relevant terms of the debt. For investments without readily available market prices, the Company may incorporate these factors into discounted cash flow models to arrive at fair value. Other factors that the Company’s board of directors may consider include the borrower’s ability to adequately service its debt, the fair market value of the portfolio company in relation to the face amount of its outstanding debt and the quality of collateral securing the Company’s debt investments. The determination of fair market value for the equity positions were determined by considering, among other factors, various income scenarios and multiples of earnings before interest, taxes, depreciation and amortization, or EBITDA, cash flows, net income, revenues, waterfall and liquidation priority and market comparables, book value multiples, economic profits and portfolio multiples.

 

11 
 

 

The fair values of the Company’s investments are determined in good faith by the Company’s board of directors. The Company’s board of directors is solely responsible for the valuation of the Company’s portfolio investments at fair value as determined in good faith pursuant to the Company’s valuation policy and consistently applied valuation process.

 

Revenue Recognition. Security transactions are accounted for on the trade date. The Company records interest income on an accrual basis to the extent it expects to collect such amounts. The Company records dividend income on the ex-dividend date. The Company does not accrue as a receivable interest or dividends on loans and securities if it has reason to doubt its ability to collect such income. Loan origination fees, original issue discount and market discount are capitalized and the Company amortizes such amounts as interest income over the respective term of the loan or security. Upon the prepayment of a loan or security, any unamortized loan origination fees and original issue discount are recorded as interest income. Upfront structuring fees are recorded as fee income when earned. The Company records prepayment premiums on loans and securities as fee income when it receives such amounts.

 

Paid-In-Kind Interest. The company has certain investments in its portfolio that contain a payment-in-kind (“PIK”) interest provision, which represents contractual interest or dividends that are added to the principal balance and recorded as income. For the three months ended June 30, 2017 and 2016, interest income included $9,870 and $9,296 of PIK interest, respectively. For the six months ended June 30, 2017 and 2016, interest income included $19,488 and $18,456 of PIK interest, respectively. The Company stops accruing PIK interest when it is determined that PIK interest is no longer collectible. To maintain RIC tax treatment, and to avoid corporate tax, substantially all of this income must be paid out to the stockholders in the form of distributions, even though the Company has not yet collected the cash.

 

Net Realized Gains or Losses, and Net Change in Unrealized Appreciation or Depreciation. Gains or losses on the sale of investments are calculated by using the specific identification method. The Company measures realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized upfront fees. 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 gains or losses when gains or losses are realized.

 

Capital Gains Incentive Fees. The Company has entered into an investment advisory agreement with the Adviser dated as of July 27, 2012. Pursuant to the terms of the investment advisory agreement, the Incentive Fee shall be determined and payable in arrears as of the end of each quarter, upon liquidation of the Company or upon termination of this Agreement, as of the termination date, and shall equal 20.0% of the Company’s realized capital gains, if any, on a cumulative basis from inception through the end of each quarter, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid Incentive Fees. The fee for the three months ended June 30, 2017 was ($18,773), of which ($29,040) was for Incentive Fees calculated on unrealized gains. The fee for the six months ended June 30, 2017 was ($334), of which ($13,124) was for Incentive Fees calculated on unrealized gains.

 

For purposes of calculating the foregoing: (1) the calculation of the Incentive Fee shall include any capital gains that result from cash distributions that are treated as a return of capital; (2) any such return of capital shall be treated as a decrease in the Company’s cost basis of an investment; and (3) all fiscal year-end valuations shall be determined by the Company in accordance with generally accepted accounting principles, applicable provisions of the Company Act (even if such valuation is made prior to the date on which the Company has elected to be regulated as a BDC) and the Company’s pricing procedures. In determining the Incentive Fee payable to the Adviser, the Company will calculate the aggregate realized capital gains, aggregate realized capital losses and aggregate unrealized capital depreciation, as applicable, with respect to each of the investments in its portfolio. For this purpose, aggregate realized capital gains, if any, will equal the sum of the differences between the net sales price of each investment, when sold, and the original cost of such investment since inception. Aggregate realized capital losses will equal the sum of the amounts by which the net sales price of each investment, when sold, is less than the cost of such investment since inception. Aggregate unrealized capital depreciation will equal the sum of the difference, if negative, between the valuation of each investment as of the applicable date and the original cost of such investment. At the end of the applicable period, the amount of capital gains that serves as the basis for the Company’s calculation of the Incentive Fees will equal the aggregate realized capital gains less aggregate realized capital losses and less aggregate unrealized capital depreciation with respect to its portfolio of investments. If this number is positive at the end of such period, then the Incentive Fees for such period will be equal to 20% of such amount, less the aggregate amount of any Incentive Fees paid in respect of its portfolio in all prior periods.

 

12 
 

 

Offering Costs. The Company will incur certain expenses in connection with registering to sell shares of its common stock in connection with the Offering. These costs principally relate to professional and filing fees. Upon recognition or repayment to the Adviser of these costs, they will be capitalized as deferred offering expenses and then subsequently expensed over a 12-month period. The Adviser may reimburse the Company for all or part of these amounts pursuant to the Expense Support and Conditional Reimbursement Agreement (“Expense Reimbursement Agreement”) discussed below. As of June 30, 2017, and December 31, 2016, $3,195,498 and $2,765,662, respectively, of offering costs have been reclassified and included as part of the Expense Reimbursement Agreement and accordingly included in Reimbursement due from the Adviser.

 

Distributions. Distributions to the Company’s stockholders are recorded as of the record date. Subject to the discretion of the Company’s board of directors and applicable legal restrictions, the Company intends to authorize and declare ordinary cash distributions on a monthly basis and pay such distributions on a monthly basis.

 

Income Taxes. The Company has elected to be treated for federal income tax purposes, and intends to annually qualify thereafter, as a regulated investment company (“RIC”) under Subchapter M of the Code. Generally, a RIC is exempt from federal income taxes if it distributes at least 90% of “Investment Company Taxable Income,” as defined in the Code, each year. Dividends paid up to 8.5 months after the current tax year can be carried back to the prior tax year for determining the dividends paid in such tax year. The Company intends to distribute sufficient dividends to maintain its RIC status each year. The Company is also subject to nondeductible federal excise taxes if it does not distribute at least 98% of net ordinary income, 98.2% of capital gain income, if any, and any recognized and undistributed income from prior years for which it paid no federal excise tax. The Company will generally endeavor each year to avoid any federal excise taxes.

 

GAAP requires management to evaluate tax positions taken by the Company and recognize a tax liability if the Company has taken an uncertain position that more likely than not would not be sustained upon examination by the Internal Revenue Service or other tax authorities. Management has analyzed the tax positions taken by the Company, and has concluded that as of June 30, 2017 and 2016, there are no uncertain positions taken or expected to be taken that would require recognition of a liability or disclosure in the financial statements. The Company is subject to routine audits by the Internal Revenue Service or other tax authorities, generally for three years after the tax returns are filed; however, there are currently no audits for any tax periods in progress.

 

Recent Accounting Pronouncements.

 

In January 2016, the FASB issued ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 retains many current requirements for the classification and measurement of financial instruments; however, it significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. ASU 2016-01 also amends certain disclosure requirements associated with the fair value of financial instruments. This guidance is effective for annual and interim periods beginning after December 15, 2017, and early adoption is not permitted for public business entities. Management is currently evaluating the impact these changes will have on the Company’s consolidated financial statements and disclosures.

 

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarified the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which clarified the implementation guidance regarding performance obligations and licensing arrangements. The new standard will become effective for the Company on January 1, 2018, with early application permitted to the effective date of January 1, 2017. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting. The guidance does not apply to revenue associated with financial instruments, including loans and notes that are accounted for under other U.S. GAAP. As a result, the Company does not expect the new revenue recognition guidance to have a material impact on the elements of its consolidated statements of operations, most closely associated with financial instruments, including realized gains, fees, interest and dividend income. The Company plans to adopt the revenue recognition guidance in the first quarter of 2018. The Company’s implementation efforts include the identification of revenue within the scope of the guidance, as well as the evaluation of revenue contracts and related accounting policies. While the Company has not yet identified any material changes in the timing of revenue recognition, the Company’s review is ongoing, and it continues to evaluate the presentation of certain contract costs.

 

13 
 

 

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The ASU further clarifies how the predominance principle should be applied to cash receipts and payments relating to more than one class of cash flows. The ASU is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017. The ASU is to be applied retrospectively for each period presented. The Company is currently evaluating the impact this ASU will have on the Company’s consolidated statement of cash flows.

 

NOTE 3 – SHARE TRANSACTIONS

 

Below is a summary of transactions with respect to shares of the Company’s common stock during the six months ended June 30, 2017 and 2016:

 

   Six months ended June 30, 
   2017   2016 
   Shares   Amount   Shares   Amount 
Gross proceeds from Offering   229,231.44   $3,471,312    268,287.21   $3,995,038 
Reinvestment of Distributions   10,186.36    139,098    7,179.98    99,893 
Commissions and Dealer Manager Fees       (334,748)       (334,040)
Net Proceeds to Company from Share Transactions   239,417.80   $3,275,662    275,467.19   $3,760,891 

 

Status of Continuous Public Offering

 

During the six months ended June 30, 2017 and 2016, the Company sold 229,231.44 and 268,287.21 shares of common stock, respectively, for gross proceeds of approximately $3,471,312 and $3,995,038, at an average price per share of $15.14 and $14.89, respectively. The increase in Capital in excess of par during the six months ended June 30, 2017 and 2016 include reinvested stockholder distributions of $139,098 and $99,893, respectively, for which the Company issued 10,186.36 and 7,179.98 shares of common stock, respectively.

 

The proceeds from the issuance of common stock as presented on the accompanying statements of changes in net assets and statements of cash flows are presented net of selling commissions and dealer manager fees of $334,748 and $334,040 for the six months ended June 30, 2017 and 2016, respectively.

 

Share Repurchase Program

 

The Company intends to continue to conduct quarterly tender offers pursuant to its share repurchase program. The Company’s board of directors will consider the following factors, among others, in making its determination regarding whether to cause the Company to offer to repurchase shares of common stock and under what terms:

 

14 
 

 

    the effect of such repurchases on the Company’s qualification as a RIC (including the consequences of any necessary asset sales);
    the liquidity of the Company’s assets (including fees and costs associated with disposing of assets);
    the Company’s investment plans and working capital requirements;
    the relative economies of scale with respect to the Company’s size;
    the Company’s history in repurchasing shares of common stock or portions thereof; and
    the condition of the securities markets.

The Company currently intends to limit the number of shares of common stock to be repurchased during any calendar year to the number of shares of common stock it can repurchase with the proceeds it receives from the issuance of shares of common stock under its distribution reinvestment plan. At the discretion of the Company’s board of directors, the Company may also use cash on hand, cash available from borrowings and cash from the liquidation of securities investments as of the end of the applicable period to repurchase shares of common stock. In addition, the Company will limit the number of shares of common stock to be repurchased in any calendar year to 10% of the weighted average number of shares of common stock outstanding in the prior calendar year, or 2.5% in each calendar quarter, though the actual number of shares of common stock that the Company offers to repurchase may be less in light of the limitations noted above.

 

Our board of directors reserves the right, in its sole discretion, to limit the number of shares to be repurchased for each class by applying the limitations on the number of shares to be repurchased, noted above, on a per class basis. We further anticipate that we will offer to repurchase such shares on each date of repurchase at a price equal to 90% of the current offering price on each date of repurchase. If the amount of repurchase requests exceeds the number of shares we seek to repurchase, we will repurchase shares on a pro-rata basis. As a result, we may repurchase less than the full amount of shares that shareholders submit for repurchase. If we do not repurchase the full amount of the shares that shareholders have requested to be repurchased, or we determine not to make repurchases of our shares, shareholders may not be able to dispose of their shares. Any periodic repurchase offers will be subject in part to our available cash and compliance with the Company Act.

 

The following table provides information concerning the Company’s repurchase of shares of common stock during the six months ended June 30, 2017 (no repurchases were made for the six months ended June 30, 2016):

 

For the Three Months Ended   Repurchase Date  Shares
Repurchased
   Percentage of
Shares Tendered
That Were
Repurchased
   Repurchase
Price Per
Share
   Aggregate
Consideration for
Repurchased
Shares
 
Fiscal 2017                        
March 31, 2017   January 20, 2017   8,482.60    27%  $13.87   $117,654 
June 30, 2017   May 12, 2017   1,936.81    6%  $13.55   $26,243 
        10,419.41    16%  $13.81   $143,897 

 

NOTE 4 – RELATED PARTY TRANSACTIONS AND ARRANGEMENTS

 

The Adviser and TFA and their affiliates will receive compensation and reimbursement for services relating to our offering and the investment and management of its assets.

 

In connection with the Offering, the Company has incurred registration, organization, operating and offering costs. Such costs have been advanced by the Adviser. As discussed below, the Company has entered into an Expense Reimbursement Agreement with its Adviser. For the period from inception through June 30, 2017, certain registration, organization, operating and offering costs have been accounted for under the Expense Reimbursement Agreement (see Expense Reimbursement Agreement below) and accordingly included in Reimbursement due from the Adviser on the statements of financial position.

 

15 
 

 

The table below, on a cumulative basis, discloses the components of the Reimbursement due from Adviser reflected on the Statements of Financial Position:

 

   June 30,   December 31, 
   2017   2016 
Operating Expenses  $1,977,505   $1,896,657 
Offering Costs   3,195,498    2,765,662 
Due to related party offset   (4,542,118)   (4,213,469)
Reimbursements received from Adviser   (342,715)   (342,715)
Other amounts due to affiliates   448    448 
Total Reimbursement due from Adviser  $288,618   $106,583 

 

Operating Expenses are the amounts reimbursed by the Adviser for our operating costs and offering costs are the cumulative amount of organizational and offering expenses reimbursed to us by the Adviser and subject to future reimbursement per the terms of our expense reimbursement agreement.

 

Due to related party offset represents the cash the Adviser paid directly for our operating and offering expenses and reimbursements received from sponsor are the amounts the Adviser paid in cash to us for reimbursement of our operating and offering costs.

 

The Company compensates the Adviser for investment services per an Investment Adviser Agreement (“Agreement”), approved by the Company’s directors, calculated as the sum of (1) base management fee, calculated quarterly at 0.5% of the Company’s average gross assets payable quarterly in arrears, and (2) an incentive fee upon capital gains determined and payable in arrears as of the end of each quarter or upon liquidation of the Company or upon termination of Agreement at 20% of Company’s realized capital gains, as defined. The Agreement expires July 2018 and may continue automatically for successive annual periods, as approved by the Company. All management fees earned by the Adviser prior to January 1, 2014 were waived by the Adviser.

 

As a BDC, we will be subject to certain regulatory restrictions in making our investments. For example, we generally will not be permitted to co-invest alongside our Adviser and its affiliates unless we obtain an exemptive order from the SEC or the transaction is otherwise permitted under existing regulatory guidance, such as syndicated transactions where price is the only negotiated term, and approval from our independent directors. As of June 30, 2017, the Company has two affiliate investments in ACON IWP Investors I, L.L.C and Javlin Capital, LLC (held by TPJ Holdings, Inc., a wholly-owned subsidiary.)

 

The Company compensates TFA for administration services per an Administration Agreement for costs and expenses incurred with the administration and operation of the Company. Such agreement expires July 2018 and may continue automatically for successive annual periods, as approved by the Company. These fees have been reimbursed from the Adviser pursuant to the Expense Reimbursement Agreement discussed below.

 

The following table describes the fees and expenses accrued under the investment advisory and administration agreement and the dealer manager agreement during the three and six months ended June 30, 2017 and 2016:

 

         Three months ended June 30,  Six months ended June 30,
Related Party  Source Agreement  Description  2017  2016  2017  2016
Triton Pacific Adviser, LLC  Investment Adviser Agreement  Base Management Fees  $82,793   $53,179   $162,695   $96,333 
Triton Pacific Adviser, LLC  Investment Adviser Agreement  Capital Gains Incentive Fees(1)  $(18,773)  $14,910   $(334)  $20,344 
TFA Associates, LLC  Administration Agreement  Administrative Services Expenses  $71,213   $81,170   $142,977   $163,492 
Triton Pacific Securities, LLC  Dealer Manager Agreement  Dealer Manager Fees(2)  $25,465   $38,616   $60,235   $86,457 

 

 

(1)During the six months ended June 30, 2017 and 2016, the Company earned capital gains incentive fees of ($334) and $20,344, respectively, based on the performance of its portfolio, of which ($13,124) and $20,344 were based on unrealized gains, respectively. No capital gains incentive fees are actually payable by the Company with respect to unrealized gains unless and until those gains are actually realized. See Note 2 for a discussion of the methodology employed by the Company in calculating the capital gains incentive fees.

 

16 
 

 

(2)During the six months ended June 30, 2017 and 2016, the Company paid the Dealer Manager $334,748 and $334,040, respectively, in sales commissions and dealer fees. $60,235 and $86,457 were retained by TPS, respectively, and the remainder re-allowed to third party participating broker dealers.

 

Director’s Fees

 

On December 15, 2014, the Company entered into an agreement (the “Director Agreement”) with its three independent directors, Marshall Goldberg, William Pruitt and Ronald Ruther (collectively, the “Independent Directors”), whereby the Independent Directors agreed to certain revisions to their compensation for serving as members of the Company’s Board. Specifically, effective October 1, 2014, the fees payable to an Independent Director shall be determined based on the Company’s net assets as of the end of each fiscal quarter and be paid quarterly in arrears as follows:

 

Net Asset Value  Annual Cash
Retainer Fee
  Board Meeting
Fee
  Annual Audit
Committee
Chairperson
Fee
  Annual Audit
Committee
Member Fee
  Audit
Committee
Meeting Fee
$0 to $25 million         
$25 million to $75 million  $20,000  $1,000  $10,000  $2,500  $500
over $75 million  $30,000  $1,000  $12,500  $2,500  $500

 

No Director’s fees were accrued for the three and six months ended June 30, 2017 and 2016.

 

Expense Reimbursement Agreement

 

On March 27, 2014, the Company and its Adviser agreed to an Expense Support and Conditional Reimbursement Agreement, or the Expense Reimbursement Agreement. The Expense Reimbursement Agreement was amended and restated effective November 17, 2014. Under the Expense Reimbursement Agreement, as amended, the Adviser, in consultation with the Company, will pay up to 100% of both the Company’s organizational and offering expenses and its operating expenses, all as determined by the Company and the Adviser. As used in the Expense Reimbursement Agreement, operating expenses refer to third party operating costs and expenses incurred by the Company, as determined under GAAP for investment management companies. Organizational and offering expenses include expenses incurred in connection with the organization of the Company and expenses incurred in connection with its offering, which are recorded as a component of equity. The Expense Reimbursement Agreement states that until the net proceeds to the Company from its offering are at least $25 million, the Adviser will pay up to 100% of both the Company’s organizational and offering expenses and its operating expenses. After the Company receives at least $25 million in net proceeds from its offering, the Adviser may, with the Company’s consent, continue to make expense support payments to the Company in such amounts as are acceptable to the Company and the Adviser. Any expense support payments shall be paid by the Adviser to the Company in any combination of cash, and/or offsets against amounts otherwise due from the Company to the Adviser.

 

Under the Expense Reimbursement Agreement as amended, once the Company has received at least $25 million in net proceeds from its offering, during any quarter occurring within three years of the date on which the Company incurred any expenses that are funded by the Adviser, the Company is required to reimburse the Adviser for any expense support payments the Company received from them. However, with respect to any expense support payments attributable to the Company’s operating expenses, (i) the Company will only reimburse the Adviser for expense support payments made by the Adviser to the extent that the payment of such reimbursement (together with any other reimbursement paid during such fiscal year) does not cause “other operating expenses” (as defined below) (on an annualized basis and net of any expense reimbursement payments received by the Company during such fiscal year) to exceed the percentage of the Company’s average net assets attributable to shares of its common stock represented by “other operating expenses” during the fiscal year in which such expense support payment from the Adviser was made (provided, however, that this clause (i) shall not apply to any reimbursement payment which relates to an expense support payment from the Adviser made during the same fiscal year); and (ii) the Company will not reimburse the Adviser for expense support payments made by the Adviser if the annualized rate of regular cash distributions declared by the Company at the time of such reimbursement payment is less than the annualized rate of regular cash distributions declared by the Company at the time the Adviser made the expense support payment to which such reimbursement relates. “Other operating expenses” means the Company’s total operating expenses excluding base management fees, incentive fees, organization and offering expenses, financing fees and costs, interest expense, brokerage commissions and extraordinary expenses.

 

17 
 

 

Quarter Ended   Amount of Expense Payment Obligation   Amount of Offering Cost Payment Obligation   Operating Expense Ratio as of the Date Expense Payment Obligation Incurred(1)   Annualized Distribution Rate as of the Date Expense Payment Obligation Incurred(2)   Eligible for Reimbursement Through
September 30, 2012   $21,826       432.69%     September 30, 2015
December 31, 2012   $26,111       531.09%     December 31, 2015
March 31, 2013   $30,819       N/A     March 31, 2016
June 30, 2013   $59,062       N/A     June 30, 2016
September 30, 2013   $65,161       N/A     September 30, 2016
December 31, 2013   $91,378       455.09%     December 31, 2016
March 31, 2014   $68,293       148.96%     March 31, 2017
June 30, 2014   $70,027   $898,518   23.17%     June 30, 2017
September 30, 2014   $92,143   $71,060   20.39%     September 30, 2017
December 31, 2014   $115,777   $90,860   11.15%     December 31, 2017
March 31, 2015   $134,301   $106,217   13.75%   2.01%   March 31, 2018
June 30, 2015   $166,549   $167,113   14.10%   3.20%   June 30, 2018
September 30, 2015   $147,747   $240,848   10.45%   3.20%   September 30, 2018
December 31, 2015   $136,401   $280,376   7.41%   3.60%   December 31, 2018
March 31, 2016   $157,996   $232,895   6.00%   3.52%   March 31, 2019
June 30, 2016   $206,933   $285,878   4.95%   3.52%   June 30, 2019
September 30, 2016   $201,573   $223,020   4.52%   3.13%   September 30, 2019
December 31, 2016   $104,561   $168,876   4.45%   3.11%   December 31, 2019
March 31, 2017   $80,847   $252,875   4.21%   3.19%   March 31, 2020
June 30, 2017   $0   $176,963   3.98%   3.18%   June 30, 2020

  

(1) “Operating Expense Ratio” includes all expenses borne by us, except for organizational and offering expenses, base management and incentive fees owed to our Adviser, financing fees and costs, interest expense, brokerage commissions and extraordinary expenses. The Company did not achieve its minimum offering amount until June 25, 2014 and as a result, did not invest the proceeds from the offering and realize any income from investments prior to the end of its fiscal quarter.
 (2) “Annualized Distribution Rate” equals the annualized rate of distributions paid to stockholders based on the amount of the regular cash distribution paid immediately prior to the date the expense support payment obligation was incurred by our Adviser. “Annualized Distribution Rate” does not include special cash or stock distributions paid to stockholders. The Company did not achieve its minimum offering amount until June 25, 2014 and as a result, did not have an opportunity to invest the proceeds from the offering and realize any income from investments or pay any distributions to stockholders prior to the end of its fiscal quarter.

In addition, with respect to any expense support payment attributable to the Company’s organizational and offering expenses, the Company will only reimburse the Adviser for expense support payments made by the Adviser to the extent that the payment of such reimbursement (together with any other reimbursement for organizational and offering expenses paid during such fiscal year) is limited to 15% of cumulative gross sales proceeds from the Company’s offering including the sales load (or dealer manager fee) paid by the Company.

 

The Expense Reimbursement Agreement is, by its terms, effective retroactively to the Company’s inception date of April 29, 2011 for Operating Expenses and from the break of escrow on June 25, 2014 for Offering Expenses. As of June 30, 2017, $5,173,003 has been recorded as Reimbursement due from the Adviser pursuant to the Expense Reimbursement Agreement. Of this, $4,542,118, representing an amount due to the Adviser, was netted against the Reimbursement due from Adviser and $342,715 was paid to the Company by the Adviser.

 

Beginning the year ended December 31, 2016, the Adviser began to reimburse less than 100% of Operating Expenses, and for the quarter ended June 30, 2017, the Adviser did not reimburse any Operating Expenses. Of these Operating Expenses in the table above, $1,331,195 has exceeded the three-year period for repayment and will not be repayable by the Company.

 

The Company or the Adviser may terminate the Expense Reimbursement Agreement at any time upon thirty days’ written notice; The Expense Reimbursement Agreement will automatically terminate upon termination of the Investment Advisory Agreement or upon the Company’s liquidation or dissolution.

 

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NOTE 5 – DISTRIBUTIONS

 

The following table reflects the cash distributions per share that the Company declared and paid on its common stock during the six months ended June 30, 2017 and 2016:

 

    Distribution 
For the Six Months Ended   Per Share   Amount 
Fiscal 2017         
January 27, 2017   $0.04000    39,407 
February 24, 2017   $0.04000    41,323 
March 23, 2017    $0.04000    42,513 
April 27, 2017   $0.04000    44,526 
May 25, 2017   $0.04000    46,364 
June 23, 2017   $0.04000    47,861 
            
Fiscal 2016           
January 22, 2016   $0.04500   $25,244 
February 16, 2016   $0.04500   $26,477 
March 23, 2016   $0.04500   $30,271 
April 21, 2016   $0.04500   $32,832 
May 19, 2016   $0.04500   $34,950 
June 23, 2016   $0.04500   $36,206 
July 21, 2016   $0.04000   $32,318 
August 25, 2016   $0.04000   $33,293 
September 22, 2016   $0.04000   $33,877 
October 20, 2016   $0.04000   $35,164 
November 18, 2016   $0.04000   $37,327 
December 20, 2016   $0.04000   $38,091 

 

On July 14, 2017, the Company authorized and declared a cash distribution of $0.04 per share for the month of July 2017, to the shareholders of record as of July 21, 2017. The timing and amount of any future distributions to stockholders are subject to applicable legal restrictions and the sole discretion of the Company’s board of directors.

 

The Company has adopted an “opt in” distribution reinvestment plan for its stockholders. As a result, if the Company makes a cash distribution, its stockholders will receive distributions in cash unless they specifically “opt in” to the distribution reinvestment plan so as to have their cash distributions reinvested in additional shares of the Company’s common stock. However, certain state authorities or regulators may impose restrictions from time to time that may prevent or limit a stockholder’s ability to participate in the distribution reinvestment plan.

 

The Company may fund its cash distributions to stockholders from any sources of funds legally available to it, including offering proceeds, borrowings, net investment income from operations, capital gains proceeds from the sale of assets, non-capital gains proceeds from the sale of assets, dividends or other distributions paid to the Company on account of preferred and common equity investments in portfolio companies and expense reimbursements from the Adviser. The Company has not established limits on the amount of funds it may use from available sources to make distributions.

 

19

 

 

The following table reflects the sources of the cash distributions on a tax basis that the Company paid on its common stock during the six months ended June 30, 2017 and 2016:

 

   Six months ended June 30, 
   2017   2016 
Source of Distribution  Distribution Amount   Percentage   Distribution Amount   Percentage 
Offering proceeds  $       $     
Borrowings                
Net investment income(1)                
Short-term capital gains proceeds from the sale of assets   47,607    18%        
Long-term capital gains proceeds from the sale of assets       0%        
Distributions from common equity (return of capital)   214,388    82%        
Expense reimbursement from sponsor       0%   185,980    100%
Total  $261,995    100%  $185,980    100%

 

 

(1)During the six months ended June 30, 2017 and 2016, 90.3% and 85.4%, respectively, of the Company’s gross investment income was attributable to cash income earned, and 9.7% and 14.6%, resepctively was attributable to non-cash accretion of discount and paid in-kind interest.

 

The Company’s net investment income (loss) on a tax basis for the six months ended June 30, 2017 and 2016 was ($15,396) and $178,212, respectively. As of June 30, 2017 and 2016, the Company had $0 and $1,415, respectively, of undistributed net investment income and realized gains on a tax basis.

 

The primary difference between the Company’s GAAP-basis net investment income and its tax-basis net investment income is due to the reversal of the required accrual for GAAP purposes of incentive fees on unrealized gains even though no such incentive fees on unrealized gains are payable by the Company for the six months ended June 30, 2017 and 2016.

The following table sets forth reconciliation between GAAP basis net investment income and tax basis net investment income for the six months ended June 30, 2017 and 2016:

 

   Six months ended June 30, 
   2017   2016 
GAAP basis net investment income (loss)  $(20,711)  $157,868 
Reversal of incentive fee accrual on unrealized gains   5,315    20,344 
Other book-tax differences         
Tax-basis net investment income (loss)  $(15,396)  $178,212 

 

The determination of the tax attributes of the Company’s distributions is made annually as of the end of the Company’s fiscal year based upon the Company’s taxable income for the full year and distributions paid for the full year. The actual tax characteristics of distributions to stockholders are reported to stockholders annually on Form 1099-DIV.

 

As of June 30, 2017 and 2016, the components of accumulated earnings on a tax basis were as follows:

 

   Six months ended June 30, 
   2017   2016 
Overdistributed ordinary income (income and short-term capital gains)  $(221,259)  $1,416 
Distributable realized gains (long-term capital gains)   38,883    1,025 
Net unrealized appreciation (depreciation) on investments   (1,316,962)   282,608 
   $(1,499,338)  $285,049 

 

The ($1,316,962) of net depreciation as of June 30, 2017 includes gross appreciation over amortized tax cost of $295,876 and gross depreciation under amortized tax cost of $1,612,838. The $282,608 of net appreciation as of June 30, 2016 includes gross appreciation over amortized tax cost of $348,950 and gross depreciation under amortized tax cost of $66,342.

 

20

 

 

The aggregate cost of the Company’s investments for U.S. federal income tax purposes totaled $12,139,742 and $6,966,166 as of June 30, 2017 and 2016, respectively. The aggregate net unrealized appreciation (depreciation) on investments on a tax basis was ($1,316,962) and $285,049 as of June 30, 2017 and 2016, respectively.

 

NOTE 6 – INVESTMENT PORTFOLIO

 

The following table summarizes the composition of the Company’s investment portfolio at amortized cost and fair value as of June 30, 2017 and December 31, 2016:

 

   Six months ended June 30, 2017
(Unaudited)
 Year Ended December 31, 2016 
   Investments at Amortized Cost(1)   Investments at Fair Value   Fair Value Percentage of Total Portfolio   Investments at Amortized Cost(1)   Investments at Fair Value   Fair Value Percentage of Total Portfolio 
Senior Secured Loans—First Lien  $7,300,737   $7,386,999    68%  $6,680,615   $6,761,313    63%
Senior Secured Loans—Second Lien   2,922,616    2,836,865    26%   2,024,991    1,967,658    19%
Subordinated Debt   666,389        0%   646,901    646,901    6%
Equity/Other   1,250,000    598,916    6%   1,250,000    1,228,301    12%
Total  $12,139,742   $10,822,780    100%  $10,602,507   $10,604,173    100%
                               

 

 

 (1) Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on investments.

 

The table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets in such industries as of June 30, 2017 and December 31, 2016:

 

   June 30, 2017
(Unaudited)
   December 31, 2016 
Industry Classification  Fair Value   Percentage of Portfolio   Fair Value   Percentage of Portfolio 
Automotive Repair, Services, and Parking  $    0.0%  $122,459    1.2%
Beverage, Food & Tobacco   1,687,642    15.6%   1,162,891    11.0%
Business Services   3,146,081    29.2%   2,793,526    26.3%
Consumer Services   673,057    6.2%   955,659    9.0%
Energy: Oil & Gas   349,781    3.2%   346,500    3.3%
Healthcare & Pharmaceuticals   1,033,319    9.5%   1,403,008    13.2%
High Tech Industries   1,303,941    12.0%   1,016,921    9.6%
Hotel, Gaming & Leisure   351,089    3.2%       0.0%
Media: Diversified and Production   345,680    3.2%   347,375    3.3%
Metals & Mining   742,813    6.9%   245,625    2.3%
Paper and Allied Products       0.0%   115,294    1.0%
Retail       0.0%   712,500    6.7%
Specialty Finance       0.0%   1,184,130    11.2%
Telecommunications   505,730    4.7%       0.0%
Transportation: Cargo   508,125    4.7%       0.0%
Wholesale Trade-Nondurable Goods   175,522    1.6%   198,285    1.9%
                     
Total  $10,822,780    100.0%  $10,604,173    100.00%

 

As of June 30, 2017, The Company made the decision to fully mark down its remaining investment value of $1,265,231 in Javlin Financial as an unrealized loss. The decision was due to performance issues within Javlin Financial’s core business and a breakdown in restructuring negotiations between the Company, its lenders, and Javlin Financial’s controlling shareholder. As a result, Javlin Financial is in default under its debt obligations and while a forbearance is currently being negotiated, it is unknown at this time if there will be any value to the investment.

 

21

 

 

NOTE 7 – FAIR VALUE OF FINANCIAL INSTRUMENTS

 

Under existing accounting guidance, fair value is defined as the price that the Company would receive upon selling an investment or pay to transfer a liability in an orderly transaction to a market participant in the principal or most advantageous market for the investment. This accounting guidance emphasizes that valuation techniques maximize the use of observable market inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances.

 

The Company classifies the inputs used to measure these fair values into the following hierarchy as defined by current accounting guidance:

 

Level 1: Inputs that are quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

Level 2: Inputs that are quoted prices for similar assets or liabilities in active markets.

 

Level 3: Inputs that are unobservable for an asset or liability.

 

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

 

As of June 30, 2017 and December 31, 2016, the Company’s investments were categorized as follows in the fair value hierarchy):

 

Valuation Inputs  Six months ended June 30, 2017 (Unaudited)   Year ended December 31, 2016 
Level 1—Price quotations in active markets  $   $ 
Level 2—Significant other observable inputs        
Level 3—Significant unobservable inputs   10,822,780    10,604,173 
Total  $10,822,780   $10,604,173 

 

The Company’s investments as of June 30, 2017 consisted of debt securities that are traded on a private over-the-counter market for institutional investors, a subordinated convertible note and two equity investments. The Company valued its debt investments by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by independent third-party pricing services and screened for validity by such services. The determination of fair market value for the equity positions were determined by considering, among other factors, various income scenarios and multiples of earnings before interest, taxes, depreciation and amortization, or EBITDA, cash flows, net income, revenues, waterfall and liquidation priority and market comparables, book value multiples, economic profits and portfolio multiples.

 

The Company may periodically benchmark the bid and ask prices it receives from the third-party pricing services against the actual prices at which the Company purchases and sells its investments. Based on the results of the benchmark analysis and the experience of the Company’s management in purchasing and selling these investments, the Company believes that these prices are reliable indicators of fair value. However, because of the private nature of this marketplace (meaning actual transactions are not publicly reported), the Company believes that these valuation inputs are classified as Level 3 within the fair value hierarchy. The Company’s board of directors reviewed and approved the valuation determinations made with respect to these investments in a manner consistent with the Company’s valuation process.

 

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The significant unobservable inputs used in the market approach of fair value measurement of our investments are the market multiples of EBITDA of comparable companies. The Company selects a population of companies for each investment with similar operations and attributes of the portfolio company. Using these guideline companies’ data, a range of multiples of enterprise value to EBITDA is calculated. The Company selects percentages from the range of multiples for purposes of determining the portfolio company’s estimated enterprise value based on said multiple and generally the latest twelve months’ EBITDA of the portfolio company. Significant increases or decreases in enterprise value may result in increases or decreases in the fair value estimate of the equity investment.

 

The following is a reconciliation for the six months ended June 30, 2017 and year ended December 31, 2016 of investments for which significant unobservable inputs (Level 3) were used in determining fair value:

 

   For the six months ended June 30, 2017 
   Senior  Secured
Loans - First Lien
   Senior  Secured
Loans - Second
Lien
   Subordinated
Convertible
Debt
   Equity/Other   Total 
Fair value at beginning of period  $6,761,313   $1,967,658   $646,901   $1,228,301   $10,604,173 
Accretion of discount (amortization of premium)   11,175    5,260            16,435 
Net realized gain (loss)   23,450    41,114            64,564 
Net change in unrealized appreciation (depreciation)   5,564    (28,418)   (666,389)   (629,385)   (1,318,628)
Purchases   2,320,750    1,728,750            4,049,500 
Paid-in-kind interest           19,488        19,488 
Sales and redemptions   (1,735,252)   (877,500)           (2,612,752)
Net transfers in or out of Level 3                    
Fair value at end of period  $7,386,999   $2,836,865   $   $598,916   $10,822,780 
                          
The amount of total gains or losses for the period included in changes in net assets attributable to the change in unrealized gains or losses relating to investments still held at the reporting date  $5,564   $(28,418)  $(666,389)  $(629,385)  $(1,318,628)

 

   For the year ended December 31, 2016 
   Senior  Secured
Loans - First Lien
   Senior  Secured
Loans - Second
Lien
   Subordinated
Convertible
Debt
   Equity/Other   Total 
Fair value at beginning of period  $2,389,377   $1,041,875   $609,219   $1,488,266   $5,528,737 
Accretion of discount (amortization of premium)   12,124    6,512            18,636 
Net realized gain (loss)   19,433    298            19,731 
Net change in unrealized appreciation (depreciation)   117,410    (33,527)       (259,965)   (176,082)
Purchases   5,083,375    1,202,500            6,285,875 
Paid-in-kind interest           37,682        37,682 
Sales and redemptions   (860,406)   (250,000)           (1,110,406)
Net transfers in or out of Level 3                    
Fair value at end of period  $6,761,313   $1,967,658   $646,901   $1,228,301   $10,604,173 
                          
The amount of total gains or losses for the period included in changes in net assets attributable to the change in unrealized gains or losses relating to investments still held at the reporting date  $117,410   $(33,527)  $   $(259,965)  $(176,082)

 

 

 

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets as of June 30, 2017 were as follows:

 

Asset Category  Fair Value   Primary Valuation Technique  Unobservable Inputs  Range   Weighted
Average
Senior Secured First Lien Debt   7,386,999   Market quotes  Indicative dealer quotes   82.00 - 103.00    99.80
Senior Secured Second Lien Debt   2,836,865   Market quotes  Indicative dealer quotes   40.20 - 102.00    97.52
Subordinated Debt      Distribution waterfall/ liquidation priorities  N/A   N/A    N/A
Equity/Other      Distribution waterfall/ liquidation priorities  N/A   N/A    N/A
Equity/Other   598,916   Market comparables  EBITDA multiples (x)   6.3x - 15.6x    8.15x
Total  $10,822,780                

  

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets as of December 31, 2016 were as follows:

 

Asset Category  Fair Value   Primary Valuation Technique  Unobservable Inputs  Range   Weighted
Average
Senior Secured First Lien Debt   6,761,313   Market quotes  Indicative dealer quotes   79.50 - 102.00    99.63
Senior Secured Second Lien Debt   1,967,658   Market quotes  Indicative dealer quotes   58.00 - 102.19    94.31
Subordinated Debt   646,901   Market comparables  Discount rate/ income multiple   14.6% - 17.4%/ 2.4x - 34.0x    15%/13.3x
Equity/Other   537,229   Market comparables  Discount rate/ income multiple   14.6% - 17.4%/ 2.4x - 34.0x    15%/13.3x
Equity/Other   691,072   Market comparables  EBITDA multiples (x)   7.15x - 9.15x    8.15x
Total  $10,604,173                

 

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As of June 30, 2017, The Company made the decision to fully mark down its remaining investment value of $1,265,231 in Javlin Financial as an unrealized loss. The decision was due to performance issues within Javlin Financial’s core business and a breakdown in restructuring negotiations between the Company, its lenders, and Javlin Financial’s controlling shareholder. As a result, Javlin Financial is in default under its debt obligations and while a forbearance is currently being negotiated, it is unknown at this time if there will be any value to the investment.

 

NOTE 8 – FINANCIAL HIGHLIGHTS

 

The following is a schedule of financial highlights of the Company for the three months ended June 30, 2017 and the year ended December 31, 2016:

 

   Six Months Ended
June 30, 2017
(Unaudited)
   Year Ended
December 31, 2016
 
Per Share Data:          
Net asset value, beginning of period  $13.55   $13.75 
Results of operations(1)          
Net investment income (loss)   (0.02)   0.48 
Net realized and unrealized appreciation (depreciation) on investments(2)   (1.02)   (0.14)
Net increase (decrease) in net assets resulting from operations   (1.04)   0.34 
Stockholder distributions(3)          
Distributions from net investment income   (0.20)   (0.51)
Distributions from net realized gain on investments   (0.04)    
Net decrease in net assets resulting from stockholder distributions   (0.24)   (0.51)
Capital share transactions          
Issuance of common stock(4)   0.03    (0.03)
Offering costs(1)        
Net increase (decrease) in net assets resulting from capital share transactions   0.03    (0.03)
Net asset value, end of period  $12.30   $13.55 
Shares outstanding, end of period   1,205,408    976,406 
Total return(5)   -7.5%   2.2%
Ratio/Supplemental Data:          
Net assets, end of period  $14,823,697   $13,228,702 
Ratio of net investment income to average net assets   -0.1%   3.6%
Ratio of total operating expenses to average net assets   3.4%   7.2%
Ratio of expenses reimbursed by sponsor to average net assets   0.6%   6.5%
Ratio of expense recoupment payable to sponsor to average net assets   0.0%   0.0%
Ratio of capital gain incentive fee to average net assets   0.00%   -0.34%
Ratio of net operating expenses to average net assets   2.8%   0.7%
Portfolio turnover(6)   12.4%   10.8%

 

(1) The per share data was derived by using the weighted average shares outstanding for the six months ended June 30, 2017 and the year ended December 31, 2016.
(2) The amount shown for a share outstanding throughout the year may not agree with the change in the aggregate gains and losses in portfolio securities for the year because of the timing of sales of the Company’s shares in relation to fluctuating market values for the portfolio.
(3) The per share data for distributions reflects the actual amount of distributions paid per share during the applicable period.
(4) The issuance of common stock on a per share basis reflects the incremental net asset value changes as a result of the issuance of shares of common stock in the Company’s continuous public offering and pursuant to the Company’s distribution reinvestment plan. The issuance of common stock at an offering price, net of sales commissions and dealer manager fees, that is greater or less than the net asset value per share results in an increase or decrease in net asset value per share.

 

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(5) The total return for each period presented was calculated by taking the net asset value per share as of the end of the applicable period, adding the cash distributions per share which were declared during the applicable calendar year and dividing the total by the net asset value per share at the beginning of the applicable year. The total return does not consider the effect of the sales load from the sale of the Company’s common stock. The total return includes the effect of the issuance of shares at a net offering price that is greater than net asset value per share, which causes an increase in net asset value per share. The historical calculation of total return in the table should not be considered a representation of the Company’s future total return, which may be greater or less than the return shown in the table due to a number of factors, including the Company’s ability or inability to make investments in companies that meet its investment criteria, the interest rate payable on the debt securities the Company acquires, the level of the Company’s expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which the Company encounters competition in its markets and general economic conditions. As a result of these factors, results for any previous period should not be relied upon as being indicative of performance in future periods. The total return calculations set forth above represent the total return on the Company’s investment portfolio during the applicable period and are calculated in accordance with GAAP. These return figures do not represent an actual return to stockholders.
(6) Portfolio turnover for the six months ended June 30, 2017 is not annualized.

 

NOTE 9 – COMMITMENTS AND CONTINGENCIES

 

The Company enters into contracts that contain a variety of indemnification provisions. The Company’s maximum exposure under these arrangements is unknown; however, the Company has not had prior claims or losses pursuant to these contracts. Management has reviewed the Company’s existing contracts and expects the risk of loss to the Company to be remote.

 

The Company is not currently subject to any material legal proceedings and, to the Company’s knowledge, no material legal proceedings are threatened against the Company. From time to time, the Company may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of the Company’s rights under contracts with its portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, the Company does not expect that any such proceedings will have a material effect upon its financial condition or results of operations.

 

NOTE 10 – SUBSEQUENT EVENTS

 

Management has evaluated all known subsequent events through the date the accompanying financial statements were available to be issued on August 14, 2017, and notes the following:

 

For the period beginning July 1, 2017 and ending August 14, 2017, the Company sold 37,253.28 shares of its common stock for total gross proceeds of $558,250, and issued amounts pursuant to its distribution reinvestment plan in the amount of $26,061.

 

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Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

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 quarterly report on Form 10-Q.

 

Except as otherwise specified, references to “we,” “us,” “our,” or the “Company,” refer to Triton Pacific Investment Corporation, Inc.

 

Forward-Looking Statements

 

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 the economy;
  risk associated with possible disruptions in our operations or the economy generally;
  the effect of investments that we expect to make;
  our contractual arrangements and relationships with third parties;
  actual and potential conflicts of interest with Triton Pacific Adviser, LLC and its 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 Triton Pacific Adviser, LLC and its Sub-Adviser to locate suitable investments for us and to monitor and administer our investments;
  the ability of Triton Pacific Adviser, LLC, its Sub-Adviser and its affiliates to attract and retain highly talented professionals;
  our ability to qualify and maintain our qualification as a RIC and as a BDC; and
  the effect of changes in laws or regulations affecting our operations or to tax legislation and our tax position.

 

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 annual 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 the factors set forth as “Risk Factors” in this report and in our last effective registration statement filed on form N-2 dated May 2, 2017, filed with the Securities and Exchange Commission (the “SEC”) on the same day.

 

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, shareholders are advised to consult any additional disclosures that we may make directly to them 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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Overview

 

We are a publicly registered, non-traded fund focused on private equity, structured as a business development company that primarily makes equity, structured equity, and debt investments in small to mid-sized private U.S. companies. Structured equity refers to derivative investment products, including convertible notes and warrants, designed to facilitate highly customized risk-return objectives. Our private equity investments will generally take the form of direct investments in common and preferred equity, as well as structured equity investments such as convertible notes and warrants. We are an externally managed, closed-end, non-diversified management investment company that has elected to be treated as a business development company under the Company Act. Triton Pacific Adviser, LLC (“Triton Pacific Adviser”), which is a registered investment adviser under the Investment Advisers Act of 1940, as amended, (the “Advisers Act”) serves as our investment adviser and TFA Associates, LLC serves as our administrator. Each of these companies is affiliated with Triton Pacific Group, Inc., a private equity investment management firm, and its subsidiary, Triton Pacific Capital Partners, LLC (“TPCP”), a private equity investment fund management company, each focused on debt and equity investments in small to mid-sized private companies.

 

We primarily make debt investments likely to generate current income and equity investments in small to mid-sized private U.S. companies either alone or together with other private equity sponsors. Our investment objective is to generate current income and long-term capital appreciation.

 

Triton Pacific Adviser 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 annually qualify to be treated, for U.S. federal income tax purposes, as a regulated investment company (“RIC”), under subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).

 

Our investment objectives are to maximize our investment portfolio’s total return by generating long-term capital appreciation from our private equity investments and current income from our debt investments. We intend to make both our debt and private equity investments in small to mid-sized private U.S. companies either alone or together with other private equity sponsors.

 

 

We are offering for sale a maximum of $300,000,000 of our common stock. We commenced our initial continuous public offering of shares through our initial registration statement (File No. 333-174873) that was declared effective by the SEC on September 4, 2012. Rule 415 promulgated under the Securities Act requires that a registration statement not be used for more than three years from its effective date, subject to a 180-day grace period. On September 2, 2015, we filed a registration statement with the SEC (File No. 333-206730) in order to continue our continuous public offering of shares for an additional three years or until all of the shares registered herein are sold. The registration statement for our follow-on offering was declared effective by the SEC on March 17, 2016 and our most-recent post-effective amendment to our registration was declared effective by the SEC on May 3, 2017. As of August 14, 2017, we have sold a total of 1,244,581.30 shares of common stock for gross proceeds of approximately $18,560,978, including shares issued pursuant to our distribution reinvestment plan in the amount of $477,505, including the reduction due to $378,017 in shares repurchased pursuant to the Company’s Repurchase Program, and 14,815 shares of common stock sold to Triton Pacific Adviser in exchange for gross proceeds of $200,003.

 

Our investment objective is to maximize our portfolio’s total return by generating current income from our debt investments and long-term capital appreciation from our equity investments. We will seek to meet our investment objectives by:

 

-Focusing primarily on debt and equity investments in small and mid-sized private U.S. companies, which we define as companies with annual revenue of from $10 million to $ 250 million at the time of investment;

 

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-Leveraging the experience and expertise of our Adviser, its Sub-Adviser and its affiliates in sourcing, evaluating and structuring transactions;

 

-Employing disciplined underwriting policies and rigorous portfolio management;

 

-Developing our equity portfolio through our Adviser’s Value Enhancement Program, more fully discussed below in “Investment Objectives and Policies – Investment Process”; and

 

-Maintaining a well-balanced portfolio.

 

We intend to be active in both debt and equity investing. We will seek to provide current income to our investors through our debt investments while seeking to enhance our investors’ overall returns through long term capital appreciation of our equity investments. We intend to be opportunistic in our investment approach, allocating our investments between debt and equity, depending on:

 

-Investment opportunities

 

-Market conditions

 

-Perceived Risk

 

Depending on the amount of capital we raise in the Offering and subject to subsequent changes in our capital base, we expect that our investments will generally range between $250,000 and $25 million per portfolio company, although this range may change in the discretion of our Adviser, subject to oversight by our board of directors. Prior to raising sufficient capital to finance investments in this range and as a strategy to manage excess cash, we may make smaller and differing types of investments in, for example, high quality debt securities, and other public and private yield-oriented debt and equity securities, directly and through our Sub-Adviser.

 

Our Adviser has engaged ZAIS to act as our investment sub-adviser. ZAIS assists our Adviser with identifying, evaluating, negotiating and structuring syndicated debt investments and makes investment recommendations for approval by our Adviser. ZAIS is a Delaware limited liability company and is a registered investment adviser under the Advisers Act and had approximately $3.444 billion in assets under management as of December 31, 2016. ZAIS is not an affiliate of us or our Adviser and does not own any of our shares.

 

We will generally source our private equity investments through third party intermediaries and our debt investments primarily through our Adviser and Sub-Adviser. We will invest only after we conduct a thorough evaluation of the risks and strategic opportunities of an investment and a price (or interest rate in the case of debt investments) has been established that reflects the intrinsic value of the investment opportunity. We will endeavor to identify the best exit strategy for each private equity investment, including methodology (for example, a sale, company redemption, or public offering) and an appropriate time horizon. We will then attempt to influence the growth and development of each portfolio company accordingly to maximize our potential return on investment using such exit strategy or another strategy that may become preferable due to changing market conditions. We anticipate that the holding period for most of our private equity investments will range from four to six years, but we will be flexible in order to take advantage of market opportunities or to overcome unfavorable market conditions.

 

We intend to generate the majority of our current income by investing in senior secured loans, second lien secured loans and, to a lesser extent, subordinated loans of small to mid-sized private U.S. companies. We may purchase interests in loans through secondary market transactions in the “over-the-counter” market for institutional loans or directly from our target companies as primary market investments. In connection with our debt investments, we may on occasion receive equity interests such as warrants or options as additional consideration. The senior secured and second lien secured loans in which we invest generally will have stated terms of three to seven years and any subordinated investments that we make generally will have stated terms of up to ten years. However, there is no limit on the maturity or duration of any security we may hold in our portfolio. The loans in which we intend to invest are often rated by a nationally recognized ratings organization, and generally carry a rating below investment grade (rated lower than “Baa3” by Moody’s Investors Service or lower than “BBB-” by Standard & Poor’s Corporation – also known as “junk bonds”). However, we may also invest in non-rated debt securities.

 

28

 

 

As a BDC, we are subject to certain regulatory restrictions in making our investments. For example, we generally will not be permitted to co-invest alongside our Adviser, including TPCP and certain of its affiliates, unless we obtain an exemptive order from the SEC or the transaction is otherwise permitted under existing regulatory guidance, such as syndicated transactions where price is the only negotiated term, and approval from our independent directors. We have applied for an exemptive relief order for co-investments, though there is no assurance that such exemptions will be granted, and in either instance, conflicts of interests with affiliates of our Adviser might exist. Should such conflicts of interest arise, we and the Adviser have developed policies and procedures for dealing with such conflicts which require the Adviser to (i) execute such transactions for all of the participating investment accounts, including ours, on a fair and equitable basis, taking into account such factors as the relative amounts of capital available for new investments, the then-current investment objectives and portfolio positions of each party, and any other factors deemed appropriate and (ii) endeavor to obtain the advice of Adviser personnel not directly involved with the investment giving rise to the conflict as to such appropriateness and other factors as well as the fairness to all parties of the investment and its terms. We intend to make all of our investments in compliance with the Company Act and in a manner that will not jeopardize our status as a BDC or RIC.

 

As a BDC, we are permitted under the Company Act to borrow funds to finance portfolio investments. To enhance our opportunity for gain, we intend to employ leverage as market conditions permit, but, as required under the Company Act, in no event will our leverage exceed 50% of the value of our assets. While we have not yet determined the amount of leverage we will use, we do not currently anticipate that we would approach the 50% maximum level frequently or at all. The use of leverage, although it may increase returns, may also increase the risk of loss to our investors, particularly if the level of our leverage is high and the value of our investments declines.

 

Revenues

 

We generate revenue in the form of dividends, interest and capital gains on the debt securities and equity interests that we hold. In addition, we may generate revenue from our portfolio companies in the form of commitment, origination, structuring or diligence fees, monitoring fees, fees for providing managerial assistance and possibly consulting fees and performance-based fees. Any such fees will be recognized as earned.

 

Expenses

 

Our primary operating expenses will be the payment of advisory fees and other expenses under the proposed investment adviser agreement. The advisory fees will compensate our Adviser for its work in identifying, evaluating, negotiating, executing, monitoring and servicing our investments.

 

We will bear all other expenses of our operations and transactions, including (without limitation) fees and expenses relating to:

 

corporate and organizational expenses relating to offerings of our common stock, subject to limitations included in the investment advisory and management services agreement;

 

the cost of calculating our net asset value, including the cost of any third-party valuation services;

 

the cost of effecting sales and repurchase of shares of our common stock and other securities;

 

investment advisory fees;

 

fees payable to third parties relating to, or associated with, making investments and valuing investments, including fees and expenses associated with performing due diligence reviews of prospective investments;

 

transfer agent and custodial fees;

 

29

 

 

fees and expenses associated with marketing efforts;

 

federal and state registration fees;

 

federal, state and local taxes;

 

independent directors’ fees and expenses;

 

costs of proxy statements, stockholders’ reports and notices;

 

fidelity bond, directors and officers/errors and omissions liability insurance and other insurance premiums;

 

direct costs such as printing, mailing, long distance telephone, and staff;

 

fees and expenses associated with independent audits and outside legal costs, including compliance with the Sarbanes-Oxley Act;

 

costs associated with our reporting and compliance obligations under the Company Act and applicable federal and state securities laws;

 

brokerage commissions for our investments;

 

legal, accounting and other costs associated with structuring, negotiating, documenting and completing our investment transactions;

 

all other expenses incurred by our Adviser, in performing its obligations, subject to the limitations included in the investment adviser agreement; and

 

all other expenses incurred by either our Administrator or us in connection with administering our business, including payments to our Administrator under the administration agreement that will be based upon our allocable portion of its overhead and other expenses incurred in performing its obligations under the administration agreement, including rent and our allocable portion of the costs of compensation and related expenses of our chief executive officer, chief compliance officer and chief financial officer and their respective staffs.

 

Reimbursement of TFA Associates, LLC for Administrative Services

 

We will reimburse TFA Associates for the administrative expenses necessary for its performance of services to us. Such costs will be reasonably allocated to us on the basis of assets, revenues, time records or other reasonable methods. However, such reimbursement is made in an amount equal to the lower of the Administrator’s actual costs or the amount that we would be required to pay for comparable administrative services in the same geographic location. We will not reimburse our Administrator 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 TFA Associates.

 

Portfolio and Investment Activity

 

During the six months ended June 30, 2017, we made investments in portfolio companies totaling $4,049,500. During the same period, we sold investments and received principal repayments of $2,612,752. As of June 30, 2017, our investment portfolio, with a total fair value of $10,822,780, consisted of interests in 33 portfolio companies (68.3% in first lien senior secured loans, 26.2% in second lien senior secured loans, and 5.5% in equity). The portfolio companies that comprised our portfolio as of such date had an average annual EBITDA of approximately $134.8 million. As of June 30, 2017, the investments in our debt portfolio were purchased at a weighted average price of 98.1% of par or stated value, and the weighted average credit rating of the investments in our portfolio that were rated (constituting 94.5% of our portfolio based on the fair value of our investments) was B2 based upon the Moody’s scale. Our estimated gross annual portfolio yield was 6.9% based upon the amortized cost of our investments and was 7.7% on the debt portfolio alone. Our gross annual portfolio yield represents the expected yield to be generated by us on our investment portfolio based on the composition of our portfolio as of June 30, 2017. The portfolio yield does not represent an actual investment return to stockholders.

 

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Total Portfolio Activity

 

The following tables present certain selected information regarding our portfolio investment activity for the six months ended June 30, 2017 and year ended December 31, 2016: 

         
Net Investment Activity  Six months ended
June 30, 2017
   Year ended
December 31, 2016
 
Purchases  $4,049,500   $6,285,875 
Sales and Redemptions   (2,612,752)   (1,110,406)
Net Portfolio Activity  $1,436,748   $5,175,469 

 

The following table presents the composition of the total purchases for the six months ended June 30, 2017:

 

  June 30, 2017   December 31, 2016
Number of Portfolio Companies 33   35
% Variable Rate (based on fair value) 94.5%   82.3%
% Fixed Rate (based on fair value) 0.0%   6.1%
% Non-Income Producing Equity or Other Investments (based on fair value) 5.5%   11.6%
Average Annual EBITDA of Portfolio Companies 134.8MM   114.6MM
Weighted Average Credit Rating of Investments that were Rated B2   B2
% of Investments on Non-Accrual (based on amortized cost) 5.3%   —  
Gross Portfolio Yield Prior to Leverage (based on amortized cost) 6.9%   6.7%

 

The following tables summarize the composition of our purchases as of June 30, 2017 and December 31, 2016:

 

   Six months ended June 30, 2017
(Unaudited)
   Year Ended December 31, 2016 
   Investments at Amortized
Cost(1)
   Investments at
Fair Value
   Fair Value Percentage of
Total Portfolio
   Investments at Amortized
Cost(1)
   Investments at
Fair Value
   Fair Value Percentage of
Total Portfolio
 
Senior Secured Loans—First Lien  $7,300,737   $7,386,999    68%  $6,680,615   $6,761,313    63%
Senior Secured Loans—Second Lien   2,922,616    2,836,865    26%   2,024,991    1,967,658    19%
Subordinated Debt   666,389        0%   646,901    646,901    6%
Equity/Other   1,250,000    598,916    6%   1,250,000    1,228,301    12%
Total  $12,139,742   $10,822,780    100%  $10,602,507   $10,604,173    100%

  

(1)Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on investments.

 

The table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets in such industries as of June 30, 2017 and December 31, 2016:

 

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   June 30, 2017
(Unaudited)
   December 31, 2016 
Industry Classification  Fair 
Value
   Percentage of
 Portfolio
   Fair
 Value
   Percentage of 
Portfolio
 
Automotive Repair, Services, and Parking  $    0.0%  $122,459    1.2%
Beverage, Food & Tobacco   1,687,642    15.6%   1,162,891    11.0%
Business Services   3,146,081    29.2%   2,793,526    26.3%
Consumer Services   673,057    6.2%   955,659    9.0%
Energy: Oil & Gas   349,781    3.2%   346,500    3.3%
Healthcare & Pharmaceuticals   1,033,319    9.5%   1,403,008    13.2%
High Tech Industries   1,303,941    12.0%   1,016,921    9.6%
Hotel, Gaming & Leisure   351,089    3.2%       0.0%
Media: Diversified and Production   345,680    3.2%   347,375    3.3%
Metals & Mining   742,813    6.9%   245,625    2.3%
Paper and Allied Products       0.0%   115,294    1.0%
Retail       0.0%   712,500    6.7%
Specialty Finance       0.0%   1,184,130    11.2%
Telecommunications   505,730    4.7%       0.0%
Transportation: Cargo   508,125    4.7%       0.0%
Wholesale Trade-Nondurable Goods   175,522    1.6%   198,285    1.9%
                     
Total  $10,822,780    100.0%  $10,604,173    100.00%

 

We do not “control” any of our portfolio companies, each as defined in the Company Act. We are an affiliate of two portfolio companies, Javlin Capital, LLC (held through TPJ Holdings, Inc. and a convertible note) and Injured Workers Pharmacy, LLC (held through ACON IWP Investors I, L.L.C.). In general, under the Company Act, we would be presumed to “control” a portfolio company if we owned 25% or more of its voting securities and would be an “affiliate” of a portfolio company if we owned 5% or more of its voting securities.

 

Portfolio Asset Quality

 

In addition to various risk management and monitoring tools, our Subadviser uses an investment rating system to characterize and monitor the expected level of returns on each investment in our debt portfolio. All of the investments included in our Subadviser’s rating systems refer to non-rated debt securities or rated debt securities that carry a rating below investment grade (rated lower than “Baa3” by Moody’s Investors Service or lower than “BBB-” by Standard & Poor’s Corporation also known as “junk bonds”). These ratings are on a scale of 1 to 8 as follows:

 

1.Highest quality obligors, minimal medium-term default risk; possibly moving towards investment grade status.

2.High quality obligors, but not likely to move towards investment grade in the medium term; performing at or in excess of expected levels; solid liquidity; conservative credit statistics.

3.Credits of with a history of performing with leverage (repeat issuers); moderate credit statistics currently performing at or in excess of expected levels; solid liquidity; no expectation of covenant defaults or third-party ratings downgrades.

4.Credits new to the leveraged loan universe; currently performing within a range of expected performance; moderate to aggressive credit statistics.

5.Credits new to the leveraged loan universe; currently performing within a range of expected performance; aggressive credit statistics or weak industry characteristics.

6.Credits placed in this category are experiencing potential liquidity problems but the issues are not imminent (more than 12 months).

7.Credits placed in this category are experiencing nearer-term liquidity problems (within 12 months).