10-Q 1 triton182476_10-q.htm FORM 10-Q

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 September 30, 2018

 

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,” and “emerging growth 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
        Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

 

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 November 14, 2018, the Registrant had 1,580,469.90 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. 28
Item 3: Quantitative and Qualitative Disclosures About Market Risk. 50
Item 4: Controls and Procedures. 51
Part II—Other Information 51
Item 1: Legal Proceedings. 51
Item 1A: Risk Factors. 51
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds. 52
Item 3: Defaults Upon Senior Securities. 53
Item 4: Mine Safety Disclosures. 53
Item 5: Other Information. 53
Item 6: Exhibits. 54
SIGNATURES 55

 

2

 

 

Part I—Financial Information

 

Item 1: Financial Statements

 

 

Triton Pacific Investment Corporation, Inc.

CONSOLIDATED StatementS of Financial Position

 

   September 30,     
   2018   December 31, 
   (unaudited)   2017 
ASSETS  
         
Affiliate Investments, at fair value (amortized cost - $1,916,389 and $1,916,389, respectively)  $501,742   $537,903 
Non-affiliate Investments, at fair value (amortized cost - $13,189,371 and $11,633,659, respectively)   13,003,062    11,497,635 
Cash   4,921,673    5,648,505 
Principal and interest receivable   25,410    41,027 
Prepaid expenses   10,697    48,091 
Reimbursement due from Adviser (see Note 4)   -    257,628 
Due from affiliates   886    - 
Deferred offering costs   205,174    84,070 
           
TOTAL ASSETS  $18,668,644   $18,114,859 
           
LIABILITIES AND NET ASSETS          
           
LIABILITIES          
Payable for investments purchased  $495,000   $990,000 
Accounts payable and accrued liabilities   129,510    249,910 
Due to related parties (see Note 4)   119,980    25,712 
TOTAL LIABILITIES   744,490    1,265,622 
           
COMMITMENTS AND CONTINGENCIES (see Note 9)          
           
NET ASSETS          
Common stock, $0.001 par value, 75,000,000 shares authorized, 1,573,804.22 and 1,417,233.32 shares issued and outstanding respectively   1,571    1,417 
Capital in excess of par value   20,899,977    19,033,890 
Accumulated undistributed net realized gains   37,415    65,363 
Accumulated overdistributed net investment income   (1,413,853)   (736,923)
Accumulated unrealized depreciation on investments   (1,600,956)   (1,514,510)
TOTAL NET ASSETS   17,924,154    16,849,237 
           
TOTAL LIABILITIES AND NET ASSETS  $18,668,644   $18,114,859 
           
Net asset value per share of common stock at period end  $11.39   $11.89 

 

The accompanying notes are an integral part of these statements.

 

3

 

 

Triton Pacific Investment Corporation, Inc.

CONSOLIDATED Statements of Operations

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(Unaudited)

                 
   Three months ended   Nine months ended 
   September 30,   September 30, 
   2018   2017   2018   2017 
INVESTMENT INCOME                    
Interest from affiliate investments  $-   $-   $-   $19,488 
Interest from non-control/ non-affiliate investments   302,265    198,075    849,536    536,481 
Fee income from non-control/ non-affiliate investments   277    29,413    7,502    40,697 
                     
Total investment income   302,542    227,488    857,038    596,666 
                     
OPERATING EXPENSES                    
Management fees   91,593    83,459    269,189    246,154 
Capital gains incentive fees (see Notes 2 and 4)   -    -    -    (334)
Administrator expense   66,558    70,495    215,786    213,473 
Professional fees   134,179    99,062    368,899    214,914 
Insurance expense   17,791    17,779    57,317    57,251 
Offering expense   83,942    -    170,932    - 
Other operating expenses   27,339    13,095    56,487    23,168 
                     
Total operating expenses   421,402    283,890    1,138,610    754,626 
                     
Expense reimbursement from Sponsor   -    -    -    (80,847)
                     
Net operating expenses   421,402    283,890    1,138,610    673,779 
                     
Net investment income/ (loss)   (118,860)   (56,402)   (281,572)   (77,113)
                     
REALIZED AND UNREALIZED GAIN/(LOSS)                    
Net realized gain on non-affiliated investments   3,740    26,569    32,960    91,134 
Net decrease in unrealized appreciation on affiliate investments   (782)   (88,923)   (36,161)   (1,350,763)
Net decrease in unrealized appreciation on non-control/ non-affiliate investments   (13,607)   (42,474)   (50,285)   (99,262)
                     
Total net realized and unrealized loss on investments   (10,649)   (104,828)   (53,486)   (1,358,891)
                     
NET DECREASE IN NET ASSETS  FROM OPERATIONS  $(129,509)  $(161,230)  $(335,058)  $(1,436,004)
                     
PER SHARE INFORMATION - Basic and Diluted                    
Net decrease in net assets from operations per share  $(0.08)  $(0.13)  $(0.22)  $(1.26)
                     
Weighted average common shares outstanding - basic and diluted   1,544,718    1,266,225    1,500,612    1,143,880 

 

The accompanying notes are an integral part of these statements.

 

4

 

 

Triton Pacific Investment Corporation, Inc.

CONSOLIDATED StatementS of CHANGES IN NET ASSETS

NINE MONTHS ended SEPTEMBER 30, 2018 AND 2017

(Unaudited)

         
   Nine months ended 
   September 30, 
   2018   2017 
Operations        
Net investment income/ (loss)  $(281,572)  $(77,113)
Net realized gain on investments   32,960    91,134 
Net decrease in unrealized appreciation on investments   (86,446)   (1,450,025)
Net decrease in net assets resulting from operations   (335,058)   (1,436,004)
Stockholder distributions (see Note 5)          
Distributions from net investment income   (395,356)   (341,207)
Distributions from net realized gain on investments   (60,908)   (59,732)
Net decrease in net assets resulting from stockholder distributions   (456,264)   (400,939)
Capital share transactions          
Issuance of common stock (see Note 3)   1,686,734    4,817,586 
Reinvestment of stockholder distributions (see Note 3)   256,864    214,336 
Repurchase of shares of common stock   (77,359)   (217,307)
Net increase in net assets from capital share transactions   1,866,239    4,814,615 
           
Total increase in net assets   1,074,917    2,977,672 
Net assets at beginning of period   16,849,237    13,228,702 
Net assets at end of period  $17,924,154   $16,206,374 
Accumulated overdistributed net investment income  $(1,413,853)  $(431,069)
Accumulated undistributed net realized gains  $37,415   $14,444 

 

The accompanying notes are an integral part of these statements.

 

5

 

 

Triton Pacific Investment Corporation, Inc. 

CONSOLIDATED Statements of CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

(Unaudited)

 

   Nine months ended 
   September 30, 
   2018   2017 
CASH FLOWS FROM OPERATING ACTIVITIES          
Net decrease in net assets resulting from operations  $(335,058)  $(1,436,004)
Adjustments to reconcile net decrease in net assets resulting from operations to net cash used by operating activities          
Purchases of investments   (4,426,250)   (6,118,500)
Proceeds from sales and repayments of investments   2,928,272    3,921,509 
Net realized gain from investments   (32,960)   (91,134)
Net change in unrealized appreciation (depreciation) on investments   86,445    1,450,025 
Accretion of discount   (24,773)   (23,918)
Net increase in paid-in-kind interest   -    (19,488)
Amortization of deferred offering costs   170,932    - 
Change in assets and liabilities          
Principal and interest receivable   15,617    (7,301)
Prepaid expenses   37,394    (21,803)
Deferred transaction costs   -    - 
Reimbursement due from Adviser   257,628    (224,004)
Due from affiliates   (886)   - 
Payable for investments purchased   (495,000)   175,875 
Accounts payable and accrued liabilities   (120,400)   115,248 
Due to related parties   94,268    (31,874)
NET CASH USED BY OPERATING ACTIVITIES   (1,844,771)   (2,311,369)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Issuance of common stock   1,686,734    4,817,586 
Payments on repurchases of shares of common stock   (77,359)   (217,307)
Stockholder distributions   (199,400)   (186,603)
Increases in distributions payable   -    (16,574)
Offering costs   (292,036)   - 
NET CASH PROVIDED BY FINANCING ACTIVITIES   1,117,939    4,397,102 
           
NET INCREASE (DECREASE) IN CASH   (726,832)   2,085,733 
           
CASH - BEGINNING OF PERIOD  $5,648,505   $3,788,901 
           
CASH  - END OF PERIOD  $4,921,673   $5,874,634 
           
Supplemental schedule of non-cash investing activities          
Reinvestment of stockholder distributions  $256,864   $214,336 

 

The accompanying notes are an integral part of these statements.

 

6

 

 

TRITON PACIFIC INVESTMENT CORPORATION, INC. 

CONSOLIDATED SCHEDULE OF INVESTMENTS

AS OF SEPTEMBER 30, 2018

(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—44.55%                               
LSF9 Atlantis Holdings, LLC     Telecommunications  L+6.00% (8.12%)  2.12%  5/1/2023  $484,375   $480,491   $469,238 
California Pizza Kitchen, Inc.     Beverage, Food & Tobacco  L+6.00% (8.39%)  2.39%  8/19/2022   343,000    340,751    334,425 
CareerBuilder     Business Services  L+6.75% (9.14%)  2.39%  7/27/2023   369,112    357,002    369,804 
Coronado Curragh LLC - Term Loan B     Metals & Mining  L+6.50% (8.89%)  2.39%  3/29/2025   345,543    334,639    349,862 
Coronado Curragh LLC - Term Loan C     Metals & Mining  L+6.50% (8.89%)  2.39%  3/21/2025   94,475    92,018    95,656 
Deluxe Entertainment Services Group, Inc.     Media: Diversified and Production  L+5.50% (7.84%)  2.34%  2/28/2020   333,512    329,039    306,831 
Flavors Holdings, Inc. Tranche B     Beverage, Food & Tobacco  L+5.75% (8.14%)  2.39%  4/3/2020   98,839    97,511    92,415 
GK Holdings, Inc.     Business Services  L+6.00% (8.39%)  2.39%  1/20/2021   120,313    119,976    112,191 
GoWireless Holdings, Inc.     Consumer Services  L+6.50% (8.74%)  2.24%  12/20/2024   481,250    476,768    471,625 
InfoGroup Inc.     Business Services  L+5.00% (7.39%)  2.39%  3/28/2023   492,500    488,744    492,091 
Isagenix International LLC     Healthcare & Pharmaceuticals  L+5.75% (8.14%)  2.39%  4/25/2025   493,750    489,056    494,984 
McAfee LLC     Business Services  L+4.50% (6.74%)  2.24%  9/27/2024   247,500    245,353    249,843 
Moran Foods, LLC     Beverage, Food & Tobacco  L+6.00% (8.24%)  2.24%  12/5/2023   343,875    336,121    250,169 
Prospect Medical Holdings, Inc.     Healthcare & Pharmaceuticals  L+5.50% (7.63%)  2.13%  2/22/2024   497,500    488,527    505,584 
Quidditch Acquisition, Inc.     Beverage, Food & Tobacco  L+7.00% (9.17%)  2.17%  3/14/2025   497,500    488,237    506,206 
Raley’s     Beverage, Food & Tobacco  L+5.25% (7.49%)  2.24%  5/18/2022   187,277    187,277    188,447 
Sahara Parent Inc     Business Services  L+5.00% (7.26%)  2.26%  8/16/2024   346,500    343,533    347,713 
Strike, LLC     Energy: Oil & Gas  L+8.00% (10.59%)  2.59%  11/30/2022   319,375    312,126    324,166 
Travel Leaders Group, LLC     Hotel, Gaming & Leisure  L+4.00% (6.16%)  2.16%  1/25/2024   498,750    497,795    505,296 
TruGreen Limited Partnership     Consumer Services  L+4.00% (6.13%)  2.13%  4/13/2023   343,035    339,583    347,109 
Verdesian Life Sciences LLC     Wholesale Trade-Nondurable Goods  L+5.00% (7.34%)  2.34%  7/1/2020   199,417    198,695    190,443 
Wirepath LLC     Consumer Services  L+4.50% (6.74%)  2.24%  8/5/2024   495,009    492,873    497,793 
Yak Access LLC     Construction & Building  L+5.00% (7.14%)  2.14%  6/29/2025   500,000    485,424    483,750 
Total Senior Secured Loans—First Lien               $8,132,407   $8,021,538   $7,985,641 
                                
Senior Secured Loans—Second Lien—27.99%                            
DG Investment Intermediate Holdings 2 Inc.     Business Services  L+6.75% (8.99%)  2.24%  2/1/2026   500,000    497,706    504,375 
Encino Acquisition Partners Holdings, LLC     Energy: Oil & Gas  L+6.75% (7.75%)  1.00%  9/26/2025   500,000    495,000    502,500 
Flavors Holdings, Inc.     Beverage, Food & Tobacco  L+10.00% (12.39%)  2.39%  10/7/2021   125,000    122,885    109,375 
FullBeauty Brands Holding     High Tech Industries  L+9.00% (11.34%)  2.34%  10/13/2023   250,000    219,377    22,000 
GK Holdings, Inc.     Business Services  L+10.25% (12.64%)  2.39%  1/21/2022   125,000    123,830    104,063 
Inmar     Business Services  L+8.00% (10.24%)  2.24%  5/1/2025   500,000    493,807    502,500 
McAfee LLC     Business Services  L+8.50% (10.74%)  2.24%  9/26/2025   500,000    497,338    511,250 
Neustar, Inc.     High Tech Industries  L+8.00% (10.24%)  2.24%  2/28/2025   749,792    740,292    746,043 
NPC International, Inc.     Beverage, Food & Tobacco  L+7.50% (9.58%)  2.08%  3/28/2025   500,000    498,846    506,250 
Oxbow Carbon LLC     Metals & Mining  L+7.50% (9.74%)  2.24%  1/4/2024   500,000    495,575    512,500 
Patriot Container Corp.     Environmental  L+7.75% (9.96%)  2.21%  3/16/2026   500,000    490,680    490,000 
Rocket Software, Inc.     Business Services  L+9.50% (11.89%)  2.39%  10/14/2024   500,000    492,497    506,565 
Total Senior Secured Loans—Second Lien               $5,249,792   $5,167,833   $5,017,421 

 

The accompanying notes are an integral part of these statements.

 

7

 

 

TRITON PACIFIC INVESTMENT CORPORATION, INC. 

CONSOLIDATED SCHEDULE OF INVESTMENTS

AS OF SEPTEMBER 30, 2018 (CONTINUED)

(UNAUDITED)

 

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—2.80%                               
ACON IWP Investors I, L.L.C.  (a)  Healthcare & Pharmaceuticals             500,000    500,000    501,742 
Javlin Capital LLC Class C-2 Preferred Units  (a) (d) (e)  Specialty Finance             214,286    750,000    - 
Total Equity/Other                   714,286   $1,250,000   $501,742 
                                
TOTAL INVESTMENTS—75.34%                    $15,105,760   $13,504,804 
OTHER ASSETS IN EXCESS OF LIABILITIES—24.66%                         $4,419,350 
NET ASSETS - 100.0%                         $17,924,154 

 

 
(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 September 30, 2018 represented 2.80% of the Company’s net assets. Fair value as of December 31, 2017 along with transactions during the nine months ended September 30, 2018 in affiliated investments were as follows):  

 

         Nine months ended September 30, 2018    
Non-controlled, Affiliated Investments  Number of
 Shares
  Fair Value at
December 31, 2017
  Gross Additions
(Cost)*
  Gross Reductions
(Cost)**
  Unrealized
Change in FMV
  Fair Value at
September 30, 2018
  Net Realized
Gain (Loss)
  Interest & Dividends
Credited to Income
 
ACON IWP Investors I, L.L.C.   500,000  $537,903  $-  $-  $(36,161) $501,742  $-  $- 
Javlin Capital, LLC, Convertible Note   666,389   -   -   -   -   -   -   - 
Javlin Capital, LLC, C-2 Preferred Units   214,286   -   -   -   -   -   -   - 
Total      $537,903  $-  $-  $(36,161) $501,742  $-  $- 

 

*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 September 30, 2018, the three-month London Interbank Offered Rate, or LIBOR, was 2.39600%.

(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 September 30, 2018, 100% of the Company’s total assets represented qualifying assets based on fair market value, though the company does own non-qualifying assets as noted by this footnote (e).

(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, 2017

                            
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—45.65%                              
LSF9 Atlantis Holdings, LLC     Telecommunications  L+6.00% (7.36%)  1.4%  5/1/2023  $493,750   $489,235   $496,322 
California Pizza Kitchen, Inc.     Beverage, Food & Tobacco  L+6.00% (7.57%)  1.6%  8/19/2022   345,625    342,933    339,577 
CareCentrix, Inc.     Healthcare & Pharmaceuticals  L+5.00% (6.69%)  1.7%  7/8/2021   195,500    192,300    196,966 
CareerBuilder     Business Services  L+6.75% (8.44%)  1.7%  7/27/2023   493,750    479,771    481,406 
Coronado Group LLC     Metals & Mining  L+7.00% (8.33%)  1.3%  6/6/2023   386,565    372,948    390,431 
CRCI Holdings, Inc.     Business Services  L+5.50% (7.19%)  1.7%  8/31/2023   324,563    321,740    325,781 
Deluxe Entertainment Services Group, Inc.     Media: Diversified and Production  L+5.50% (6.88%)  1.4%  2/28/2020   340,762    333,958    334,586 
Flavors Holdings, Inc. Tranche B     Beverage, Food & Tobacco  L+5.75% (7.44%)  1.7%  4/3/2020   104,687    102,670    97,098 
GK Holdings, Inc.     Business Services  L+6.00% (7.69%)  1.7%  1/20/2021   121,250    120,778    97,364 
GoWireless Holdings, Inc.     Consumer Services  L+6.50% (8.16%)  1.7%  12/20/2024   500,000    495,000    496,250 
IG Investments Holdings, LLC     Business Services  L+3.50% (5.19%)  1.7%  10/29/2021   345,543    344,239    349,431 
InfoGroup Inc.     Business Services  L+5.00% (6.69%)  1.7%  3/28/2023   496,250    491,871    493,769 
Jackson Hewitt, Inc.     Business Services  L+7.00% (8.38%)  1.4%  7/30/2020   186,139    183,882    184,509 
McAfee LLC     Business Services  L+4.50% (6.07%)  1.6%  9/27/2024   249,375    246,960    248,930 
Moran Foods, LLC     Beverage, Food & Tobacco  L+6.00% (7.57%)  1.6%  12/5/2023   346,500    337,622    278,718 
Pre-Paid Legal Services, Inc     Consumer Services  L+5.25% (6.82%)  1.6%  7/1/2019   317,021    316,483    318,275 
Raley’s     Beverage, Food & Tobacco  L+5.25% (6.82%)  1.6%  5/18/2022   285,967    285,967    289,184 
Sahara Parent Inc     Business Services  L+5.00% (6.69%)  1.7%  8/16/2024   349,125    345,783    341,598 
SITEL Worldwide Corporation     Business Services  L+5.50% (6.88%)  1.4%  9/20/2021   195,500    195,212    196,314 
Strike, LLC     Energy: Oil & Gas  L+8.00% (9.50%)  1.5%  11/30/2022   332,500    323,942    337,488 
Travel Leaders Group, LLC     Hotel, Gaming & Leisure  L+4.50% (5.92%)  1.4%  1/25/2024   347,379    345,866    352,809 
TruGreen Limited Partnership     Consumer Services  L+4.00% (5.54%)  1.5%  4/13/2023   345,634    341,640    351,036 
Verdesian Life Sciences LLC     Wholesale Trade-Nondurable Goods  L+5.00% (6.38%)  1.4%  7/1/2020   208,335    207,283    187,502 
Wirepath LLC     Consumer Services  L+5.25% (6.87%)  1.6%  8/5/2024   498,750    496,340    505,608 
Total Senior Secured Loans—First Lien                $7,810,470   $7,714,423   $7,690,952 
                              
Senior Secured Loans—Second Lien—22.59%                              
Flavors Holdings, Inc.     Beverage, Food & Tobacco  L+10.00% (11.69%)  1.7%  10/7/2021   125,000    122,343    101,250 
FullBeauty Brands Holding     High Tech Industries  L+9.00% (10.57%)  1.6%  10/13/2023   250,000    218,903    73,334 
GK Holdings, Inc.     Business Services  L+10.25% (11.94%)  1.7%  1/21/2022   125,000    123,559    93,125 
Inmar     Business Services  L+8.00% (9.42%)  1.4%  5/1/2025   500,000    493,103    502,813 
McAfee LLC     Business Services  L+8.50% (10.07%)  1.6%  9/26/2025   500,000    496,986    502,504 
Neustar, Inc.     High Tech Industries  L+8.00% (9.40%)  1.4%  2/28/2025   750,000    739,275    759,844 
NPC International, Inc.     Beverage, Food & Tobacco  L+7.50 (9.05%)  1.6%  3/28/2025   500,000    498,135    512,500 
Oxbow Carbon LLC     Metals & Mining  L+7.00 (8.24%)  1.2%  1/19/2020   250,000    240,350    250,938 
Oxbow Carbon LLC     Metals & Mining  L+6.00 (10.50%)  4.5%  1/4/2024   500,000    495,034    502,500 
Rocket Software, Inc.     Business Services  L+9.50% (11.19%)  1.7%  10/14/2024   500,000    491,548    507,875 
Total Senior Secured Loans—Second Lien                 $4,000,000   $3,919,236   $3,806,683 

 

The accompanying notes are an integral part of these statements.

 

9

 

 

TRITON PACIFIC INVESTMENT CORPORATION, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

AS OF DECEMBER 31, 2017 (CONTINUED)

                            
Portfolio Company  Footnotes  Industry  Rate(b)  Base
Rate
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—3.19%                              
ACON IWP Investors I, L.L.C.  (a)  Healthcare & Pharmaceuticals            500,000    500,000    537,903 
Javlin Capital LLC Class C-2 Preferred Units  (a) (d) (e)  Specialty Finance            214,286    750,000    - 
Total Equity/Other                  714,286   $1,250,000   $537,903 
                               
TOTAL INVESTMENTS—71.43%                      $13,550,048   $12,035,538 
OTHER ASSETS IN EXCESS OF LIABILITIES—28.57%                           $4,813,699 
NET ASSETS - 100.00%                           $16,849,237 

 

 

(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, 2017 represented 68.24% of the Company’s net assets. Fair value as of December 31, 2017 along with transactions during the period ended December 31, 2017 in affiliated investments were as follows:

 

       Year Ended December 31, 2017     
Non-controlled, Affiliated Investments  Fair Value at
December 31, 2016
   Gross Additions (Cost)*   Gross Reductions
(Cost)**
   Fair Value at
December 31, 2017
   Net Realized
Gain (Loss)
   Interest & Dividends
Credited to Income
 
ACON IWP Investors I, L.L.C.  $691,072   $-   $-   $537,903   $-   $- 
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   $-   $537,903   $-   $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)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, 2017. Certain investments are subject to a LIBOR or Prime interest rate floor. As of December 31, 2017, the three-month London Interbank Offered Rate, or LIBOR, was 1.69465%.

(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, 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.

 

10

 

 

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 a 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 nine months ended September 30, 2018 and 2017.

 

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 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 946, Financial Services – Investment Companies, 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, 2017.

 

Management Estimates and Assumptions. The preparation of unaudited, consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets

 

11

 

 

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.

 

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.

 

ASC Topic 820, Fair Value Measurement, 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

 

12

 

 

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.

 

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 September 30, 2018 and 2017, interest income included -0- and -0- of PIK interest, respectively. For the nine months ended September 30, 2018 and 2017, interest income included -0- and $19,488 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 September 30, 2018 and 2017 was -0- and -0-, respectively. The fee for the nine months ended September 30, 2018 and 2017 was -0- and ($334), respectively, of which all 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

 

13

 

 

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.

 

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 September 30, 2018, $3,089,687 of offering costs have been reclassified and included as part of the Expense Reimbursement Agreement and accordingly included in Reimbursement due from the Adviser. Of these expenses, $1,574,616 has exceeded the three-year period for repayment and will not be repayable by the Company. $225,000 of offering costs from contingent expenses recorded in prior periods were deemed to be non-payable and the Reimbursement from the Adviser was adjusted accordingly. For the three and nine months ended September 30, 2018, the Company incurred $73,477 and $292,036, respectively, in offering costs that were not reimbursed by the Sponsor, of which $83,942 and $170,932, respectively, was expensed by the Company for the three and nine months ended September 30, 2018.

 

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 September 30, 2018 and 2017, 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.

 

NOTE 3 – SHARE TRANSACTIONS

 

Below is a summary of transactions with respect to shares of the Company’s common stock during the nine months ended September 30, 2018 and 2017:

  

14

 

 

    Nine months ended September 30,
    2018   2017
    Shares   Amount   Shares   Amount
Gross proceeds from Offering   141,332.86   $ 1,865,205   362,028.61   $ 5,320,227
Reinvestment of Distributions   21,626.05     256,864   16,105.02     214,336
Commissions and Dealer Manager Fees   -     (178,471)   -     (502,640)
Net Proceeds to Company from Share Transactions   162,958.91   $      1,943,598   378,133.63   $ 5,031,923

  

During the nine months ended September 30, 2018 and 2017, the Company sold 141,322.86 and 362,028.61 shares of common stock, respectively, for gross proceeds of approximately $1,865,205 and $5,320,227, at an average price per share of $13.20 and $14.70, respectively. The increase in capital in excess of par value during the nine months ended September 30, 2018 and 2017 include reinvested stockholder distributions of $256,864 and $214,336, respectively, for which the Company issued 21,626.05 and 16,105.02 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 $178,471 and $502,640 for the nine months ended September 30, 2018 and 2017, 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:

 

    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. 

 

15

 

 

The following table provides information concerning the Company’s repurchase of shares of common stock during the nine months ended September 30, 2018 and 2017:

 

For the Nine Months Ended  Repurchase Date  Shares Repurchased  Percentage of Shares Tendered That Were Repurchased   Average Price Paid Per Share Aggregate Consideration for Repurchased Shares
Fiscal 2018              
 March 31, 2018   March 28, 2018  6,388.01  11%   $12.11 $ 77,359
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   26,244
 September 30, 2017   September 25, 2017  5,968.22  9%    12.30   73,409

  

The Company and its board did not authorize a repurchase for the three months ended September 30, 2018 nor the three months ended June 30, 2018.

 

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 September 30, 2018, certain registration, organization, operating and offering costs have been accounted for under the Expense Reimbursement Agreement and accordingly included in Reimbursement due from the Adviser on the statements of financial position.

 

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

 

   September 30,   December 31, 
   2018   2017 
Operating Expenses  $1,977,504   $1,977,504 
Offering Costs   3,089,687    3,314,687 
Due to related party offset   (4,724,476)   (4,707,407)
Reimbursements received from Adviser   (342,715)   (342,715)
Other amounts due to affiliates   886    15,559 
Total Reimbursement due from Adviser  $886   $257,628 

 

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

 

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July 2019 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 September 30, 2018, 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 2019 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 nine months ended September 30, 2018 and 2017:

 

         Three months ended September 30,   Nine months ended September 30, 
Related Party  Source Agreement  Description  2018   2017   2018   2017 
Triton Pacific Adviser, LLC  Investment Adviser Agreement  Base Management Fees  $91,593   $83,459   $269,189   $246,154 
Triton Pacific Adviser, LLC  Investment Adviser Agreement  Capital Gains Incentive Fees(1)  $-   $-   $-   $(334)
TFA Associates, LLC  Administration Agreement  Administrative Services Expenses  $66,558   $70,495   $215,786   $213,473 
Triton Pacific Securities, LLC  Dealer Manager Agreement  Dealer Manager Fees(2)  $11,427   $37,201   $34,809   $97,435 

 

(1)During the nine months ended September 30, 2018 and 2017, the Company earned capital gains incentive fees of -0- and ($334), respectively, based on the performance of its portfolio, of which all were based on unrealized losses, 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.

(2)During the nine months ended September 30, 2018 and 2017, the Company paid the Dealer Manager $178,471 and $502,640, respectively, in sales commissions and dealer fees. $34,809 and $97,435 were retained by TPS, respectively, and the remainder re-allowed to third party participating broker dealers.

 

The following table describes the amounts owed to affiliates as of September 30, 2018:

 

   September 30, 
   2018 
Management fees payable  $91,593 
Dealer manager fees payable   5,610 
Other amounts due to affiliates   22,777 
Total due to affiliates  $119,980 

 

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

 

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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.

 

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  $0  432.69%  -  September 30, 2015
December 31, 2012  $26,111  $0  531.09%  -  December 31, 2015
March 31, 2013  $30,819  $0  N/A  -  March 31, 2016
June 30, 2013  $59,062  $0  N/A  -  June 30, 2016
September 30, 2013  $65,161  $0  N/A  -  September 30, 2016
December 31, 2013  $91,378  $0  455.09%  -  December 31, 2016
March 31, 2014  $68,293  $0  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
September 30, 2017  $0  $119,188  4.19%  3.00%  September 30, 2020
December 31, 2017  $0  $0  N/A  N/A  N/A

 

(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

 

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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 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 our liquidation or dissolution. The Expense Reimbursement Agreement expires by its terms on December 31, 2018, unless extended with the mutual consent of the Company and our Adviser. Upon termination of the Expense Reimbursement Agreement we may be required to repay our Adviser all expense support payments made by our Adviser within three years of the date of termination, subject to the limitations contained in the agreement.

 

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 September 30, 2018, $5,067,191 has been recorded as Reimbursement due from the Adviser pursuant to the Expense Reimbursement Agreement. Of this, $4,724,476, 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 year ended December 31, 2017, the Adviser did not reimburse any operating expenses after the first quarter. Additionally, the Adviser did not reimburse any offering expenses for the first nine months of 2018 and fourth quarter of 2017. Of these Operating Expenses in the table above, $2,663,810 has exceeded the three-year period for repayment and will not be repayable by the Company. $2,403,381 remains that could potentially be subject to repayment by the Company.

 

NOTE 5 – DISTRIBUTIONS

 

The following table reflects the cash distributions per share that the Company declared and paid on its common stock during the nine months ended September 30, 2018 and 2017:

 

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    Distribution 
For the Nine Months Ended   Per Share   Amount 
Fiscal 2018         
January 29, 2018   $0.03370   $47,908 
February 28, 2018   $0.03370   $49,067 
March 28, 2018   $0.03370   $49,752 
April 26, 2018   $0.03370   $50,700 
May 29, 2018   $0.03370   $51,014 
June 27, 2018   $0.03370   $51,096 
July 27, 2018   $0.03370   $51,473 
August 27, 2018   $0.03370   $52,453 
September 25, 2018   $0.03370   $52,802 
            
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 
July 21, 2017   $0.04000   $48,678 
August 29, 2017   $0.03417   $44,767 
September 28, 2017   $0.03417   $45,500 

 

On October 23, 2018, the Company authorized and declared a cash distribution of $0.0337 per share for the month of October 2018, to the shareholders of record as of October 25, 2018. 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.

 

The following table reflects the sources of the cash distributions on a tax basis that the Company paid on its common stock during the nine months ended September 30, 2018 and 2017:

 

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   Nine months ended September 30, 
   2018   2017 

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   13,000    3%   47,998    12%
Long-term capital gains proceeds from the sale of assets   47,908    11%   -    - 
Distributions from common equity (return of capital)   395,356    86%   352,941    88%
Expense reimbursement from sponsor   -    -    -    - 
Total  $456,264    100%  $400,939    100%

 

 

(1)During the nine months ended September 30, 2018 and 2017, 97.1% and 92.7%, respectively, of the Company’s gross investment income was attributable to cash income earned, and 2.9% and 7.3%, 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 nine months ended September 30, 2018 and 2017 was ($281,572) and ($77,447), respectively. As of September 30, 2018 and 2017, the Company had ($1,316,612) and ($356,802), 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 nine months ended September 30, 2018 and ($334) was reversed for the nine months ended September 30, 2017.
 

The following table sets forth reconciliation between GAAP basis net investment income and tax basis net investment income for the nine months ended September 30, 2018 and 2017:

 

   Nine months ended September 30, 
   2018   2017 
GAAP basis net investment income (loss)  $(281,572)  $(77,113)
Reversal of incentive fee accrual on unrealized gains   -    (334)
Other book-tax differences   -    - 
Tax-basis net investment income (loss)  $(281,572)  $(77,447)

 

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 September 30, 2018 and 2017, the components of accumulated earnings on a tax basis were as follows:  

 

   Nine months ended September 30, 
   2018   2017 
Undistributed (overdistributed) ordinary income (income and short-term capital gains)  $(1,354,027)  $(421,863)
Distributable realized gains (long-term capital gains)   37,415    65,061 
Net unrealized appreciation (depreciation) on investments   (1,600,956)   (1,448,359)
   $(2,917,568)  $(1,805,161)

 

The ($1,600,956) of net depreciation as of September 30, 2018 includes gross appreciation over amortized tax cost of $200,456 and gross depreciation under amortized tax cost of $1,801,412. The ($1,448,359) of net depreciation as

 

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of September 30, 2017 includes gross appreciation over amortized tax cost of $191,929 and gross depreciation under amortized tax cost of $1,640,288.

 

The aggregate cost of the Company’s investments for U.S. federal income tax purposes totaled $15,105,760 and $12,934,038 as of September 30, 2018 and 2017, respectively. The aggregate net unrealized appreciation (depreciation) on investments on a tax basis was ($1,600,956) and ($1,448,359) as of September 30, 2018 and 2017, 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 September 30, 2018 and December 31, 2017:

 

   Nine months ended September 30, 2018             
   (Unaudited)   Year Ended December 31, 2017 
   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  $8,021,538   $7,985,641    59%  $7,714,423   $7,690,952    64%
Senior Secured Loans—Second Lien   5,167,833    5,017,421    37%   3,919,236    3,806,683    32%
Subordinated Debt   666,389    -    0%   666,389    -    0%
Equity/Other   1,250,000    501,742    4%   1,250,000    537,903    4%
Total  $15,105,760   $13,504,804    100%  $13,550,048   $12,035,538    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 September 30, 2018 and December 31, 2017:

 

   September 30, 2018
(Unaudited)
   December 31, 2017 
Industry Classification 

Fair 

Value 

  

Percentage of 

Portfolio 

  

Fair 

Value 

  

Percentage of 

Portfolio 

 
Beverage, Food & Tobacco   1,987,287    14.7%   1,618,327    13.4%
Business Services   3,700,395    27.5%   4,325,419    35.8%
Construction & Building   483,750    3.6%   -    0.0%
Consumer Services   1,316,527    9.7%   1,671,168    13.9%
Energy: Oil & Gas   826,666    6.1%   337,488    2.8%
Environmental   490,000    3.6%   -    0.0%
Healthcare & Pharmaceuticals   1,502,310    11.1%   734,869    6.1%
High Tech Industries   768,043    5.7%   833,178    6.9%
Hotel, Gaming & Leisure   505,296    3.7%   352,809    2.9%
Media: Diversified and Production   306,831    2.3%   334,586    2.8%
Metals & Mining   958,018    7.1%   1,143,870    9.5%
Telecommunications   469,238    3.5%   496,322    4.3%
Wholesale Trade-Nondurable Goods   190,443    1.4%   187,502    1.6%
Total  $13,504,804    100.0%  $12,035,538    100.00%

 

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

 

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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 September 30, 2018 and December 31, 2017, the Company’s investments were categorized as follows in the fair value hierarchy):

 

Valuation Inputs  Nine months ended
September 30, 2018
(Unaudited)
   Year ended
December 31,
2017
 
Level 1—Price quotations in active markets  $-   $- 
Level 2—Significant other observable inputs   -    - 
Level 3—Significant unobservable inputs   13,504,804    12,035,538 
Total  $13,504,804   $12,035,538 

  

The Company’s investments as of September 30, 2018 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.

 

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 nine months ended September 30, 2018 and year ended December 31, 2017 of investments for which significant unobservable inputs (Level 3) were used in determining fair value:

 

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   For the nine months ended September 30, 2018 
   Senior Secured
Loans - First Lien
   Senior  Secured
Loans - Second
Lien
   Subordinated
Convertible
Debt
   Equity/Other   Total 
Fair value at beginning of period  $7,690,952   $3,806,683   $-   $537,903   $12,035,538 
Accretion of discount (amortization of premium)   18,119    6,654    -    -    24,773 
Net realized gain (loss)   23,310    9,650    -    -    32,960 
Net change in unrealized appreciation (depreciation)   (12,425)   (37,859)   -    (36,161)   (86,445)
Purchases   2,943,750    1,482,500    -    -    4,426,250 
Paid-in-kind interest   -    -    -    -    - 
Sales and redemptions   (2,678,064)   (250,208)   -    -    (2,928,272)
Net transfers in or out of Level 3   -    -    -    -    - 
Fair value at end of period  $7,985,642   $5,017,420   $-   $501,742   $13,504,804 
                          
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  $(12,425)  $(37,859)  $-   $(36,161)  $(86,445)

  

   For the year ended December 31, 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)   21,761    10,005    -    -    31,766 
Net realized gain (loss)   50,321    41,115    -    -    91,436 
Net change in unrealized appreciation (depreciation)   (104,169)   (55,220)   (666,389)   (690,398)   (1,516,176)
Purchases   4,392,250    2,720,625    -    -    7,112,875 
Paid-in-kind interest   -    -    19,488    -    19,488 
Sales and redemptions   (3,430,524)   (877,500)   -    -    (4,308,024)
Net transfers in or out of Level 3   -    -    -    -    - 
Fair value at end of period  $7,690,952   $3,806,683   $-   $537,903   $12,035,538 
                          
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  $(104,169)  $(55,220)  $-   $(690,398)  $(849,787)

 

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets as of September 30, 2018 were as follows:

 

Asset Category   Fair Value   Primary Valuation Technique   Unobservable Inputs   Range   Weighted Average
Senior Secured Loans - First Lien     7,985,642   Market quotes   Indicative dealer quotes   71.89 - 102.25   98.55
Senior Secured Loans - Second Lien   5,017,420   Market quotes   Indicative dealer quotes   7.10 - 103.00   99.64
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     501,742   Market comparables   EBITDA multiples (x)   6.50x - 8.50x   7.50x
Total   $ 13,504,804                

  

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets as of December 31, 2017 were as follows:

 

Asset Category   Fair Value   Primary Valuation Technique   Unobservable Inputs   Range   Weighted Average
Senior Secured Loans - First Lien     7,690,952   Market quotes   Indicative dealer quotes   78.05 - 102.00   98.73
Senior Secured Loans - Second Lien   3,806,683   Market quotes   Indicative dealer quotes   26.67 - 103.00   98.55
Subordinated Debt     -   Distribution waterfall/ liquidation priorities   Book value multiples (x)   N/A   N/A
Equity/Other     -   Distribution waterfall/ liquidation priorities   Book value multiples (x)   N/A   N/A
Equity/Other     537,903   Market comparables   EBITDA multiples (x)   7.15x - 9.15x   8.15x
Total   $ 12,035,538                

  

On June 30, 2017, the Company made the decision to write down the carrying value of its investment value in Javlin Financial. 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. It is unknown at this time if there will be any value to the investment.

 

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NOTE 8 – FINANCIAL HIGHLIGHTS

 

The following is a schedule of financial highlights of the Company for the nine months ended September 30, 2018 and the year ended December 31, 2017:

 

   Nine Months Ended
September 30, 2018
(Unaudited)
   Year Ended
December 31, 2017
 
Per Share Data:          
Net asset value, beginning of period  $11.89   $13.55 
Results of operations(1)          
Net investment income (loss)   (0.19)   (0.16)
Net realized and unrealized appreciation (depreciation) on investments(2)   (0.03)   (1.12)
Net increase (decrease) in net assets resulting from operations   (0.22)   (1.28)
Stockholder distributions(3)          
Distributions from net investment income   (0.29)   (0.41)
Distributions from net realized gain on investments   (0.01)   (0.04)
Net decrease in net assets resulting from stockholder distributions   (0.30)   (0.45)
Capital share transactions          
Issuance of common stock(4)   0.02    0.07 
Net increase (decrease) in net assets resulting from capital share transactions   0.02    0.07 
Net asset value, end of period  $11.39   $11.89 
Shares outstanding, end of period   1,573,804    1,417,233 
Total return(5)   -1.7%   -8.9%
Ratio/Supplemental Data:          
Net assets, end of period  $17,924,154   $16,849,237 
Ratio of net investment income to average net assets   -1.6%   -1.3%
Ratio of total operating expenses to average net assets   6.5%   7.3%
Ratio of expenses reimbursed by sponsor to average net assets   0.0%   0.5%
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   0.0%   0.0%
Ratio of net operating expenses to average net assets   6.5%   6.7%
Portfolio turnover(6)   16.8%   28.6%

   

(1) The per share data was derived by using the weighted average shares outstanding for the nine months ended September 30, 2018 and the year ended December 31, 2017.
(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.
(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

 

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  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 nine months ended September 30, 2018 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 November 14, 2018, and notes the following:

 

For the period beginning October 1, 2018 and ending November 14, 2018, the Company sold 4,097.98 shares of its common stock for total gross proceeds of $52,700, and issued amounts pursuant to its distribution reinvestment plan in the amount of $29,708.31.

 

On March 23, 2018, an amendment to Section 61(a) of the Company Act was signed into law to permit BDCs to reduce the minimum “asset coverage” ratio from 200% to 150%, so long as certain approval and disclosure requirements are satisfied. As a result, these amendments permit BDCs to potentially increase their debt-to-equity ratio from a maximum of 1 to 1 to a maximum of 2 to 1. In addition, for BDCs like the Company whose securities are not listed on a national securities exchange, the Company is also required to offer to repurchase its outstanding shares at the rate of 25% per quarter over four calendar quarters. Under the existing 200% minimum asset coverage ratio, the Company is permitted to borrow up to one dollar for investment purposes for every one dollar of investor equity, and under the 150% minimum asset coverage ratio, the Company will be permitted to borrow up to two dollars for investment purposes for every one dollar of investor equity.

 

On April 18, 2018, the Board of Directors of the Company, including a “required majority” (as such term is defined in Section 57(o) of the Company Act), approved the application to the Company of the 150% minimum asset coverage ratio set forth in Section 61(a)(2) of the Company Act. As a result, and subject to certain additional disclosure requirements, the minimum asset coverage ratio applicable to the Company will be reduced from 200% to 150%, effective as of April 18, 2019. In addition, in order to provide the Company with the maximum financial flexibility at the earliest possible date, the Board of Directors also authorized the submission of a proposal for stockholders to approve the application of the 150% minimum asset coverage ratio to the Company at the Company’s 2018 annual meeting of stockholders (the “2018 Annual Meeting”). If the Company’s stockholders approve such proposal at the 2018 Annual Meeting, the 150% minimum asset coverage ratio will then apply effective as the first day after the 2018 Annual Meeting and, as a result, the Company will be permitted to incur double the maximum amount of leverage that the Company is able to incur currently approximately ten months earlier than if the Company’s stockholders do not vote to approve such proposal.

 

On August 10, 2018, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Pathway Capital Opportunity Fund, Inc. (“PWAY”), a registered closed-end investment company that operates as an interval fund pursuant to Rule 23c-3 under the Company Act. Pursuant to the Merger Agreement,

 

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and subject to certain conditions described therein, PWAY will merge with and into the Company, with the Company as the surviving legal entity in the merger (the “Merger”). It is expected that PWAY will be the surviving accounting entity. The respective boards of directors of the Company and PWAY, including the directors who are not “interested persons” as defined in Section 2(a)(19) of the Company Act, determined that the Merger would be in the best interests of each of the Company and PWAY, and further approved the Merger upon the terms and subject to the conditions and limitations set forth in the Merger Agreement. If the proposed Merger is consummated, the holders of shares of PWAY’s Class A common stock, par value $0.01 per share (“PWAY Class A Shares”), will have a right to receive a number of shares of the Company’s Class A common stock, par value $0.001 per share (“TPIC Common Stock”), equal to the result of (A) the PWAY Class A per-share net asset value (“NAV”) divided by (B) the Company per-share NAV, in each case determined in accordance with the Merger Agreement, and the holders of shares of PWAY’s Class I common stock, par value $0.01 per share (“PWAY Class I Shares” and, together with the PWAY Class A Shares, the “PWAY Common Stock”), will have a right to receive a number of shares of TPIC Common Stock equal to the result of (A) the PWAY Class I per-share NAV divided by (B) the Company per-share NAV, in each case determined in accordance with the Merger Agreement. The closing of the Merger is subject to a number of closing conditions, including the approval of the stockholders of both the Company and PWAY.

 

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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 with the SEC on June 22, 2018 and declared effective on June 25, 2018.

 

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 June 25, 2018. As of November 14, 2018, we have sold a total of 1,580,469.90 shares of common stock for gross proceeds of approximately $23,022,029.93 including shares issued pursuant to our distribution reinvestment plan in the amount of $890,616.79, including the reduction due to $604,017.28 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;

 

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

 

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-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 $5.221 billion in assets under management as of June 30, 2018. 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.

 

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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. The Company Act generally prohibits us from incurring indebtedness unless immediately after such borrowing we have an asset coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our assets). However, recent legislation has modified the Company Act by allowing a BDC to increase the maximum amount of leverage it may incur from an asset coverage ratio of 200% to an asset coverage ratio of 150%, if certain requirements are met. Under the legislation, we are allowed to increase our leverage capacity if stockholders representing at least a majority of the votes cast, when quorum is met, approve a proposal to do so. If we receive stockholder approval, we would be allowed to increase our leverage capacity on the first day after such approval. Alternatively, the legislation allows the majority of our independent directors to approve an increase in our leverage capacity, and such approval would become effective after one year. In either case, we would be required to make certain disclosures on our website and in SEC filings regarding, among other things, the receipt of approval to increase our leverage, our leverage capacity and usage, and risks related to leverage. As a non-traded BDC, we would also be required to offer to repurchase our outstanding shares at the rate of 25% per quarter over four calendar quarters.

 

At a meeting held on April 18, 2018, our Board of Directors, including a “required majority” (as defined in Section 57(o) of the Company Act) approved the application of the modified asset coverage requirements from 200% asset coverage to 150% asset coverage. As a result, and subject to certain additional disclosure requirements as well as the repurchase obligations, both as described above, the 150% minimum asset coverage ratio will apply to the Company effective as of April 18, 2019. We intend to seek stockholder approval to accelerate the decrease of the required asset coverage ratio from 200% to 150%, which would give us the ability to increase the amount of leverage we could incur effective the day after stockholder approval is received.

 

Proposed Merger with Pathway Capital Opportunity Fund

 

On August 10, 2018, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Pathway Capital Opportunity Fund, Inc. (“PWAY”), a registered closed-end investment company that operates as an interval fund pursuant to Rule 23c-3 under the Company Act. Pursuant to the Merger Agreement, and subject to certain conditions described therein, PWAY will merge with and into the Company, with the Company as the surviving entity in the merger (the “Merger”). The respective boards of directors of the Company and PWAY, including the directors who are not “interested persons” as defined in Section 2(a)(19) of the Company Act, determined that the Merger would be in the best interests of each of the Company and PWAY, and further approved the Merger upon the terms and subject to the conditions and limitations set forth in the Merger Agreement. The closing of the Merger (the “Closing”) is subject to the satisfaction or waiver of certain closing conditions, as described below. It is expected that the Merger will qualify as a “reorganization” under the provisions of Section 368(a) of Internal Revenue Code of 1986, as amended (the “Code”) and shareholders of PWAY generally will not recognize gain or loss in connection with the exchange of their shares of PWAY common stock for shares of the Company’s common stock pursuant to the Merger Agreement.

 

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If the proposed Merger is consummated, the holders of shares of PWAY’s Class A common stock, par value $0.01 per share (“PWAY Class A Shares”), will have a right to receive a number of shares of the Company’s Class A common stock, par value $0.001 per share (“TPIC Common Stock”), equal to the result of (A) the PWAY Class A per-share net asset value (“NAV”) divided by (B) the Company per-share NAV, in each case determined in accordance with the Merger Agreement, and the holders of shares of PWAY’s Class I common stock, par value $0.01 per share (“PWAY Class I Shares” and, together with the PWAY Class A Shares, the “PWAY Common Stock”), will have a right to receive a number of shares of TPIC Common Stock equal to the result of (A) the PWAY Class I per-share NAV divided by (B) the Company per-share NAV, in each case determined in accordance with the Merger Agreement. Until the Merger is completed, the value of the shares of TPIC Common Stock to be issued in the Merger and the number of shares of the Company Common Stock to be issued to PWAY stockholders may fluctuate or change.

 

Triton Pacific Adviser and ZAIS Group, LLC currently serve as the investment adviser and investment sub-adviser, respectively, to the Company. These entities are expected to no longer serve in such capacities following completion of the Merger, and Prospect Flexible Income Management, LLC (the “New Investment Adviser”), subject to the approval of the Company’s stockholders, is expected to serve as the investment adviser to the combined company following completion of the Merger. In addition, TFA Associates, LLC, which currently serves as the administrator to the Company is also expected to cease to serve in such capacity, and Prospect Administration LLC (“Prospect Administration”) is expected to serve as the administrator and TFA Associates, LLC is expected to serve as the sub-administrator to the combined surviving company following completion of the Merger. Finally, in accordance with the provisions of the Maryland General Corporation Law, the Company’s board of directors has approved the change in the Company’s name to TP Flexible Income Fund, Inc. (“FLEX”), subject to and effective upon consummation of the Merger.

 

At the effective time of the Merger, the Company’s board of directors will continue to consist of five directors, with each of Prospect Capital Management L.P. (“Prospect Capital Management”) and Triton Pacific Adviser having the right to nominate one individual for election to the board of directors of the combined surviving company so long as (i) the New Investment Adviser is the investment adviser to the combined surviving company and (ii) such nomination is (A) in accordance with the combined surviving company’s charter, bylaws and applicable law, and (B) consistent with the duties of the board of directors of the combined surviving company. Prospect Capital Management has nominated M. Grier Eliasek, PWAY’s existing Chief Executive and Officer and President, to the combined surviving company’s board of directors, and Triton Pacific Adviser has nominated Craig J. Faggen, TPIC’s existing Chief Executive Officer and member of its board of directors, to the combined surviving company’s board of directors. In addition, the Company has nominated three new independent directors to the combined surviving company’s board of directors, each of whom is currently an independent director on PWAY’s board of directors. The terms of each of these nominated directors is effective upon consummation of the Merger.

 

The Merger Agreement contains (a) customary representations and warranties made by each party to the other party, and (b) customary covenants and agreements, including: (i) a covenant by each party to cooperate in the preparation of the proxy materials to be filed in connection with the Merger; and (ii) a covenant by each party to take actions reasonably necessary, proper or advisable to consummate and make effective the transactions contemplated by the Merger Agreement.

 

As more fully described in the Merger Agreement, the obligations of PWAY and the Company to complete the Merger are subject to the satisfaction or, where permissible, waiver of, certain conditions including the following: (i) the approvals of PWAY and the Company stockholders are obtained at their respective stockholder meetings; (ii) a joint proxy statement and prospectus filed by the Company on Form N-14 (the “Registration Statement”) has become effective and no stop order suspending its effectiveness has been issued and no proceedings for that purpose have been initiated or threatened by the SEC; (iii) all necessary regulatory and statutory approvals (if any) are obtained by each of PWAY and the Company and remain in full force and effect and all statutory waiver periods in respect thereof have expired or been terminated; (iv) any applicable waiting period applicable to the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, has expired or been terminated; (v) no order, injunction or decree or law preventing or making illegal the consummation of the Merger or any of the other transactions contemplated by the Merger Agreement is in effect, and no such suit or proceeding is pending; (vi) the New Investment Adviser is duly registered as an investment adviser under the Investment Advisers Act of 1940, as amended; (vii) a new investment advisory

 

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agreement is duly executed and delivered by FLEX and the New Investment Adviser; (viii) a new administration agreement is duly executed and delivered by FLEX and Prospect Administration; (ix) an expense limitation agreement by and between FLEX and the New Investment Adviser (as described in the Registration Statement), is duly executed and delivered by such parties; (x) the Triton Termination and Waiver Agreement (as defined and described in the Registration Statement) is duly executed and delivered by the relevant parties; (xi) a distribution agreement, by and between FLEX and Triton Pacific Securities, LLC, is duly executed and delivered by such parties; and (xii) the truth and accurateness of the representations and warranties and compliance with covenants of each other party in the Merger Agreement, subject to the materiality standards provided in the Merger Agreement.

 

As more fully described in the Merger Agreement, the Merger Agreement contains certain termination rights for PWAY or the Company, as applicable, including if: (i) the parties mutually agree to terminate; (ii) the Merger has not been completed by December 31, 2018, unless extended in writing with the mutual consent of the Company and PWAY; (iii) any regulatory or statutory approvals required to be obtained by either PWAY or the Company with respect to the Merger or any of the other transactions contemplated by the Merger Agreement have been denied and such denials have become final and nonappealable; (iv) a governmental entity has issued a final and non-appealable order or promulgated a law prohibiting or making illegal the Merger or any of the other transactions contemplated by the Merger Agreement; (v) the stockholders of PWAY fail to approve the Merger and the transactions contemplated thereby (collectively, the “PWAY Stockholder Proposals”); (vi) the PWAY board of directors has changed its recommendation in favor of the PWAY Stockholder Proposals; (vii) the stockholders of the Company fail to approve the Merger and the transactions contemplated thereby (collectively, the “the Company Stockholder Proposals”); (viii) the Company board of directors has changed its recommendation in favor of the Company Stockholder Proposals; (ix) either the Company or PWAY receives a Superior Proposal (as defined in the Merger Agreement) by a third party and the board of directors of the Company or PWAY, as the case may be, approves such entity to enter into definitive documentation with respect to such Superior Proposal and such entity pays the other entity the reasonable, documented out-of-pocket expenses incurred in connection transactions contemplated by the Merger Agreement; or (x) either party breaches its representations, warranties or covenants in the Merger Agreement such that the closing conditions cannot be satisfied. The Merger Agreement provides that, in connection with the termination of the Merger Agreement under specified circumstances, the Company or PWAY, as the terminating party, will be required to pay the other party, as the non-terminating party, in cash, an amount equal to such non-terminating party’s reasonable, documented out-of-pocket expenses incurred in connection with the transactions contemplated by the Merger Agreement.

 

In connection with the proposed Merger, the Company has filed with the SEC a Registration Statement on Form N-14 that includes proxy statements of the Company and PWAY and that also constitutes a prospectus of the Company regarding the TPIC Common Stock to be issued to the stockholders of PWAY in connection with the Merger. The Registration Statement will be mailed to the stockholders of TPIC and PWAY if and when it is declared effective by the SEC.

 

The description of the Merger Agreement set forth above is qualified in its entirety by reference to the full text of the Merger Agreement, which is attached as an exhibit to the Registration Statement on Form N-14 filed by the Company with the SEC on August 13, 2018.

 

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

 

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We also 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;

 

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.

 

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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 nine months ended September 30, 2018, we made investments in portfolio companies totaling $4,426,250. During the same period, we sold investments and received principal repayments of $2,928,272. As of September 30, 2018, our investment portfolio, with a total fair value of $13,504,804, consisted of interests in 33 portfolio companies (59.1% in first lien senior secured loans, 37.2% in second lien senior secured loans, 0% in subordinated convertible debt and 3.7% in equity). The portfolio companies that comprised our portfolio as of such date had an average annual EBITDA of approximately $167.3 million. As of September 30, 2018, the investments in our debt portfolio were purchased at a weighted average price of 98.4% of par or stated value, and the weighted average credit rating of the investments in our portfolio that were rated (constituting 96.3% 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 7.8% based upon the amortized cost of our investments and was 8.5% 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 September 30, 2018. The portfolio yield does not represent an actual investment return to stockholders.

 

Total Portfolio Activity

 

  September 30, 2018   December 31, 2017
Number of Portfolio Companies 33   32
% Variable Rate (based on fair value) 96.3%   95.5%
% Fixed Rate (based on fair value) 0.0%   0.0%
% Non-Income Producing Equity or Other Investments (based on fair value) 3.7%   4.5%
Average Annual EBITDA of Portfolio Companies 167.3MM   162.3MM
Weighted Average Credit Rating of Investments that were Rated B2   B2
% of Investments on Non-Accrual (based on amortized cost) —     —  
Gross Portfolio Yield Prior to Leverage (based on amortized cost) 7.8%   6.7%

 

The following tables present certain selected information regarding our portfolio investment activity for the nine months ended September 30, 2018 and year ended December 31, 2017:

 

Net Investment Activity  Nine months ended
September 30, 2018
   Year ended
December 31, 2017
 
Purchases  $4,426,250   $7,112,875 
Sales and Redemptions   (2,928,272)   (4,308,024)
Net Portfolio Activity  $1,497,978   $2,804,851 

 

The following table presents the composition of the total purchases for the nine months ended September 30, 2018:

 

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   Nine months ended September 30, 2018
(unaudited)
   Year ended December 31, 2017 
   Purchases   Percentage of  Portfolio   Purchases   Percentage of  Portfolio 
Senior Secured Loans—First Lien  $2,943,750   67%   $4,392,250   62% 
Senior Secured Loans—Second Lien   1,482,500   33%    2,720,625   38% 
Subordinated Debt   -   0%    -   0% 
Equity/Other   -   0%    -   0% 
Total  $4,426,250   100%   $7,112,875   100% 

 

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 September 30, 2018 and December 31, 2017:

 

   September 30, 2018
(Unaudited)
  December 31, 2017
Industry Classification  Fair
Value
   Percentage of
 Portfolio
  Fair
 Value
   Percentage of
 Portfolio
Beverage, Food & Tobacco   1,987,287   14.7%   1,618,327   13.4%
Business Services   3,700,395   27.5%   4,325,419   35.8%
Construction & Building   483,750   3.6%   -   0.0%
Consumer Services   1,316,527   9.7%   1,671,168   13.9%
Energy: Oil & Gas   826,666   6.1%   337,488   2.8%
Environmental   490,000   3.6%   -   0.0%
Healthcare & Pharmaceuticals   1,502,310   11.1%   734,869   6.1%
High Tech Industries   768,043   5.7%   833,178   6.9%
Hotel, Gaming & Leisure   505,296   3.7%   352,809   2.9%
Media: Diversified and Production   306,831   2.3%   334,586   2.8%
Metals & Mining   958,018   7.1%   1,143,870   9.5%
Telecommunications   469,238   3.5%   496,322   4.3%
Wholesale Trade-Nondurable Goods   190,443   1.4%   187,502   1.6%
Total  $13,504,804   100.0%  $12,035,538   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.

 

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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).

8.Credits placed in this category have experienced either a technical or actual payment default which may require a write-down within our respective portfolios.

 

Categories 1 through 5 are performing in line with expectation, while categories 6-8 are closely watched for or have experienced liquidity problems and/or default.

 

The following table shows the distribution of our senior secured loan investments on the 1 to 8 scale at fair value as of September 30, 2018 and December 31, 2017:

 

    September 30, 2018   December 31, 2017 
Investment Rating   Fair Value   Percentage   Fair Value   Percentage 
1   $188,447    1.4%  $-    0.0%
2    695,361    5.3%   486,150    4.2%
3    2,005,301    15.4%   4,067,859    35.4%
4    3,309,314    25.5%   2,975,871    25.9%
5    5,923,983    45.6%   3,508,571    30.5%
6    858,656    6.6%   459,184    4.0%
7    22,000    0.2%   -    0.0%
8    -    0.0%   -    0.0%
    $13,003,062    100.0%  $11,497,635    100.0%

 

Results of Operations

 

Investment Income

 

For the three months ended September 30, 2018 and 2017, we generated $302,542 and $227,488, respectively, in investment income in the form of interest and fees earned on our debt portfolio. Such revenues represent $293,723 of cash income and $8,819 in non-cash portions related to the accretion of discounts and paid-in-kind interest for the three months ended September 30, 2018. We expect the dollar amount of interest that we earn to continue to increase as the size of our investment portfolio increases.

 

For the nine months ended September 30, 2018 and 2017, we generated $857,038 and $596,666, respectively, in investment income in the form of interest and fees earned on our debt portfolio. Such revenues represent $832,265 of cash income and $24,773 in non-cash portions related to the accretion of discounts and paid-in-kind interest for the nine months ended September 30, 2018.

 

Operating Expenses

 

Total operating expenses before reimbursement from the sponsor and management fee waiver totaled $421,402 and $283,890 for the three months ended September 30, 2018 and 2017, respectively, and consisted of

 

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base management fees, adviser and administrator reimbursements, professional fees, insurance expense, directors’ fees and other general and administrative fees. The base management fees for the quarters were $91,593 and $83,459, respectively, and the incentive fees for the quarters were -0- and -0-, respectively. Pursuant to the Expense Reimbursement Agreement (discussed below), the sponsor did not reimburse the Company for the three months ended September 30, 2018 and 2017.

 

Total operating expenses before reimbursement from the sponsor and management fee waiver totaled $1,138,610 and $754,626 for the nine months ended September 30, 2018 and 2017, respectively, and consisted of base management fees, adviser and administrator reimbursements, professional fees, insurance expense, directors’ fees and other general and administrative fees. The base management fees for the periods were $269,189 and $246,154, respectively, and the incentive fees for the quarters were -0- and ($334), respectively. Pursuant to the Expense Reimbursement Agreement (discussed below), the sponsor reimbursed the Company -0- and $80,847 for the nine months ended September 30, 2018 and 2017.

 

Our other general and administrative expenses totaled $27,339 and $13,095 for the three months ended September 30, 2018 and 2017, respectively, and $56,487 and $23,168 for the nine months ended September 30, 2018 and 2017, respectively, and consisted of the following:

 

   Three months ended
September 30, 2018
   Three months ended
September 30, 2017
   Nine months ended
September 30, 2018
   Nine months ended
September 30, 2017
 
Licenses and permits  $-   $-   $623   $413 
Outside Services   1,763    9,753    1,859    9,753 
Printing fees   9,841    2,408    20,356    8,560 
Travel expenses   14,685    -    25,774    1,056 
Other   1,050    934    7,875    3,386 
Total  $27,339   $13,095   $56,487   $23,168 

 

Net Investment Income

 

Our net investment income totaled ($118,860) (($0.08) per share based on weighted average shares outstanding) for the three months ended September 30, 2018 and ($56,402) (($0.04) per share based on weighted average shares outstanding) for the three months ended September 30, 2017.

 

Our net investment income totaled ($281,572) (($0.19) per share based on weighted average shares outstanding) for the nine months ended September 30, 2018 and ($77,113) (($0.07) per share based on weighted average shares outstanding) for the nine months ended September 30, 2017.

 

Net Realized Gains/Losses from Investments

 

We measure realized gains or losses by the difference between the net proceeds from the disposition and the amortized cost basis of investment, without regard to unrealized gains or losses previously recognized.

 

For the three and nine months ended September 30, 2018, we sold investments and received principal payments of $1,069,852 and $2,928,272, from which we realized a net gain of $3,740 and $32,960, respectively. For the three and nine months ended September 30, 2017, we sold investments and received principal payments of $1,313,279 and $3,926,031, from which we realized a net gain of $31,093 and $95,657, respectively.

 

Net Unrealized Appreciation/Depreciation on Investments

 

Net change in unrealized appreciation on investments reflects the net change in the fair value of our investment portfolio. For the three and nine months ended September 30, 2018, net changes in unrealized appreciation were ($14,389) and ($86,445), respectively. For the three and nine months ended September 30, 2017, net changes in unrealized appreciation were ($131,397) and ($1,450,025), respectively.  

 

On June 30, 2017, we made the decision to fully mark down its remaining investment value 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. It is unknown at this time if there will be any value to the investment.

 

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Changes in Net Assets from Operations

 

For the three and nine months ended September 30, 2018, we recorded a net income of ($129,509) and ($335,058), respectively versus net income of ($161,230) and ($1,436,004), respectively, for the three and nine months ended September 30, 2017.

 

Based on 1,544,718 and 1,500,612 weighted average common shares outstanding for the three and nine months ended September 30, 2018, basic and diluted, our per share net increase in net assets resulting from operations was ($0.08) and ($0.22).

 

Based on 1,266,225 and 1,143,880 weighted average common shares outstanding for the three and nine months ended September 30, 2017, basic and diluted, our per share net increase in net assets resulting from operations was ($0.13) and ($1.26).

 

Financial Condition, Liquidity and Capital Resources

 

We generate cash primarily from the net proceeds of our offering, and from cash flows from fees (such as management fees), interest and dividends earned from our investments and principal repayments and proceeds from sales of our investments. Our primary use of funds is investments in companies, and payments of our expenses and distributions to holders of our common stock.

 

The offering of our common stock represents a continuous offering of our shares. The initial offering of our common stock commenced on September 4, 2012 and terminated on March 1, 2016. On March 17, 2016, we commenced the follow-on offering of our common stock, which follow-on offering is currently ongoing. We intend to file post-effective amendments to our registration statement to allow us to continue our offering for three years. Our most recent post-effective amendment was filed with the SEC on June 22, 2018 and was declared effective by the SEC on June 25, 2018. The Dealer Manager is not required to sell any specific number or dollar amount of shares but will use its best efforts to sell the shares offered. The minimum investment in shares of our common stock is $5,000.

 

The current offering price for our shares is $12.66 per share; however, to the extent our net asset value increases, we will sell at a price necessary to ensure that shares are not sold at a price per share, after deduction of selling commissions and dealer manager fees, that is below our net asset value per share. In connection with each closing, our board of directors or a committee thereof is required, within 48 hours of the time that each closing and sale is made, to make the determination that we are not selling shares of any class of our common stock at a price per share which, after deducting upfront selling commissions, if any, is below the then-current net asset value per share of the applicable class. Promptly following any such adjustment to the offering price per share, we will file a prospectus supplement with the SEC disclosing the adjusted offering price, and we appropriately publish the updated information. The Dealer Manager for this offering is an affiliate of our Adviser.

 

During the nine months ended September 30, 2018, we sold 141,332.86 shares of our common stock for gross proceeds of $1,865,205 at an average price per share of $13.20. The increase in capital in excess of par value during the nine months ended September 30, 2018 include reinvested stockholder distributions of $256,864 for which we issued 21,626.05 shares of common stock. The sales commissions and dealer manager fees related to the sale of our common stock were $178,471 for the nine months ended September 30, 2018. These sales commissions and fees include $34,809 retained by the dealer manager, Triton Pacific Securities, LLC, which is an affiliate of ours. Our offering expenses are capitalized as deferred offering expenses and then subsequently expensed over a 12-month period.

 

We may borrow funds to make investments at any time, including before we have fully invested the proceeds of our offering, to the extent we determine that additional capital would allow us to take advantage of investment opportunities, or if our board of directors determines that leveraging our portfolio would be in our best interests and the best interests of our stockholders. We have not yet decided, however, whether, and to what extent, we will finance portfolio investments using debt. We do not currently anticipate issuing any preferred stock.

 

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Contractual Obligations

 

We have entered into certain contracts under which we have material future commitments. On July 27, 2012, we entered into the investment advisory agreement with Triton Pacific Adviser, LLC in accordance with the Company Act. The investment advisory agreement became effective on June 25, 2014, the date that we met the minimum offering requirement. Triton Pacific Adviser serves as our investment advisor in accordance with the terms of our investment advisory agreement. Payments under our investment advisory agreement in each reporting period will consist of (i) a management fee equal to a percentage of the value of our gross assets and (ii) a capital gains incentive fee based on our performance.

 

On July 27, 2012, we entered into the administration agreement with TFA Associates, LLC pursuant to which TFA Associates furnishes us with administrative services necessary to conduct our day-to-day operations. TFA Associates is reimbursed for administrative expenses it incurs on our behalf in performing its obligations. Such costs are reasonably allocated to us on the basis of assets, revenues, time records or other reasonable methods. We do not reimburse TFA Associates 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.

 

At the time of our offering, our Administrator has contracted with Bank of New York Mellon and affiliated entities to provide additional administrative services, while we have directly engaged Bank of New York Mellon and affiliated entities to act as our custodian. We have also contracted with Phoenix American Financial Services to act as our transfer agent, plan administrator, distribution paying agent and registrar. In April 2018, our Administrator contracted with SS&C Technologies, Inc. to provide additional accounting services beginning the fourth quarter.

 

On August 10, 2018, we entered into the Merger Agreement, discussed above under the heading Merger with Pathway Capital Opportunity Fund.

 

If any of our contractual obligations discussed above are terminated, our costs may increase under any new agreements that we enter into as replacements. We would also likely incur expenses in locating alternative parties to provide the services we expect to receive under the investment advisory agreement and administration agreement. Any new investment advisory agreement would also be subject to approval by our stockholders.

 

Off-Balance Sheet Arrangements

 

Other than contractual commitments and other legal contingencies incurred in the normal course of our business, we do not have any off-balance sheet financings or liabilities.

 

Distributions

 

We elected to be treated, beginning with our fiscal year ending December 31, 2012, and intend to qualify annually thereafter, as a RIC under the Code. To obtain and maintain RIC tax treatment, we must, among other things, distribute at least 90% of our net ordinary income and net short-term capital gains in excess of net long-term capital losses, if any, to our stockholders. In order to avoid certain excise taxes imposed on RICs, we must distribute during each calendar year an amount at least equal to the sum of: (i) 98% of our ordinary income for the calendar year, (ii) 98.2% of our capital gains in excess of capital losses for the one-year period generally ending on October 31 of the calendar year (unless an election is made by us to use our taxable year) and (iii) any ordinary income and net capital gains for preceding years that were not distributed during such years and on which we paid no federal income tax.

 

While we intend to distribute any income and capital gains in the manner necessary to minimize imposition of the 4% U.S. federal excise tax, sufficient amounts of our taxable income and capital gains may not be distributed to avoid entirely the imposition of the tax. In that event, we will be liable for the tax only on the amount by which we do not meet the foregoing distribution requirement.

 

Our board of directors has authorized, and has declared, cash distributions on our common stock on a monthly basis since the second quarter of 2015. The amount of each such distributions is subject to our board of directors’ discretion and applicable legal restrictions related to the payment of distributions. We calculate each

 

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stockholder’s specific distribution amount for the month using record and declaration dates, and distributions will begin to accrue on the date we accept subscriptions for shares of our common stock. From time to time, we may also pay interim distributions at the discretion of our board. Each year a statement on Internal Revenue Service Form 1099-DIV (or any successor form) identifying the source of the distribution (i.e., paid from ordinary income, paid from net capital gain on the sale of securities, and/or a return of paid-in capital surplus which is a nontaxable distribution) will be mailed to our stockholders. Our distributions may exceed our earnings, especially during the period before we have substantially invested the proceeds from our offering. As a result, a portion of the distributions we make may represent a return of capital for tax purposes.

 

We have adopted an “opt in” distribution reinvestment plan for our common stockholders. As a result, when we make a distribution, 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 our common stock. Any distributions reinvested under the plan will nevertheless remain taxable to U.S. stockholders.

 

The following table reflects the cash distributions per share that we have declared and paid on our common stock through September 30, 2018:

 

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    Distribution 
For the Nine Months Ended   Per Share   Amount 
Fiscal 2018         
January 29, 2018   $0.03370   $47,908 
February 28, 2018   $0.03370   $49,067 
March 28, 2018   $0.03370   $49,752 
April 26, 2018   $0.03370   $50,700 
May 29, 2018   $0.03370   $51,014 
June 27, 2018   $0.03370   $51,096 
July 27, 2018   $0.03370   $51,473 
August 27, 2018   $0.03370   $52,453 
September 25, 2018   $0.03370   $52,802 
            
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 
July 21, 2017   $0.04000   $48,678 
August 29, 2017   $0.03417   $44,767 
September 28, 2017   $0.03417   $45,500 
October 26, 2017   $0.03417   $46,109 
November 27, 2017   $0.03370   $46,685 
December 26, 2017   $0.03370   $47,326 
            
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 

 

Our distributions previously were paid quarterly in arrears.  On January 15, 2015, our Board declared a quarterly cash distribution for the fourth quarter of 2014 of $0.07545 per share payable on January 30, 2015, to shareholders of record as of January 20, 2015. In addition, on April 2, 2015, our Board declared a cash distribution for the first quarter of 2015 of $0.116 per share payable on April 13, 2015, to shareholders of record as of April 6, 2015. Commencing in April 2015, and subject to our board of directors’ discretion and applicable legal restrictions, our board of directors began to authorize and declare a monthly distribution amount per share of our common stock, payable in advance.  We then calculate each stockholder’s specific distribution amount for the month using record and declaration dates, and distributions will begin to accrue on the date we accept subscriptions for shares of our common stock.  No distributions were declared for the years before 2015.

 

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

 

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reimbursements from the Adviser. The Company has not established limits on the amount of funds it may use from available sources to make distributions.

 

The following table reflects the sources of the cash distributions on a tax basis that the Company paid on its common stock during the nine months ended September 30, 2018 and September 30, 2017:

 

   Nine months ended September 30, 
   2018   2017 
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   13,000    3%   47,998    12%
Long-term capital gains proceeds from the sale of assets   47,908    11%   -    - 
Distributions from common equity (return of capital)   395,356    86%   352,941    88%
Expense reimbursement from sponsor   -    -    -    - 
Total  $456,264    100%  $400,939    100%
 
(1)During the nine months ended September 30, 2018 and 2017, 97.1% and 92.7%, respectively, of the Company’s gross investment income was attributable to cash income earned, and 2.9% and 7.3%, resepctively was attributable to non-cash accretion of discount and paid in-kind interest.

 

Related Party Transactions

 

We have entered into an investment and advisory agreement with Triton Pacific Adviser in which our senior management holds equity interest. Members of our senior management also serve as principals of other investment managers affiliated with Triton Pacific Adviser that do and may in the future manage investment funds, accounts or other investment vehicles with investment objectives similar to ours.

 

We have entered into an administration agreement with TFA Associates in which our senior management holds equity interest and act as principals.

 

We have entered into a dealer manager agreement with Triton Pacific Securities, LLC and pay them a fee of up to 10% of gross proceeds raised in the offering, some of which will be re-allowed to other participating broker-dealers. Triton Pacific Securities, LLC is an affiliated entity of Triton Pacific Adviser.

 

We have entered into a license agreement with Triton Pacific Group, Inc. under which Triton Pacific Group, Inc. has granted us a non-exclusive, royalty-free license to use the name “Triton Pacific” for specified purposes in our business. Under this agreement, we have the right to use the “Triton Pacific” name, subject to certain conditions, for so long as Triton Pacific Adviser or one of its affiliates remains our investment advisor. Other than with respect to this limited license, we have no legal right to the “Triton Pacific” name.

 

We have entered into an expense support and conditional reimbursement agreement with Triton Pacific Adviser pursuant to which the Adviser will pay up to 100% of the Company’s organization, offering and operating expenses, subject to repayment by us to the Adviser, in order for the Company to achieve a reasonable level of expenses relative to its investment income, as determined by the Company and the Adviser has agreed to make advances to us to cover certain of our operating expenses. (See "Expense Reimbursement Agreement”, below.)

 

Management Fee

 

Pursuant to the investment adviser agreement, we pay our Adviser a fee for investment advisory and management services consisting of a base management fee and an incentive fee.

 

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The base management fee is calculated at a quarterly rate of 0.5% of our average gross assets (including amounts borrowed for investment purposes) and payable quarterly in arrears. For the first quarter of our operations, the base management fee was calculated based on the initial value of our gross assets. Subsequently, the base management fee for any calendar quarter is calculated based on the average value of our gross assets at the end of that and the immediately preceding quarters, appropriately adjusted for any share issuances or repurchases during that quarter. The base management fee may or may not be taken in whole or in part at the discretion of our Adviser. All or any part of the base management fee not taken as to any quarter shall be accrued without interest and may be taken in such other quarter as our Adviser shall determine. The base management fee for any partial quarter will be appropriately pro-rated.

 

Though, in accordance with the Advisers Act, the Adviser could have received an incentive fee on both current income earned and income from capital gains, the Adviser has agreed to waive any incentive fees from current income. As such, the Adviser will be paid an incentive fee only upon the realization of a capital gain from the sale of an investment. The incentive fee will be calculated and payable quarterly in arrears or as of the date of our liquidation or the termination of the investment adviser agreement, and will equal 20% of our realized capital gains 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 capital gain incentive fees.

 

For purposes of 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 will be treated as a decrease in our cost basis for the relevant investment and (3) all fiscal year-end valuations will be determined by us in accordance with GAAP, applicable provisions of the Company Act and our pricing procedures. In determining the incentive fee payable to our Adviser, we 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 our portfolio. For this purpose, aggregate realized capital gains, if any, will equal the sum of the positive differences between the net sales prices of our investments, when sold, and the cost of such investments since inception. Aggregate realized capital losses will equal the sum of the amounts by which the net sales prices of our investments, when sold, is less than the original cost of such investments 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 our calculation of the capital gains incentive fee will equal the aggregate realized capital gains less aggregate realized capital losses and less aggregate unrealized capital depreciation with respect to our portfolio investments. If this number is positive at the end of such period, then the incentive fee for such period will be equal to 20% of such amount, less the aggregate amount of any incentive fees paid in all prior periods.

 

While the investment advisory agreement neither includes nor contemplates the inclusion of unrealized gains in the calculation of the capital gains incentive fee, pursuant to an interpretation of an American Institute of Certified Public Accountants, or AICPA, Technical Practice Aid for investment companies, we include unrealized gains in the calculation of the capital gains incentive fee expense and related accrued capital gains incentive fee. This accrual reflects the incentive fees that would be payable to our Advisor as if our entire portfolio was liquidated at its fair value as of the balance sheet date even though our Adviser is not entitled to an incentive fee with respect to unrealized gains unless and until such gains are actually realized.

 

The organizational and offering expense and other expense reimbursements may include a portion of costs incurred by our Adviser or its members or affiliates on our behalf for legal, accounting, printing and other offering expenses, including for marketing, salaries and direct expenses of its employees, employees of its affiliates and others while engaged in registering and marketing the shares of our common stock, which shall include development of marketing and marketing presentations and training and educational meetings and generally coordinating the marketing process for us and may also include amounts reimbursed by us to our Dealer Manager for actual bona fide due diligence expenses incurred by our Dealer Manager or participating broker-dealers in an aggregate amount that is reasonable in relation to the gross proceeds raised in our offering and which are supported by detailed, itemized invoices. None of the reimbursements referred to above will exceed actual expenses incurred by our Adviser, its members or affiliates. Our Adviser will reimburse to us, without recourse or reimbursement by us, any organizational and offering expenses to the extent those expenses, when aggregated with sales load, exceed 15.0%.

 

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Expense Reimbursement Agreement

 

On March 27, 2014, we and our Adviser agreed to the Expense Reimbursement Agreement. The Expense Reimbursement Agreement was amended and restated effective April 5, 2018. Under the Expense Reimbursement Agreement, as amended, our Adviser, in consultation with the Company, may pay up to 100% of both our organizational and offering expenses and our operating expenses, all as determined by us and our Adviser. As used in the Expense Reimbursement Agreement, operating expenses refer to third party operating costs and expenses incurred by us, as determined under generally accepted accounting principles for investment management companies. Organizational and offering expenses include expenses incurred in connection with the organization of our company and expenses incurred in connection with our offering, which are recorded as a component of equity. The Expense Reimbursement Agreement states that until the net proceeds to us from our offering are at least $25 million, our Adviser may pay up to 100% of both our organizational and offering expenses and our operating expenses. After we received at least $25 million in net proceeds from our offering, our Adviser may, with our consent, continue to make expense support payments to us in such amounts as are acceptable to us and our 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 we have received at least $25 million in net proceeds from our offering, we are required to reimburse our Adviser for any expense support payments we received from them occurring within three years of the date on which we incurred such expenses However, with respect to any expense support payments attributable to our operating expenses, (i) we will only reimburse our Adviser for expense support payments made by our 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 us during such fiscal year) to exceed the percentage of our average net assets attributable to shares of our common stock represented by “other operating expenses” during the fiscal year in which such expense support payment from our Adviser was made (provided, however, that this clause (i) shall not apply to any reimbursement payment which relates to an expense support payment from our Adviser made during the same fiscal year); and (ii) we will not reimburse our Adviser for expense support payments made by our Adviser if the annualized rate of regular cash distributions declared by us at the time of such reimbursement payment is less than the annualized rate of regular cash distributions declared by us at the time our Adviser made the expense support payment to which such reimbursement relates. “Other operating expenses” means our total operating expenses excluding base management fees, incentive fees, organization and offering expenses, financing fees and costs, interest expense, brokerage commissions and extraordinary expenses.

 

In addition, with respect to any expense support payment attributable to our organizational and offering expenses, we will only reimburse our Adviser for expense support payments made by our 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 including the sales load (or dealer manager fee) paid by us.

 

Under the Expense Reimbursement Agreement, any unreimbursed expense support payments may be reimbursed by us within a period not to exceed three years from the end of the quarter in which we incurred the expense.

 

We or our 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 our liquidation or dissolution. The Expense Reimbursement Agreement expires by its terms on December 31, 2018, unless extended with the mutual consent of us and our Adviser. Upon termination of the Expense Support Agreement we may be required to repay our Adviser all expense support payments made by our Adviser within three years of the date of termination, subject to the limitations contained in the agreement.

 

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The Expense Reimbursement Agreement is, by its terms, effective retroactively to our inception date of April 29, 2011. As a result, our Adviser has agreed to reimburse a total of $5,067,191 as of September 30, 2018. This amount reflects the aggregate amount advanced by the Adviser to us and is not the amount that is currently due and owed by us to our Adviser.

 

Below is a table that provides information regarding expense support payments incurred by our Adviser pursuant to the Expense Support Agreement as well as other information relating to our ability to reimburse our Adviser for such payments: 

 

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   $0   432.69%   -   September 30, 2015
December 31, 2012   $26,111   $0   531.09%   -   December 31, 2015
March 31, 2013   $30,819   $0   N/A   -   March 31, 2016
June 30, 2013   $59,062   $0   N/A   -   June 30, 2016
September 30, 2013   $65,161   $0   N/A   -   September 30, 2016
December 31, 2013   $91,378   $0   455.09%   -   December 31, 2016
March 31, 2014   $68,293   $0   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
September 30, 2017   $0   $119,188   4.19%   3.00%   September 30, 2020
December 31, 2017   $0   $0   N/A   N/A   N/A

 

(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.

Beginning with the year ended December 31, 2016, the Adviser began to reimburse less than 100% of operating expenses, and for the year ended December 31, 2017, the Adviser did not reimburse any operating expenses after the first quarter. Additionally, the Adviser did not reimburse any offering expenses for the first three quarters of 2018. Of these offering and operating expenses, $2,663,810 has exceeded the three-year period for repayment and will not be repayable by us. $225,000 of offering costs from contingent expenses recorded in prior periods were deemed to be non-payable and the Reimbursement from the Adviser was adjusted accordingly. $2,403,381 remains that could potentially be subject to repayment by the Company.

 

The chart below, on a cumulative basis, discloses the components of the Reimbursement due from Sponsor reflected on the chart above:

 

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   September 30,   December 31, 
   2018   2017 
Operating Expenses  $1,977,504   $1,977,504 
Offering Costs   3,089,687    3,314,687 
Due to related party offset   (4,724,476)   (4,707,407)
Reimbursements received from Adviser   (342,715)   (342,715)
Other amounts due to affiliates   886    15,559 
Total Reimbursement due from Adviser  $886   $257,628 

 

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.

 

Either we or our Adviser may terminate the Expense Support Agreement at any time, except that if our Adviser terminates the agreement, it may not terminate its obligations to provide expense support payments after the commencement of any monthly period. If we terminate the Investment Advisory Agreement, we will be required to repay our Adviser all expense support payments made by our Adviser within three years of the date of termination.

 

Asset Coverage

 

In accordance with the Company Act, the Company is currently only allowed to borrow amounts such that its “asset coverage,” as defined in the Company Act, is at least 200% after such borrowing. “Asset coverage” generally refers to a company’s total assets, less all liabilities and indebtedness not represented by “senior securities,” as defined in the Company Act, divided by total senior securities representing indebtedness and, if applicable, preferred stock. “Senior securities” for this purpose includes borrowings from banks or other lenders, debt securities and preferred stock. As of September 30, 2018 and December 31, 2017, the Company did not have any senior securities.

 

On March 23, 2018, an amendment to Section 61(a) of the Company Act was signed into law to permit BDCs to reduce the minimum “asset coverage” ratio from 200% to 150%, so long as certain approval and disclosure requirements are satisfied. In addition, for BDCs like the Company whose securities are not listed on a national securities exchange, the Company is also required to offer to repurchase its outstanding shares at the rate of 25% per quarter over four calendar quarters. Under the existing 200% minimum asset coverage ratio, the Company is permitted to borrow up to one dollar for investment purposes for every one dollar of investor equity, and under the 150% minimum asset coverage ratio, the Company will be permitted to borrow up to two dollars for investment purposes for every one dollar of investor equity. In other words, Section 61(a) of the Company Act, as amended, permits BDCs to potentially increase their debt-to-equity ratio from a maximum of 1 to 1 to a maximum of 2 to 1.

 

On April 18, 2018, the Board of Directors of the Company, including a “required majority” (as such term is defined in Section 57(o) of the Company Act), approved the application to the Company of the 150% minimum asset coverage ratio set forth in Section 61(a)(2) of the Company Act. As a result, and subject to certain additional disclosure requirements and the repurchase obligations described above, the minimum asset coverage ratio applicable to the Company will be reduced from 200% to 150%, effective as of April 18, 2019. In addition, in order to provide the Company with the maximum financial flexibility at the earliest possible date, the Board of Directors also authorized the submission of a proposal for stockholders to approve the application of the 150% minimum asset coverage ratio to the Company. The Company intends to ask its stockholders to approve the application of the 150% minimum asset coverage ratio in connection with their approval of the Merger Agreement and the related

 

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transactions. If the Company’s stockholders approve such proposal, the 150% minimum asset coverage ratio will then apply effective as of the first day after stockholder approval. As a result, the Company will be permitted to incur double the maximum amount of leverage that the Company is able to incur significantly earlier than if the Company’s stockholders do not vote to approve such proposal.

 

Critical Accounting Policies

 

This discussion of our expected operating plans is based upon our expected financial statements, which will be prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these financial statements will require our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ. In addition to the discussion below, we will describe our critical accounting policies in the notes to our future financial statements.

 

Valuation of Investments

 

Our board of directors has established procedures for the valuation of our investment portfolio. These procedures are detailed below.

 

Investments for which market quotations are readily available will be valued at such market quotations. For most of our investments, market quotations will not be available. With respect to investments for which market quotations are not readily available or when such market quotations are deemed not to represent fair value, our board of directors has approved a multi-step valuation process each quarter, as described below:

 

1.Each portfolio company or investment will be valued by our Adviser, potentially with assistance from one or more independent valuation firms engaged by our board of directors;

 

2.the independent valuation firm, if involved, will conduct independent appraisals and make an independent assessment of the value of each investment;

 

3.the audit committee of our board of directors will review and discuss the preliminary valuation prepared by our Adviser and that of the independent valuation firm, if any; and

 

4.the board of directors will discuss the valuations and determine the fair value of each investment in our portfolio in good faith based on the input of our Adviser, the independent valuation firm, if any, and the audit committee.

 

Investments will be valued utilizing a cost approach, a market approach, an income approach, or a combination of approaches, as appropriate. The cost approach is most likely only to be used early in the life of an investment or if we determine that there has been no material change in the investment since purchase. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present value amount, calculated using an appropriate discount rate. The measurement is based on the net present value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that we may take into account in fair value pricing our investments include, as relevant: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the Company’s ability to make payments, its earnings and discounted cash flows, the markets in which the Company does business, comparisons of financial ratios of peer companies that are public, M&A comparables, the principal market and enterprise values, among other factors.

 

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We have adopted ASC Topic 820, Fair Value Measurement, which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements.

 

ASC Topic 820 provides a consistent definition of fair value which focuses on exit price and prioritizes, within a measurement of fair value, the use of market-based inputs over entity-specific inputs. It defines fair value as the price an entity would receive when an asset is sold or when a liability is transferred in an orderly transaction between market participants at the measurement date. In addition, ASC Topic 820 provides a framework for measuring fair value and establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels of valuation hierarchy established by ASC Topic 820 are defined as follows:

 

Level 1: Quoted prices in active markets for identical assets or liabilities, accessible by the company at the measurement date.

 

Level 2: Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices.

 

Level 3: Unobservable inputs for the asset or liability.

 

In all cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to each investment.

 

In accordance with ASC Topic 820, the fair value of our investments is defined as the price that we would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market in which that investment is transacted.

 

Revenue Recognition