Form 10-Q

Large accelerated filer

Accelerated filer

Non-accelerated filer

☒ (Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

Yes ☒ No ☐

10-Q 1 d377954d10q.htm FORM 10-Q Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2017

☐	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: 814-01074

NexPoint Capital, Inc.

(Exact name of registrant as specified in its charter)


Delaware		38-3926499
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

300 Crescent Court, Suite 700 Dallas, Texas		75201
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (972) 628-4100

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.001 per share

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

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

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

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 May 8, 2017, the Registrant had 8,240,442 shares of common stock, $0.001 par value, outstanding.

Part I – Financial Information

Item 1.

Financial Statements

NexPoint Capital, Inc.

Statements of Assets and Liabilities


	March 31, 2017 (Unaudited)		December 31, 2016
Assets
Investments, at fair value (cost of $63,784,306 and $78,591,669, respectively)	$	63,115,536	$	78,290,596
Cash and cash equivalents		9,418,996		3,948,113
Receivable for common stock sold		—		56,890
Dividends and interest receivable		1,152,529		829,876
Receivable from Adviser⁽¹⁾		4,177,196		4,096,447
Prepaid expenses		16,470		23,241
Capitalized offering costs		210,642		228,555

Total assets		78,091,369		87,473,718

Liabilities
Credit facility payable⁽²⁾		—		11,200,000
Payable for investments purchased		—		8,536,248
Common stock repurchased		565,015		38,533
Interest expense and commitment fees payable		—		21,583
Accrued expenses and other liabilities		515,444		384,400

Total liabilities		1,080,459		20,180,764

Commitments and contingencies⁽³⁾

Net assets
Preferred stock, $0.001 par value (25,000,000 shares authorized, 0 shares issued and outstanding)		—		—
Common stock, $0.001 par value (200,000,000 shares authorized, 7,979,704 and 7,102,226 shares issued and outstanding, respectively)		7,980		7,102
Paid-in capital in excess of par		70,477,977		61,925,016
Accumulated net realized gain		4,105,375		3,258,750
Undistributed net investment income		813,348		128,159
Net unrealized appreciation (depreciation) on investments (including net increase from amounts committed by affiliates of $2,275,000 and $2,275,000, respectively)		1,606,230		1,973,927

Total net assets	$	77,010,910	$	67,292,954

Net asset value per share of common stock	$	9.65	$	9.47

⁽¹⁾	See Note 4 for a discussion of related party transactions and arrangements.

⁽²⁾	See Note 7 for a discussion of credit facility.

⁽³⁾	See Note 4 and Note 8 for a discussion of the commitments and contingencies of the Company (as defined in Note 1).

See Notes to Financial Statements

NexPoint Capital, Inc.

Statements of Operations

(Unaudited)


	Three Months Ended March 31,
	2017			2016
Investment income:
Interest	$	2,335,529		$	642,176
Dividend income		78,277			33,257

Total investment income		2,413,806			675,433

Expenses:
Investment advisory fees⁽¹⁾		411,325			171,353
Amortized offering costs		109,729			5,834
Capital gains incentive fees⁽¹⁾		95,785			—
Administration fees⁽¹⁾		82,265			34,268
Stock transfer fee		79,911			61,451
Custodian and accounting service fees		76,886			54,533
Legal fees		60,904			65,078
Audit and tax fees		51,287			48,175
Interest expense and commitment fees⁽²⁾		50,379			22,183
Reports to stockholders		47,679			26,353
Other expenses		47,395			5,110
Directors’ fees⁽¹⁾		2,867			847

Total expenses		1,116,412			495,185
Expenses waived or reimbursed by the Adviser⁽¹⁾		(736,940	)		(362,725	)

Net expenses		379,472			132,460

Net investment income		2,034,334			542,973

Net realized and unrealized gains (losses) on investments:
Net realized gain (loss) on investments and securities sold short		846,625			(539,824	)
Net change in unrealized appreciation (depreciation) on investments and securities sold short		(367,697	)		1,744,425
Net increase from amounts committed by affiliates⁽¹⁾		—			872,000

Net realized and unrealized gains (losses)		478,928			2,076,601

Net increase in net assets resulting from operations	$	2,513,262		$	2,619,574

Per share information - basic and diluted per common share
Net investment income:	$	0.27		$	0.18
Earnings per share:	$	0.34		$	0.86
Weighted average shares outstanding:		7,501,991			3,053,707

Distributions declared per share:		0.18			0.17

⁽¹⁾	See Note 4 for a discussion of related party transactions and arrangements.

⁽²⁾	See Note 7 for a discussion of credit facility.

See Notes to Financial Statements

NexPoint Capital, Inc.

Statements of Changes in Net Assets

(Unaudited)


	Three Months Ended March 31,
	2017			2016
Increase (decrease) in net assets resulting from operations:
Net investment income	$	2,034,334		$	542,973
Net realized gain (loss) on investments and securities sold short		846,625			(539,824	)
Net change in unrealized appreciation (depreciation) on investments and securities sold short		(367,697	)		1,744,425
Net increase from amounts committed by affiliates⁽¹⁾		—			872,000

Net increase in net assets resulting from operations		2,513,262			2,619,574

Distributions to stockholders:
Net investment income		(1,349,145	)		(541,276	)

Total distributions to stockholders		(1,349,145	)		(541,276	)

Capital share transactions:
Issuance of common stock		8,222,024			5,656,146
Issuance of common shares pursuant to distribution reinvestment plan		896,830			459,596
Repurchase of common stock		(565,015	)		(32,378	)

Net increase in net assets resulting from capital transactions		8,553,839			6,083,364

Total increase in net assets		9,717,956			8,161,662
Net assets at beginning of period		67,292,954			22,298,879

Net assets at end of period	$	77,010,910		$	30,460,541

Undistributed (distributions in excess of) net investment income	$	813,348		$	(76,202	)

Changes in common shares
Issuance of common stock		844,602			675,955
Reinvestment of common stock		91,769			54,859
Repurchase of common stock		(58,893	)		(3,232	)

Net increase in common shares		877,478			727,582

⁽¹⁾	See Note 4 for a discussion of related party transactions and arrangements.

See Notes to Financial Statements

NexPoint Capital, Inc.

Statements of Cash Flows

(Unaudited)


	Three Months Ended March 31,
	2017			2016
Cash flows used in operating activities
Net increase in net assets resulting from operations	$	2,513,262		$	2,619,574

Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities:
Purchases of investment securities		(17,524,104	)		(15,827,260	)
Proceeds from securities sold short		—			165,454
Payment-in-kind investments		(91,795	)		—
Proceeds from sales and principal repayments of investment securities		33,994,813			8,437,380
Net realized (gain) loss on investments		(846,625	)		539,824
Net change in unrealized (appreciation) depreciation on investments		367,697			(1,744,425	)
Amortization of premium/discount, net		(724,926	)		(34,416	)
Amortization of capitalized offering costs		109,729			5,834
Increase (decrease) in operating assets and liabilities:
(Increase) decrease in receivable for investments sold		—			(1,533,198	)
(Increase) decrease in due from broker		—			(62,638	)
(Increase) decrease in dividends and interest receivable		(322,653	)		(177,791	)
(Increase) decrease in receivable from Adviser		(80,749	)		(987,342	)
(Increase) decrease in other receivables		—			(350	)
(Increase) decrease in prepaid expenses		6,771			103
(Increase) decrease in restricted cash		—			(1,142,541	)
Increase (decrease) in payable for investments purchased		(8,536,248	)		(633,082	)
Increase (decrease) in directors’ fees payable		—			345
Increase (decrease) in interest expense and commitment fees payable		(21,583	)		17,392
Increase (decrease) in accrued expenses and other liabilities		131,044			(73,162	)

Net cash flow provided by (used in) operating activities		8,974,633			(10,430,299	)

Cash flows provided by financing activities
Proceeds from issuance of common stock, net of receivable for common stock sold		8,278,914			5,837,046
Repurchase of common stock, net of payable		(38,533	)		(4,747	)
Distributions paid in cash		(452,315	)		(81,680	)
Offering costs paid, net of due to Adviser		(91,816	)		(61,157	)
Borrowings under credit facilities		8,700,000			3,600,000
Repayments of credit facilities		(19,900,000	)		—

Net cash flow provided by (used in) financing activities		(3,503,750	)		9,289,462

Net increase (decrease) in cash and cash equivalents		5,470,883			(1,140,837	)

Cash and cash equivalents
Beginning of the period		3,948,113			7,350,748

End of the period	$	9,418,996		$	6,209,911

Supplemental disclosure and non-cash financing activities
Cash paid during the period for interest	$	54,473		$	4,895
Reinvestment of distributions paid	$	896,830		$	459,596

See Notes to Financial Statements

NexPoint Capital, Inc.

Schedule of Investments

As of March 31, 2017

(Unaudited)


Portfolio Company⁽¹⁾⁽²⁾	Interest Rate			Base Rate Floor			Maturity Date		Principal Amount		Amortized Cost⁽³⁾		Fair Value
Senior Secured Loans – 34.2%⁽⁴⁾
Energy – 2.9%
Fieldwood Energy, LLC (First Lien Term Loan)⁽⁵⁾		L + 700			1.00	%		8/31/2020	$	1,800,549	$	1,574,598	$	1,712,781
Fieldwood Energy, LLC (First Lien Term Loan)⁽⁶⁾		L + 712.5			1.25	%		9/30/2020		567,797		542,363		493,983

														2,206,764

Healthcare – 14.1%
Quorum Health Corp. (First Lien Term Loan)⁽⁶⁾		L + 575			1.00	%		4/29/2022		3,397,958		3,257,661		3,327,264
Radnet, Inc. (Second Lien Term Loan)⁽⁶⁾		L + 700			1.00	%		3/25/2021		3,457,917		3,341,206		3,483,851
U.S. Renal Care, Inc. (Second Lien Term Loan)⁽⁶⁾		L + 800			1.00	%		12/31/2023		4,500,000		4,419,941		4,050,000

														10,861,115

Media/Telecommunications – 5.6%
iHeartCommunications, Inc. (First Lien Term Loan)⁽⁵⁾		L + 675			—			1/30/2019		5,000,000		4,059,125		4,313,525

Retail – 3.1%
Toys ‘R’ Us-Delaware, Inc. (First Lien Term Loan)⁽⁶⁾		L + 875			1.00	%		4/24/2020		2,967,121		2,453,685		2,381,114

Service – 0.6%
Advantage Sales & Marketing, Inc. (Second Lien Term Loan)⁽⁷⁾		L + 650			1.00	%		7/25/2022		500,000		497,658		487,750

Technology – 6.6%
Avaya, Inc. (First Lien Term Loan)⁽⁵⁾		L + 750			1.00	%		1/24/2018		2,140,000		2,122,021		2,206,276
SkillSoft Corp. (Second Lien Term Loan)^(5) (8)		L + 825			1.00	%		4/28/2022		1,500,000		833,429		1,048,125
SkillSoft Corp. (First Lien Term Loan)^(5) (8)		L + 475			1.00	%		4/28/2021		1,980,955		1,654,931		1,827,441

														5,081,842

Utility – 1.3%
Granite Acquisition, Inc. (Second Lien Term Loan)^{(6) (8)}		L + 725			1.00	%		12/19/2022		1,000,000		947,796		991,250
Texas Competitive Electric Holdings Company LLC (TXU) (Escrow Loan)⁽⁹⁾										3,500,000		87,816		13,125

														1,004,375

Total Senior Secured Loans														26,336,485

Asset-Backed Securities – 2.7%
Financials – 2.7%
Grayson Investor Corp. ^{(8) (10) (11) (12)}								11/1/2021		800		456,000		270,260
Highland Park CDO I Ltd. 2006 1A A2 ^{(6) (8) (10) (12)}		L + 40						11/25/2051		1,610,716		1,327,004		1,530,180
PAMCO CLO 1997-1A B ^{(8) (10) (12) (13) (14)}										559,644		321,796		293,086

														2,093,526

Total Asset-Backed Securities														2,093,526

Corporate Bonds – 31.3%
Energy – 4.4%
GenOn Energy, Inc.		7.875	%					6/15/2017		2,500,000		2,171,002		1,743,750
GenOn Energy, Inc.		9.875	%					10/15/2020		2,500,000		1,892,539		1,643,750

														3,387,500

Healthcare – 21.1%
Ortho-Clinical Diagnostics ⁽¹⁰⁾		6.625	%					5/15/2022		9,217,000		8,224,118		8,617,895
Quorum Health Corp. ⁽¹⁰⁾		11.625	%					4/15/2023		3,542,000		2,828,104		3,112,532
Tenet Healthcare Corp. ⁽⁸⁾		8.125	%					4/1/2022		1,000,000		968,630		1,048,750
Valeant Pharmaceuticals International, Inc. ^(8) (10)		6.125	%					4/15/2025		4,500,000		3,738,294		3,481,875

														16,261,052

Media/Telecommunications – 4.0%
iHeartCommunications, Inc. PIK		14.000	%					2/1/2021		9,090,000		3,387,785		3,090,600

Retail – 1.1%
Guitar Center, Inc. ⁽¹⁰⁾		6.500	%					4/15/2019		1,000,000		897,203		845,000

Telecommunication Services – 0.7%
Intelsat Jackson Holdings S.A. ⁽⁸⁾		7.250	%					10/15/2020		575,000		464,983		526,844

Total Corporate Bonds													$	24,110,996

See Notes to Financial Statements.


Portfolio Company⁽¹⁾⁽²⁾	Interest Rate	Base Rate Floor	Maturity Date		Principal Amount		Amortized Cost⁽³⁾		Fair Value
					Shares
Common Stocks – 12.1%
Chemicals – 0.1%
MPM Holdings, Inc. ^{(8) (15)}						8,500		250,750		80,750

Healthcare – 5.0%
CareDx, Inc. ⁽¹⁵⁾						501,252		1,999,995		701,753
Forward Pharma A/S ADR ^{(8) (15)}						17,000		481,015		366,350
Gemphire Therapeutics, Inc. ^(15) (16)						158,394		1,499,991		1,663,137
Kadmon Holdings, Inc. ^{(15) (16)}						297,619		1,000,000		1,077,380

										3,808,620

Real Estate Investment Trust (REIT) – 3.0%
Independence Realty Trust, Inc. ⁽⁸⁾						246,727		2,216,203		2,311,832

Utility – 4.0%
Vistra Energy Corp.						188,356		3,712,260		3,070,210

Total Common Stocks										9,271,412

Rights – 0.1%
Utility – 0.1%
Vistra Energy Corp. ⁽¹⁵⁾						58,356		154,404		82,808

Total Rights										82,808

Warrants – 1.6%
Healthcare – 1.6%
CareDx, Inc. ^{(14) (15)}				6/14/2017		250,626		—		183,974
Kadmon Holdings, Inc. ^{(14) (15) (16)}				4/13/2018		119,047		—		98,918
Galena Biopharma, Inc. ^{(14) (15)}				1/21/2021		1,500,054		—		2,250
Gemphire Therapeutics, Inc. ^{(14) (15) (16)}				3/15/2022		118,796		—		647,782
SCYNEXIS, Inc. ^{(14) (15) (16)}				6/21/2021		195,000		—		287,385

										1,220,309

Total Warrants										1,220,309

Total Investments-82.0%							$	63,784,306	$	63,115,536

Cash Equivalents – 12.1%⁽¹⁷⁾									$	9,352,714
Other Assets & Liabilities, net-5.9%									$	4,542,660

Net Assets- 100.0%									$	77,010,910

⁽¹⁾

The Company did not “control” and was not an “affiliated person” of any of its portfolio companies, each as defined in the Investment Company Act of 1940, as amended (the “1940 Act”). In general, under the 1940 Act, the Company would be presumed to “control” a portfolio company if it owned 25% or more of its voting securities or had the power to exercise control over the management or policies of such portfolio company, and would be an “affiliated person” of a portfolio company if it owned 5% or more of its voting securities. Additionally, companies under common control (e.g., companies with a common owner of greater than 25% of their respective voting securities) are affiliates under the 1940 Act.

⁽²⁾	All investments are denominated in United States Dollars.

⁽³⁾	Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on investments.

⁽⁴⁾

Senior secured loans in which the Company invests generally pay interest at rates which are periodically determined by reference to a base lending rate plus a spread (unless otherwise identified, all senior secured loans carry a variable rate of interest). These base lending rates are generally (i) the Prime Rate offered by one or more major United States banks, (ii) the lending rate offered by one or more European banks such as the London Interbank Offered Rate (“LIBOR”) or (iii) the coupon rate. Rate shown represents the actual rate at March 31, 2017. Senior secured loans, while exempt from registration under the Securities Act of 1933 (the “1933 Act”), contain certain restrictions on resale and cannot be sold publicly. Senior secured floating rate loans often require prepayments from excess cash flow or permit the borrower to repay at its election. The degree to which borrowers repay, whether as a contractual requirement or at their election, cannot be predicted with accuracy. As a result, the actual remaining maturity may be substantially less than the stated maturity shown.

⁽⁵⁾	The interest rate on these investments is subject to a base rate of 1-Month LIBOR, which at March 31, 2017 was 0.98%. The LIBOR rate used to calculate interest is the higher of the prevailing 1 month LIBOR rate in effect on the date of the monthly reset, or the LIBOR base rate floor shown.

⁽⁶⁾	The interest rate on these investments is subject to a base rate of 3-Month LIBOR, which at March 31, 2017 was 1.15%. The LIBOR rate used to calculate interest is the higher of the prevailing 3 month LIBOR rate in effect on the date of the quarterly reset, or the LIBOR base rate floor shown.

⁽⁷⁾	The interest rate on these investments is subject to a base rate of 2-Month LIBOR, which at March 31, 2017 was 1.03%. The LIBOR rate used to calculate interest is the higher of the prevailing 2 month LIBOR rate in effect on the date of the monthly reset, or the LIBOR base rate floor shown.

⁽⁸⁾

The investment is not a qualifying asset under Section 55 of the Investment Company Act of 1940, as amended (the “1940 Act”). 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. Non-qualifying assets represented 17.64% of the Company’s total assets as of March 31, 2017.

⁽⁹⁾	The investment represents value held in escrow pending future events. No interest is being accrued.

⁽¹⁰⁾	Securities exempt from registration under Rule 144A of the 1933 Act. These securities may only be resold in transactions exempt from registration to qualified institutional buyers. As of March 31, 2017, these securities amounted to $18,150,828, or 23.57% of net assets.

⁽¹¹⁾	The investment is considered to be the equity tranche of the issuer.

See Notes to Financial Statements.

⁽¹²⁾	Securities of collateralized loan obligations where an affiliate of the Adviser serves as collateral manager.

⁽¹³⁾	The issuer is, or is in danger of being, in default of its payment obligation.

⁽¹⁴⁾

Represents Fair Value as determined by the Company’s Board of Directors (the “Board”), or its designee in good faith, pursuant to the policies and procedures approved by the Board. The Board considers fair valued securities to be securities for which market quotations are not readily available and these securities may be valued using a combination of observable and unobservable inputs. Securities with a total aggregate value of $1,513,395 or 1.97% of net assets were fair valued under the Company’s valuation procedures as of March 31, 2017.

⁽¹⁵⁾	Non-income producing security.

⁽¹⁶⁾

Restricted Securities. These securities are not registered and may not be sold to the public. There are legal and/or contractual restrictions on resale. The Company does not have the right to demand that such securities be registered. The values of these securities are determined by valuations provided by pricing services, brokers, dealers, market makers, or in good faith under the procedures established by the Board.

⁽¹⁷⁾	State Street U.S. Government Money Market Fund.

Glossary:

ADR American Depositary Receipt

PIK Payment-in-Kind

See Notes to Financial Statements.

NexPoint Capital, Inc.

Schedule of Investments

As of December 31, 2016


Portfolio Company⁽¹⁾⁽²⁾	Interest Rate		Base Rate Floor			Maturity Date		Principal Amount		Amortized Cost⁽³⁾		Fair Value
Senior Secured Loans – 61.8%⁽⁴⁾
Energy – 5.2%
EnergySolutions, LLC (First Lien Term Loan)⁽⁵⁾		L+575		1.00	%		5/29/2020	$	1,271,516	$	1,157,116	$	1,284,231
Fieldwood Energy, LLC (First Lien Term Loan)⁽⁶⁾		L+700		1.00	%		8/31/2020		1,800,549		1,561,679		1,717,274
Fieldwood Energy, LLC (First Lien Term Loan)⁽⁶⁾		L+712.5		1.25	%		9/30/2020		567,797		541,399		498,241

													3,499,746

Healthcare – 34.3%
American Renal Holdings, Inc. (First Lien Term Loan)⁽⁶⁾⁽⁷⁾		L+350		1.25	%		9/22/2019		994,684		989,745		999,036
BioScrip, Inc. (First Lien Initial Term Loan)⁽⁶⁾		L+525		1.25	%		7/31/2020		587,430		565,881		560,995
BioScrip, Inc. (First Lien Term Loan)⁽⁶⁾		L+525		1.25	%		7/31/2020		352,458		339,528		336,597
MPH Acquisition Holdings, LLC (First Lien Term Loan)⁽⁶⁾		L+400		1.00	%		6/7/2023		4,639,769		4,662,125		4,728,435
Onex Carestream Finance LP (Second Lien Term Loan)⁽⁶⁾		L+850		1.00	%		12/7/2019		819,967		826,664		676,473
Quorum Health Corp. (First Lien Term Loan)⁽⁶⁾		L+575		1.00	%		4/29/2022		6,446,692		6,224,337		6,336,551
Radnet, Inc. (Second Lien Term Loan)⁽⁶⁾		L+700		1.00	%		3/25/2021		5,457,917		5,285,401		5,406,749
U.S. Renal Care, Inc. (Second Lien Term Loan)⁽⁶⁾		L+800		1.00	%		12/31/2023		4,500,000		4,417,808		4,005,000

													23,049,836

Media/Telecommunications – 6.1%
iHeartCommunications, Inc. (First Lien Term Loan)^(5) (8)		L+675		—			1/30/2019		5,000,000		3,956,219		4,087,500

Retail – 4.7%
Leslie’s Poolmart, Inc. (First Lien Term Loan)⁽⁶⁾		L+425		1.00	%		8/16/2023		564,623		561,901		572,036
Toys ‘R’ Us-Delaware, Inc. (First Lien Term Loan)⁽⁶⁾		L+875		1.00	%		4/24/2020		2,974,709		2,428,339		2,621,463

													3,193,499

Service – 5.6%
Advantage Sales & Marketing, Inc. (Second Lien Term Loan)⁽⁶⁾		L+650		1.00	%		7/25/2022		500,000		497,570		489,690
Weight Watchers International, Inc. (First Lien Term Loan)^{(5) (7) (9)}		L+325		0.75	%		4/2/2020		3,958,869		2,762,942		3,301,420

													3,791,110

Technology – 4.4%
SkillSoft Corp. (Second Lien Term Loan)^(6) (7)		L+825		1.00	%		4/28/2022		1,500,000		816,718		1,130,160
SkillSoft Corp. (First Lien Term Loan)^(6) (7)		L+475		1.00	%		4/28/2021		1,986,034		1,643,329		1,820,329

													2,950,489

Utility – 1.5%
Granite Acquisition, Inc. (Second Lien Term Loan)⁽⁶⁾⁽⁷⁾		L+725		1.00	%		12/19/2022		1,000,000		946,087		965,000
Texas Competitive Electric Holdings Company LLC (TXU) (Escrow Loan)⁽¹⁰⁾									3,500,000		87,816		17,500

													982,500

Total Senior Secured Loans													41,554,680

Asset-Backed Securities – 3.9%
Financials – 3.9%
CIFC Funding Ltd. 2015-1A ^{(7) (11) (12)}							1/22/2027		550,000		437,250		490,875
Grayson Investor Corp. ^{(7) (11) (12) (13)}							11/1/2021		800		456,000		275,668
Highland Park CDO I Ltd. 2006 1A A2 ^{(6) (7) (11) (13)}		L+40					11/25/2051		1,654,789		1,361,664		1,572,049
PAMCO CLO 1997-1A B ^{(7) (11) (13) (14) (15)}									559,644		321,795		275,625

													2,614,217

Total Asset-Backed Securities													2,614,217

See Notes to Financial Statements.

NexPoint Capital, Inc.

Schedule of Investments (continued)

As of December 31, 2016


Portfolio Company⁽¹⁾⁽²⁾	Interest Rate			Base Rate Floor	Maturity Date		Principal Amount		Amortized Cost⁽³⁾		Fair Value
Convertible Bonds – 1.0%
Healthcare – 1.0%
Fluidigm Corp.		2.750	%			2/1/2034	$	1,000,000	$	569,431	$	700,625

Total Convertible Bonds												700,625

Corporate Bonds – 41.8%
Energy – 2.7%
GenOn Energy, Inc. ⁽⁸⁾		7.875	%			6/15/2017		2,500,000		1,793,750		1,793,750

Healthcare – 33.1%
CHS/Community Health Systems, Inc. ⁽⁷⁾		6.875	%			2/1/2022		4,000,000		3,523,811		2,800,000
Kindred Healthcare, Inc. ⁽⁷⁾		8.750	%			1/15/2023		1,500,000		1,477,525		1,408,125
Ortho-Clinical Diagnostics ^{(8) (11)}		6.625	%			5/15/2022		12,717,000		11,425,209		11,318,130
Quorum Health Corp. ⁽¹¹⁾		11.625	%			4/15/2023		4,000,000		3,002,425		3,370,000
Valeant Pharmaceuticals International, Inc. ^{(8) (7) (11)}		6.125	%			4/15/2025		4,500,000		3,722,965		3,397,500

												22,293,755

Retail – 1.4%
Guitar Center, Inc. ⁽¹¹⁾		6.500	%			4/15/2019		1,000,000		886,466		912,500

Technology – 3.2%
Diamond 1 Finance Corp. / Diamond 2 Finance Corp.⁽¹¹⁾		6.020	%			6/15/2026		2,000,000		2,052,663		2,170,446

Telecommunication Services – 1.4%
Intelsat Jackson Holdings S.A. ⁽⁷⁾		7.250	%			10/15/2020		1,209,000		962,999		943,020

Total Corporate Bonds												28,113,471


							Shares
Common Stocks – 6.7%
Chemicals – 0.1%
MPM Holdings, Inc. ^{(7) (16)}								8,500		250,750		73,665

Healthcare – 2.0%
CareDx, Inc. ⁽¹⁶⁾								501,252		1,999,995		1,353,380

Real Estate Investment Trust (REIT) – 3.3%
Independence Realty Trust, Inc. ⁽⁷⁾								246,727		2,216,203		2,200,805

Utility – 1.3%
Vistra Energy Corp.								58,356		1,703,760		904,525

Total Common Stocks												4,532,375

Rights – 0.1%
Utility – 0.1%
Vistra Energy Corp. ⁽¹⁶⁾								58,356		154,404		96,288

Total Rights												96,288

Warrants – 1.0%
Healthcare – 1.0%
CareDx, Inc. ^{(15) (16)}						6/14/2017		250,626		—		395,318
Galena Biopharma, Inc. ^{(15) (16)}						1/21/2021		1,500,054		—		23,851
SCYNEXIS, Inc. ^{(15) (16) (17)}						6/21/2021		195,000		—		259,771

												678,940

Total Warrants												678,940

Total Investments- 116.3%									$	78,591,669	$	78,290,596

Other Assets & Liabilities, net- (16.3%)											$	(10,997,642	)

Net Assets- 100.0%											$	67,292,954

See Notes to Financial Statements.

NexPoint Capital, Inc.

Schedule of Investments (continued)

As of December 31, 2016

⁽¹⁾

⁽²⁾	All investments are denominated in United States Dollars.

⁽³⁾	Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on investments.

⁽⁴⁾

Senior secured loans in which the Company invests generally pay interest at rates which are periodically determined by reference to a base lending rate plus a spread (unless otherwise identified, all senior secured loans carry a variable rate of interest). These base lending rates are generally (i) the Prime Rate offered by one or more major United States banks, (ii) the lending rate offered by one or more European banks such as the London Interbank Offered Rate (“LIBOR”) or (iii) the coupon rate. Rate shown represents the actual rate at December 31, 2016. Senior secured loans, while exempt from registration under the Securities Act of 1933 (the “1933 Act”), contain certain restrictions on resale and cannot be sold publicly. Senior secured floating rate loans often require prepayments from excess cash flow or permit the borrower to repay at its election. The degree to which borrowers repay, whether as a contractual requirement or at their election, cannot be predicted with accuracy. As a result, the actual remaining maturity may be substantially less than the stated maturity shown.

⁽⁵⁾	The interest rate on these investments is subject to a base rate of 1-Month LIBOR, which at December 31, 2016 was 0.77%.The LIBOR rate used to calculate interest is the higher of the prevailing 1 month LIBOR rate in effect on the date of the monthly reset, or the LIBOR base rate floor shown.

⁽⁶⁾	The interest rate on these investments is subject to a base rate of 3-Month LIBOR, which at December 31, 2016 was 1.00%. The LIBOR rate used to calculate interest is the higher of the prevailing 3 month LIBOR rate in effect on the date of the quarterly reset, or the LIBOR base rate floor shown.

⁽⁷⁾

The investment is not a qualifying asset under Section 55 of the Investment Company Act of 1940, as amended (the “1940 Act”). 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. Non-qualifying assets represented 24.75% of the Company’s total assets as of December 31, 2016.

⁽⁸⁾	All or a portion of this position has not settled. Full contract rates do not take effect until settlement date.

⁽⁹⁾	The Company views Weight Watchers to be included in the Healthcare Industry as defined in the Company’s organizational documents. If this classification were reflected, value and percentage of the healthcare sector under Senior Secured Loans would increase to $26,351,256 and 39.16%, respectively.

⁽¹⁰⁾	The investment represents value held in escrow pending future events. No interest is being accrued.

⁽¹¹⁾	Securities exempt from registration under Rule 144A of the 1933 Act. These securities may only be resold in transactions exempt from registration to qualified institutional buyers. As of December 31, 2016, these securities amounted to $23,782,793, or 35.34% of net assets.

⁽¹²⁾	The investment is considered to be the equity tranche of the issuer.

⁽¹³⁾	Securities of collateralized loan obligations where an affiliate of the Adviser serves as collateral manager.

⁽¹⁴⁾	The issuer is, or is in danger of being, in default of its payment obligation.

⁽¹⁵⁾

Represents Fair Value as determined by the Company’s Board of Directors (the “Board”), or its designee in good faith, pursuant to the policies and procedures approved by the Board. The Board considers fair valued securities to be securities for which market quotations are not readily available and these securities may be valued using a combination of observable and unobservable inputs. Securities with a total aggregate value of $954,565 or 1.42% of net assets were fair valued under the Company’s valuation procedures as of December 31, 2016.

⁽¹⁶⁾	Non-income producing security.

⁽¹⁷⁾

See Notes to Financial Statements.

NexPoint Capital, Inc.

Notes To Financial Statements (Unaudited)

Note 1 — Organization

NexPoint Capital, Inc. (the “Company”) is an externally managed, non-diversified, closed-end management investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). The Company follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification Topic 946 Financial Services - Investment Companies. The Company’s investment objective is to generate current income and capital appreciation primarily through investments in middle-market healthcare companies, middle-market companies in non-healthcare sectors, syndicated floating rate debt of large public and nonpublic companies and collateralized loan obligations. The Company has elected to be treated for federal income tax purposes, and intends to qualify annually thereafter, as a regulated investment company (“RIC”), under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).

The Company was formed in Delaware on September 30, 2013 and formally commenced operations on September 2, 2014 upon satisfying the minimum offering requirement by raising gross proceeds of $10.0 million in connection with a private placement with NexPoint Advisors, L.P. (the “Adviser”), our external advisor. In aggregate through March 31, 2017, the Adviser controls 2,041,174 total shares, including reinvestment of dividends, for a net amount of approximately $19.7 million.

The Company has retained the Adviser to manage certain aspects of its affairs on a day-to-day basis. Highland Capital Funds Distributor, Inc. (the “Dealer Manager”), an entity under common ownership with the Adviser, serves as the dealer manager of the Company’s continuous public offering. The shares are being offered on a “best efforts” basis, which means generally that the Dealer Manager is required to use only its best efforts to sell the shares and it has no firm commitment or obligation to purchase any of the shares. The Adviser and Dealer Manager are related parties and will receive fees and other compensation for services related to the investment and management of the Company’s assets and the continuous public offering.

Note 2 — Summary of Significant Accounting Policies

Basis of Accounting

The accompanying financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Additionally, the accompanying financial statements of the Company and related financial information have been prepared pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Certain financial information that is normally included in annual financial statements is not required for interim financial statements and has been condensed or omitted. The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ending December 31, 2017.

Use of Estimates

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

Statements of Cash Flows

Information on financial transactions which have been settled through the receipt or disbursement of cash is presented in the Statements of Cash Flows. The cash amount shown in the Statements of Cash Flows is the amount included within the Company’s Statements of Assets and Liabilities and includes cash on hand at its custodian bank.

Cash and Cash Equivalents

The Company considers liquid assets deposited with a bank and certain short-term debt instruments with original maturities of three months or less to be cash equivalents. These investments represent amounts held with financial institutions that are readily accessible to pay Company expenses or purchase investments. Cash and cash equivalents are valued at cost plus accrued interest, which approximates market value. The value of cash equivalents denominated in foreign currencies is determined by converting to U.S. dollars on the date of the Statements of Assets and Liabilities. As of March 31, 2017 and December 31, 2016, the Company had cash and cash equivalents of $9,418,996 and $3,948,113, respectively. As of March 31, 2017 and December 31, 2016, $9,352,714 and $3,913,546 was held in the State Street U.S. Government Money Market Fund, and $66,282 and $34,567 was held in a custodial account with State Street Bank and Trust Company, respectively.

Securities Sold Short and Restricted Cash

The Company may sell securities short. A security sold short is a transaction in which the Company sells a security it does not own in anticipation that the market price of that security will decline. When the Company sells a security short, it must borrow the security sold short from a broker-dealer and deliver it to the buyer upon conclusion of the transaction. The Company may have to pay a fee to borrow particular securities and is often obligated to pay over any dividends or other payments received on such borrowed securities. Cash held as collateral for securities sold short is classified as restricted cash on the Statements of Assets and Liabilities. Securities held as collateral for securities sold short are shown on the Schedule of Investments for the Company, as applicable. As of March 31, 2017 and December 31, 2016, the Company did not have any securities sold short.

When securities are sold short, the Company intends to limit exposure to a possible market decline in the value of its portfolio companies through short sales of securities that the Adviser believes possess volatility characteristics similar to those being hedged. In addition, the Company may use short sales for non-hedging purposes to pursue its investment objective. Subject to the requirements of the 1940 Act and the Code, the Company will not make a short sale if, after giving effect to such sale, the market value of all securities sold short by the Company exceeds 25% of the value of its total assets.

Other Fee Income

Fee income may consist of origination/closing fees, amendment fees, administrative agent fees, transaction break-up fees and other miscellaneous fees. Origination fees, amendment fees, and other similar fees are non-recurring fee sources. Such fees are received on a transaction by transaction basis and do not constitute a regular stream of income. For the three months ended March 31, 2017 and March 31, 2016, the Company recognized $0 and $0 of fee income, respectively.

Fair Value of Financial Instruments

Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosure (“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.

The Company determines the net asset value of its investment portfolio each quarter, or more frequently as needed. 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 board of directors of the Company (the “Board”) or by the Adviser, pursuant to board-approved procedures. In connection with that determination, the Company will provide the Board with portfolio company valuations which are based on relevant inputs, including indicative dealer quotes, values of like securities, recent portfolio company financial statements and forecasts, and valuations prepared by third-party valuation services.

With respect to investments for which market quotations are not readily available, the Board and the Adviser undertake a multi-step valuation process, as described below:

•

The valuation process begins with each portfolio company or investment being initially valued by investment professionals of the Adviser responsible for credit monitoring.

•

Preliminary valuation conclusions are then documented and discussed with senior management of the Adviser (the “Valuation Committee”).

•

The audit committee of the Board reviews these preliminary valuations.

•

At least once each quarter, the valuations for approximately one quarter of the portfolio investments that have been fair valued are reviewed by an independent valuation firm such that, over the course of a year, each material portfolio investment that has been fair valued shall have been reviewed by an independent valuation firm at least once.

•

Based on this information, the Board discusses valuations and determines the fair value of each investment in the portfolio in good faith.

As of March 31, 2017, the Company held the following investments for which a sufficient level of current, reliable market quotations were not available:


Instrument	Type	Market value
PAMCO CLO 1997-1A B	Asset-Backed	$	293,086
CareDx, Inc.	Warrant		183,974
Galena Biopharma, Inc.	Warrant		2,250
Gemphire Therapeutics, Inc.	Warrant		647,782
Kadmon Holdings, Inc.	Warrant		98,918
SCYNEXIS, Inc.	Warrant		287,385

As of December 31, 2016, the Company held the following investments for which a sufficient level of current, reliable market quotations were not available:


Instrument	Type	Market value
CareDx, Inc.	Warrant	$	395,318
SCYNEXIS, Inc.	Warrant		259,771
PAMCO CLO 1997-1A B	Asset-Backed		275,625
Galena Biopharma, Inc.	Warrant		23,851

Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to the Company’s financial statements will refer to the uncertainty with respect to the possible effect of such valuations, and any change in such valuations, in the Company’s financial statements. Below is a description of factors that the Valuation Committee and the Board 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 Board may consider include the borrower’s ability to adequately service its debt, the fair market value of the portfolio company in relation to the face amount of its outstanding debt and the quality of collateral securing the Company’s debt investments.

The Company’s equity investments in portfolio companies for which there is no liquid public market will be valued at fair value. The Valuation Committee and the Board, in its analysis of fair value, may consider various factors, such as multiples of earnings before interest, taxes, depreciation and amortization (“EBITDA”), cash flows, net income, revenues or, in limited instances,

book value or liquidation value. All of these factors may be subject to adjustments based upon the particular circumstances of a portfolio company or the Company’s actual investment position. For example, adjustments to EBITDA may take into account compensation to previous owners or acquisition, recapitalization, restructuring or other related items.

The Valuation Committee and the Board may also look to private merger and acquisition statistics, public trading multiples discounted for illiquidity and other factors, valuations implied by third-party investments in the portfolio companies or industry practices in determining fair value. The Valuation Committee and the Board may also consider the size and scope of a portfolio company and its specific strengths and weaknesses, as well as any other factors it deems relevant in assessing the value. Generally, the value of the Company’s equity interests in public companies for which market quotations are readily available will be based upon the most recent closing public market price.

If the Company receives warrants or other equity-linked securities at nominal or no additional cost in connection with an investment in a debt security, the Company will allocate the cost basis in the investment between the debt securities and any such warrants or other equity-linked securities received at the time of origination. The Valuation Committee and the Board will subsequently value these warrants or other equity-linked securities received at fair value.

As applicable, the Company values its Level 2 assets by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which is provided by an independent third-party pricing service and screened for validity by such service. For investments for which the third-party pricing service is unable to obtain quoted prices, the Company obtains bid and ask prices directly from dealers who make a market in such investments.

To the extent that the Company holds investments for which no active secondary market exists and, therefore, no bid and ask prices can be readily obtained, the Valuation Committee utilizes an independent third-party valuation service to value such investments.

The Company periodically benchmarks the bid and ask prices received from the third-party pricing service and/or dealers, as applicable, and valuations received from the third-party valuation service against the actual prices at which it purchases and sells its investments. The Company believes that these prices are reliable indicators of fair value. The Company’s Valuation Committee and the Board review and approve the valuation determinations made with respect to these investments in a manner consistent with the Company’s valuation process.

As of March 31, 2017, the Company’s investments consisted of senior secured loans, bonds, asset-backed securities, common stocks, rights and warrants, which may be purchased for a fraction of the price of the underlying securities. The fair value of the Company’s loans, bonds and asset-backed securities are generally based on quotes received from brokers or independent pricing services. Loans, bonds and asset-backed securities with quotes that are based on actual trades with a sufficient level of activity on or near the measurement date are classified as Level 2 assets. Loans, bonds and asset-backed securities that are priced using quotes derived from implied values, indicative bids or a limited number of actual trades are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable.

The fair value of the Company’s common stocks and options that are not actively traded on national exchanges are generally priced using quotes derived from implied values, indicative bids, or a limited amount of actual trades and are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable. Exchange traded options are valued based on the last trade price on the primary exchange on which they trade. If an option does not trade, the mid-price is utilized to value the option.

At the end of each calendar quarter, the Company evaluates the Level 2 and 3 investments for changes in liquidity, including: whether a broker is willing to execute at the quoted price, the depth and consistency of prices from third party services, and the existence of contemporaneous, observable trades in the market. Additionally, management evaluates the Level 1 and 2 assets and liabilities on a quarterly basis for changes in listings or delistings on national exchanges.

Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments may fluctuate from period to period. Additionally, the fair value of investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values the Company may ultimately realize. Further, such investments may be subject to legal and other restrictions on resale or otherwise less liquid than publicly traded securities.

The inputs or methodology used for valuing investments are not necessarily an indication of the risk associated with investing in those investments. Transfers in and out of the levels are recognized at the fair value at the end of the period. The following are summaries of the Company’s investments categorized within the fair value hierarchy as of March 31, 2017 and December 31, 2016:


	March 31, 2017
Investments	Level 1		Level 2		Level 3		Total
Assets
Senior Secured Loans
Energy	$	—	$	2,206,764	$	—	$	2,206,764
Healthcare		—		6,811,115		4,050,000		10,861,115
Media/Telecommunications		—		4,313,525		—		4,313,525
Retail		—		2,381,114		—		2,381,114
Service		—		487,750		—		487,750
Technology		—		5,081,842		—		5,081,842
Utility		—		1,004,375		—		1,004,375
Asset-Backed Securities		—		1,800,440		293,086		2,093,526
Corporate Bonds		—		24,110,996		—		24,110,996
Common Stocks
Chemicals		—		—		80,750		80,750
Healthcare		3,808,620		—		—		3,808,620
Real Estate Investment Trust (REIT)		2,311,832		—		—		2,311,832
Utility		3,070,210		—		—		3,070,210
Rights		—		82,808		—		82,808
Warrants		—		1,218,059		2,250		1,220,309

Total Assets	$	9,190,662	$	49,498,788	$	4,426,086	$	63,115,536


	December 31, 2016
Investments	Level 1		Level 2		Level 3		Total
Assets
Senior Secured Loans
Energy	$	—	$	3,499,746	$	—	$	3,499,746
Healthcare		—		19,044,836		4,005,000		23,049,836
Media/Telecommunications		—		4,087,500		—		4,087,500
Retail		—		3,193,499		—		3,193,499
Service		—		3,791,110		—		3,791,110
Technology				2,950,489		—		2,950,489
Utility		—		982,500		—		982,500
Asset–Backed Securities		—		2,338,592		275,625		2,614,217
Convertible Bonds		—		700,625		—		700,625
Corporate Bonds		—		28,113,471		—		28,113,471
Common Stock
Chemicals		—		—		73,665		73,665
Healthcare		1,353,380		—		—		1,353,380
Real Estate Investment Trust (REIT)		2,200,805		—		—		2,200,805
Utility		—		904,525		—		904,525
Rights		—		96,288		—		96,288
Warrants		—		655,089		23,851		678,940

Total Assets	$	3,554,185	$	70,358,270	$	4,378,141	$	78,290,596

The table below sets forth a summary of changes in the Company’s Level 3 investments (measured at fair value using significant unobservable inputs) for the three months ended March 31, 2017.


Investments:	Balance as of December 31, 2016		Transfers into Level 3		Transfer out of Level 3		Net amortization (accretion) of premium/ (discount)		Net realized gains/ (losses)		Net change in unrealized gains/ (losses)			Purchases		(Sales and redemptions)		Balance as of March 31, 2017		Change in unrealized gain/(loss) on Level 3 securities still held at period end
Senior Secured Loans
Healthcare	$	4,005,000	$	—	$	—	$	2,133	$	—	$	42,867		$	—	$	—	$	4,050,000	$	42,867
Asset-Backed Securities Financials		275,625		—		—		—		—		17,461			—		—		293,086		17,461
Common Stocks Chemicals		73,665		—		—		—		—		7,085			—		—		80,750		7,085
Warrants Healthcare		23,851		—		—		—		—		(21,601	)		—		—		2,250		(21,601	)

Total	$	4,378,141	$	—	$	—	$	2,133	$	—	$	45,812		$	—	$	—	$	4,426,086	$	45,812

The table below sets forth a summary of changes in the Company’s Level 3 investments (measured at fair value using significant unobservable inputs) for the three months ended March 31, 2016.


Investments:	Balance as of December 31, 2015		Transfers into Level 3		Transfer out of Level 3		Net amortization (accretion) of premium/ (discount)		Net realized gains/ (losses)		Net change in unrealized gains/ (losses)			Purchases		(Sales and redemptions)		Balance as of March 31, 2016		Change in unrealized gain/(loss) on Level 3 securities still held at period end
Senior Secured Loans
Healthcare	$	4,438,125	$	—	$	—	$	1,747	$	—	$	3,878		$	—	$	—	$	4,443,750	$	3,878
Asset-Backed Securities Financials		—		1,022,665		—		—		—		—			—		—		1,022,665		—
Common Stocks Chemicals		87,125		—		—		—		—		(27,625	)		—		—		59,500		(27,625	)
Warrants Healthcare		—		—		—		—		—		1,354,849			—		—		1,354,849		1,354,849

Total	$	4,525,250	$	1,022,6655	$	—	$	1,747	$	—	$	1,331,102		$	—	$	—	$	6,880,764	$	1,331,102

Investments designated as Level 3 may include investments valued using quotes or indications furnished by brokers which are based on models or estimates and may not be executable prices. In light of the developing market conditions, the Adviser continues to search for observable data points and evaluate broker quotes and indications received for investments. Determination of fair values is uncertain because it involves subjective judgments and estimates that are unobservable. Transfers from Level 3 to Level 2 and from Level 2 to Level 1 are due to an increase in market activity (e.g. frequency of trades), which resulted in an increase of available market inputs to determine price. For the three months ended March 31, 2017, $3,070,210 was transferred from Level 2 to Level 1. The Company uses end of period market value in the determination of the amount associated with any transfers between levels.

The following are summaries of significant unobservable inputs used in the fair valuations of investments categorized within Level 3 of the fair value hierarchy as of March 31, 2017 and December 31, 2016:

Investment

Fair value at
March 31, 2017⁽¹⁾

Valuation

technique

Unobservable
inputs

Range of input value(s)
(weighted average)

Senior Secured Loans

4,050,000

Third Party Pricing Vendor

N/A

Common Stocks

80,750

Third Party Pricing Vendor

N/A

Warrants

2,250

Black-Scholes Option Pricing

Volatility

Asset-Backed Securities

293,086

Discounted Cash Flow

Discount Rate

20.85

Total

4,426,086

⁽¹⁾	Included within Level 3 Assets of $4,426,086 are financial instruments for which a sufficient level of current, reliable market quotations were not available. Please refer to Note 2, under Fair Value of Financial Instruments for additional detail on these instruments.

Investment

Fair value at
December 31, 2016⁽¹⁾

Valuation

technique

Unobservable
inputs

Range of input value(s)
(weighted average)

Senior Secured Loans

4,005,000

Third Party Pricing Vendor

N/A

Common Stocks

73,665

Third Party Pricing Vendor

N/A

Warrants

23,851

Black-Scholes Option Pricing

Volatility

Asset-Backed Securities

275,625

Discounted Cash Flow

Discount Rate

20.85

Total

4,378,141

⁽¹⁾	Included within Level 3 Assets of $4,378,141 are financial instruments for which a sufficient level of current, reliable market quotations were not available. Please refer to Note 2, under Fair Value of Financial Instruments for additional detail on these instruments.

The Company’s determinations of fair value may differ materially from the values that would have been used if a ready market for Company’s portfolio investments existed. The determination of fair value (and thus the amount of unrealized losses the Company may incur in any year) is, to a degree, subjective, because it is based on unobservable inputs and certain assumptions.

Derivative Transactions

The Company is subject to equity price risk, interest rate risk and foreign currency exchange rate risk in the normal course of pursuing its investment objective. The Company may invest without limitation in warrants and may also use derivatives, primarily swaps (including equity, variance and volatility swaps), options and futures contracts on securities, interest rates, commodities and/or currencies, as substitutes for direct investments the Company can make. The Company may also use derivatives such as swaps, options (including options on futures), futures, and foreign currency transactions (e.g., foreign currency swaps, futures and forwards) to any extent deemed by the Adviser to be in the best interest of the Company, and to the extent permitted by the 1940 Act, to hedge various investments for risk management and speculative purposes.

Options

The Company purchases options, subject to certain limitations. The Company may invest in options contracts to manage its exposure to the stock and bond markets and fluctuations in foreign currency values. Writing puts and buying calls tend to increase the Company’s exposure to the underlying instrument while buying puts and writing calls tend to decrease the Company’s exposure to the underlying instrument, or economically hedge other Company investments. The Company’s risks in using these contracts include changes in the value of the underlying instruments, nonperformance of the counterparties under the contracts’ terms and changes in the liquidity of the secondary market for the contracts. Options are valued at the last sale price, or if no sales occurred on that day, at the last quoted bid price. As of March 31, 2017 and March 31, 2016, the Company did not hold options.

Investment Transactions

Investment transactions are accounted for on trade date. Realized gains/(losses) on investments sold are recorded on the basis of specific identification method for both financial statement and U.S. federal income tax purposes. Payable for investments purchased and receivable for investments sold on the Statements of Assets and Liabilities, if any, represents the cost of purchases and proceeds from sales of investment securities, respectively, for trades that have been executed but not yet settled. Due from Broker, if any, represents certain receivables from counterparties related to principal paydowns among other things.

Income Recognition

Corporate actions (including cash dividends from common stock and equity tranches of asset-backed securities) are recorded on the ex-dividend date, net of applicable withholding taxes, except for certain foreign corporate actions, which are recorded as soon after the ex-dividend date as such information becomes available. Interest income is recorded on the accrual basis. The Company does not accrue as a receivable interest or dividends on loans, asset-backed securities and other securities if there is a reason to doubt the Company’s ability to collect such income. For loans with contractual PIK (payment-in-kind) interest income, which represents contractual interest accrued and added to the loan balance that generally becomes due at maturity, we will not accrue PIK interest if we believe that the PIK interest is no longer collectible. Loan origination fees, original issue discount and market discount are capitalized and such amounts are amortized 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.

Accretion of discounts and amortization of premiums on taxable bonds, loans and asset-backed securities are computed to the call or maturity date, whichever is shorter, using the effective yield method. Withholding taxes on foreign dividends have been provided for in accordance with the Company’s understanding of the applicable country’s tax rules and rates.

Organization and Offering Costs

Organization costs include the cost of incorporating, such as the cost of legal services and other fees pertaining to our organization and are paid by the Adviser, are expensed as we raise proceeds and become payable to the Adviser. Organization costs and offering costs are limited to 1% of total gross proceeds raised and are not due and payable to the Adviser to the extent they exceed that amount. Please refer to Note 4 for additional information on Organization and Offering Costs.

Paid-in Capital

The proceeds from the issuance of common stock as presented on the Company’s Statements of Changes in Net Assets is presented net of selling commissions and fees for the three months ended March 31, 2017 and March 31, 2016. Selling commissions and fees of $691,260 and $443,198 were paid for the three months ended March 31, 2017 and March 31, 2016, respectively.

Earnings Per Share

In accordance with the provisions of ASC Topic 260 — Earnings per Share (“ASC 260”), basic earnings per share is computed by dividing earnings available to common stockholders by the weighted average number of shares outstanding during the period. Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis.

The following table sets forth the computation of the weighted average basic and diluted net increase in net assets per share from operations:


	For the three months ended
	March 31, 2017		March 31, 2016
Net increase in net assets from operations	$	2,513,262	$	2,619,574
Weighted average common shares outstanding		7,501,991		3,053,707
Earnings per common share-basic and diluted		0.34		0.86

Distributions

Distributions to the Company’s stockholders will be recorded as of the record date. Subject to the discretion of the Board and applicable legal restrictions, the Company intends to authorize and declare ordinary cash distributions on a weekly basis and pay such distributions on a monthly basis. Net realized capital gains, if any, will be distributed or deemed distributed at least every 12-month period.

Recent Accounting Pronouncements

The Company generally intends to take advantage of the extended transition period available to emerging growth companies to comply with the new or revised accounting standards below until those standards are applicable to private companies.

In January 2016, the FASB issued Accounting Standards Update 2016-01, Financial Instruments (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities. The amendments in this update make improvements to the requirements for accounting for equity investments and simplify the impairment assessment of equity investments. For public entities this update will be effective for fiscal years beginning after December 15, 2017. For all other entities, this update will be effective for fiscal years beginning after December 31, 2018, and for interim periods within fiscal years beginning after December 15, 2019. The Company is currently evaluating the impact of this new guidance on its financial statement presentation.

call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. For public entities this update will be effective for interim periods and fiscal years beginning after December 15, 2016. For all other entities, this update will be effective for fiscal years beginning after December 31, 2017, and for interim periods within fiscal years beginning after December 15, 2018. The Company is currently evaluating the impact of this new guidance on its financial statement presentation.

In August, 2016, the FASB issued Accounting Standards Update 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Receipts and Cash Payments. The amendments in this update address eight specific issues, where there has been diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230. For public entities this update will be effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. For all other entities, this update is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The Company is currently evaluating the impact of this new guidance on its financial statement presentation.

In October 2016, the U.S. Securities and Exchange Commission adopted new rules and amended existing rules (together, “final rules”) intended to modernize the reporting and disclosure of information by registered investment companies. In part, the final rules amend Regulation S-X and require standardized, enhanced disclosure about derivatives in investment company financial statements, as well as other amendments. The compliance date for the amendments to Regulation S-X is August 1, 2017. The Company is currently evaluating the impact that the adoption of the amendments to Regulation S-X will have on its financial statement presentation and related disclosures.

In November, 2016, the FASB issued Accounting Standards Update 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The amendments in this update require the statement of cash flows explain the change during the period in the total of cash, cash equivalents. Amounts generally described as restricted cash or restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. For public entities this update will be effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. For all other entities, this update is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The Company is currently evaluating the impact of this new guidance on its financial statement presentation.

In December 2016, the FASB issued Accounting Standards Update 2016-19, Technical Corrections and Improvements. The amendments in this update include an amendment to FASB ASC Topic 820, Fair Value Measurement and Disclosures to clarify the difference between a valuation approach and a valuation technique. The amendment also requires an entity to disclose when there has been a change in either or both a valuation approach and/or a valuation technique. For public entities, this update will be effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. For all other entities, this update is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The Company is currently evaluating the impact of this new guidance on its financial statement presentation.

In March 2017, the FASB issued Accounting Standards Update 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20). The amendments in this update shorten the amortization period for certain callable debt securities held at premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. For public entities this update will be effective for fiscal years beginning after December 15, 2018, and for interim periods within those fiscal years. For all other entities, this update is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company is currently evaluating the impact of this new guidance on the Company’s financial statements.

Note 3 — Investment Portfolio

The following table shows the composition of the Company’s investments by industry classification at fair value at March 31, 2017:


	Fair value		Percentage
Assets
Healthcare	$	32,151,096		50.9	%
Media/Telecommunications		7,404,125		11.7	%
Energy		5,594,264		8.9	%
Technology		5,081,842		8.1	%
Utility		4,157,393		6.6	%
Retail		3,226,114		5.1	%
Real Estate Investment Trusts (REITs)		2,311,832		3.7	%
Financials		2,093,526		3.3	%
Telecommunication Services		526,844		0.8	%
Service		487,750		0.8	%
Chemicals		80,750		0.1	%

Total Assets	$	63,115,536		100.0	%

The following table shows the composition of the Company’s investments by industry classification at fair value at December 31, 2016:


	Fair value		Percentage
Assets
Healthcare	$	48,076,536		61.5	%
Energy		5,293,496		6.8	%
Technology		5,120,935		6.5	%
Retail		4,105,999		5.2	%
Media/Telecommunications		4,087,500		5.2	%
Service		3,791,110		4.8	%
Financials		2,614,217		3.3	%
Real Estate Investment Trusts (REITs)		2,200,805		2.8	%
Utility		1,983,313		2.6	%
Telecommunication Services		943,020		1.2	%
Chemicals		73,665		0.1	%

Total assets	$	78,290,596		100.0	%

The following table summarizes the amortized cost and the fair value of the Company’s investments as of March 31, 2017:


	Amortized Cost		Fair value		Percentage of Portfolio (at Fair Value)
Assets
Senior Secured Loans - First Lien	$	15,664,384	$	16,262,384		25.8	%
Senior Secured Loans - Second Lien		10,040,030		10,060,976		16.0	%
Senior Secured Loans - Escrow Loan		87,816		13,125		0.0	%
Corporate Bonds		24,572,658		24,110,996		38.2	%
Common Stocks		11,160,214		9,271,412		14.7	%
Asset-Backed Securities		2,104,800		2,093,526		3.3	%
Warrants		—		1,220,309		1.9	%
Rights		154,404		82,808		0.1	%

Total Assets	$	63,784,306	$	63,115,536		100.0	%

The following table summarizes the amortized cost and the fair value of the Company’s investments as of December 31, 2016:


	Amortized cost		Fair value		Percentage of portfolio (at fair value)
Assets
Senior Secured Loans - First Lien	$	27,394,540	$	28,864,108		36.9	%
Senior Secured Loans - Second Lien		12,790,248		12,673,072		16.2	%
Senior Secured Loans - Escrow Loan		87,816		17,500		0.0	%
Asset-Backed Securities		2,576,709		2,614,217		3.3	%
Convertible Bonds		569,431		700,625		0.9	%
Corporate Bonds		28,847,813		28,113,471		35.9	%
Common Stocks		6,170,708		4,532,375		5.8	%
Rights		154,404		96,288		0.1	%
Warrants		—		678,940		0.9	%

Total assets	$	78,591,669	$	78,290,596		100.0	%

The following table shows the composition of the Company’s investments by geographic classification at March 31, 2017:


Geography	Fair value		Percentage
Assets
Cayman Islands⁽¹⁾	$	2,093,526		3.3	%
Luxembourg⁽¹⁾		2,875,566		4.6	%
United States		58,146,444		92.1	%

Total Assets	$	63,115,536		100.0	%

⁽¹⁾	Investment denominated in USD

The following table shows the composition of the Company’s investments by geographic classification at December 31, 2016:


Geography	Fair value		Percentage
Assets
Cayman Islands⁽¹⁾	$	2,123,342		2.7	%
Luxembourg⁽¹⁾		2,950,489		3.8	%
United States		73,216,765		93.5	%

Total assets	$	78,290,596		100.0	%

⁽¹⁾	Investment denominated in USD

Note 4 — Related Party Transactions and Arrangements

Investment Advisory Fee

Payments for investment advisory services under the Company’s investment advisory agreement (the “Investment Advisory Agreement”) and administrative services agreement (the “Administration Agreement”) is equal to (a) a base management fee calculated at an annual rate of 2.0% of the average value of the Company’s gross assets at the end of the two most recently completed calendar quarters and (b) an incentive fee based on the Company’s performance.

For the three months ended March 31, 2017 and March 31, 2016, the Company incurred investment advisory fees payable to the Adviser of $411,325 and $171,353, respectively, which were voluntarily waived. Amounts waived for management fees or administrative services expenses pertaining to periods prior to June 10, 2016 are not recoupable, but amounts waived for management fees or administrative services expenses pertaining to periods from and after June 10, 2016 are subject to recoupment by the Adviser

within three years from the date that such fees were otherwise payable, provided that the recoupment will be limited to the amount of such voluntarily waived fees from and after June 10, 2016 and will not cause the sum of the Company’s advisory fees, administration fees, Other Expenses (as defined under “Expense Limits and Reimbursements” below), and any recoupment to exceed the annual rate of 3.40% of average gross assets.

Incentive Fee

The incentive fee consists of two parts. The first part, which is referred to as the subordinated incentive fee on income, is calculated and payable quarterly in arrears, and equals 20.0% of “pre-incentive fee net investment income” for the immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on the Company’s net assets, as defined in the Investment Advisory Agreement, equal to 1.875% per quarter. As a result, the Adviser will not earn this incentive fee for any quarter until the Company’s pre-incentive fee net investment income for such quarter exceeds the hurdle rate of 1.875%. Once the Company’s pre-incentive fee net investment income in any quarter exceeds the hurdle rate, the Adviser will be entitled to a “catch-up” fee equal to the amount of the pre-incentive fee net investment income in excess of the hurdle rate, until the Company’s pre-incentive fee net investment income for such quarter equals 2.34375% of the Company’s net assets at the end of such quarter. This “catch-up” feature allows the Adviser to recoup the fees foregone as a result of the existence of the hurdle rate in that quarter. Thereafter, the Adviser will receive 20.0% of the Company’s pre-incentive fee net investment income from the quarter.

The second part of the incentive fee, which is referred to as the incentive fee on capital gains, is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement). This fee equals 20.0% of the Company’s incentive fee capital gains, which will equal the Company’s realized capital gains on a cumulative basis from formation, calculated as of the end of the applicable period, computed net of all realized capital losses (proceeds less amortized cost) and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gains incentive fees. The Company will accrue for the capital gains incentive fee, which, if earned, will be paid annually. The Company will accrue for the capital gains incentive fee based on net realized and unrealized gains; however, under the terms of the Investment Advisory Agreement, the fee payable to the Adviser will be based on realized gains and no such fee will be payable with respect to unrealized gains unless and until such gains are actually realized.

For the three months ended March 31, 2017 and March 31, 2016, the Company incurred $95,785 and $0 of incentive fees on capital gains, respectively, all of which was voluntarily waived.

Administration Fee

Pursuant to the Administration Agreement with the Adviser, the Company also reimburses the Adviser for expenses necessary for its performance of services related to the Company’s administration and operations. The amount of the reimbursement will be the lesser of (1) the Company’s allocable portion of overhead and other expenses incurred by the Adviser in performing its obligations under the Administration Agreement and (2) 0.40% of the Company’s average gross assets. The Adviser is required to allocate the cost of such services to the Company based on objective factors such as assets, revenues, time allocations and/or other reasonable metrics. The Board assesses the reasonableness of such reimbursements based on the breadth, depth and quality of such services as compared to the estimated cost to the Company of obtaining similar services from third-party service providers known to be available. In addition, the Board will consider whether any single third-party service provider would be capable of providing all such services at comparable cost and quality. Finally, the Board will compare the total amount paid to the Adviser for such services as a percentage of the Company’s net assets to the same ratio as reported by other comparable BDCs.

For the three months ended March 31, 2017 and March 31, 2016, the Company incurred administration fees payable to the Adviser of $82,265 and $34,268, respectively, which were voluntarily waived. Amounts waived for management fees or administrative services expenses pertaining to periods prior to June 10, 2016 are not recoupable, but amounts waived for management fees or administrative services, expenses pertaining to periods from and after June 10, 2016 are subject to recoupment by the Adviser within three years from the date that such fees were otherwise payable, provided that the recoupment will be limited to the amount of such voluntarily waived fees from and after June 10, 2016 and will not cause the sum of the Company’s advisory fees, administration fees, Other Expenses, and any recoupment to exceed the annual rate of 3.40% of average gross assets.

Investment Advisory and Administration Fees Table

Amounts waived and subject to recoupment pertaining to advisory and administrator fees are shown below.


Period ended	Advisory fees waived and subject to recoupment⁽¹⁾		Administration fees waived and subject to recoupment⁽¹⁾		Recoupment eligibility expiration
March 31, 2017	$	390,969	$	78,194		March 31, 2020
December 31, 2016		366,861		73,372		December 31, 2019
September 30, 2016		343,320		68,664		September 30, 2019
June 30, 2016		74,421		14,884		June 30, 2019

Total	$	1,175,571	$	235,114

⁽¹⁾	The Advisor has permanently waived the recoupment of any advisory fees or administration fees calculated on the portion of gross assets attributable to the receivable from Adviser balance on the Statements of Assets and Liabilities. The amounts shown have been reduced by this waiver.

In addition, cumulatively since inception through to June 10, 2016, the Company has voluntarily waived $930,143 and $186,042 of advisory fees and administration fees, respectively, all of which are not recoupable.

Organization and Offering Costs

Organization costs include the cost of incorporating, such as the cost of legal services and other fees pertaining to our organization and are paid by the Adviser, are expensed as we raise proceeds and become payable to the Adviser. For the three months ended March 31, 2017 and March 31, 2016, the Adviser did not incur or pay organization costs on our behalf.

Offering costs include legal fees, promotional costs and other costs pertaining to the public offering of our shares of common stock, and are capitalized and amortized to expense over one year. For the three months ended March 31, 2017 and March 31, 2016, the Adviser incurred offering costs of $296,961 and $231,772, respectively, on our behalf. For the three months ended March 31, 2017 and March 31, 2016, respectively, the Company capitalized $91,816 and $61,157 of offering costs, respectively. Of the capitalized offering costs, $109,729 and $5,834 were amortized to expense during the three months ended March 31, 2017 and March 31, 2016, respectively, and $210,642 and $55,323 remained on the Statement of Assets and Liabilities as of March 31, 2017 and March 31, 2016, respectively.

Organization costs and offering costs are limited to 1% of total gross proceeds raised in this offering and are not due and payable to the Adviser to the extent they exceed that amount. Currently, the cumulative aggregate amount of $4,431,202 of organization and offering costs exceeds 1% of total proceeds raised. To the extent the Company is unable to raise sufficient capital such that the expenses paid by the Adviser on behalf of the Company are more than 1% of total proceeds at the end of the Offering, the Adviser will forfeit the right to reimbursement of the remaining $3,660,521 of these costs.

Fees Paid to Officers and Directors

Each director who is not an “interested person” of the Company as defined in the 1940 Act (the “Independent Directors”) receives an annual retainer of $150,000 payable in quarterly installments and allocated among each portfolio in the Highland Fund Complex based on relative net assets. The “Highland Fund Complex” consists of all of the registered investment companies advised by the Adviser and any affiliates as of the period covered by this report. The Company pays no compensation to any of its officers, all of whom are employees of an affiliate of the Adviser. Although the Company believes that Mr. Powell is technically no longer an “interested person” of the Company, in light of his previous employment with affiliates of the Adviser, as well as the possibility that he may provide consulting services to affiliates of the Adviser, it is possible that the SEC might in the future determine Mr. Powell to be an “interested person” of the Company. Therefore, the Company intends to treat Mr. Powell as an “interested person” of the Company for all purposes other than compensation (Mr. Powell will be compensated at the same rate as the Independent Directors) from December 16, 2015 until December 4, 2017 (the second anniversary of his resignation from an affiliate of the Adviser).

For the three months ended March 31, 2017 and March 31, 2016, the Company recorded an expense relating to director fees of $2,867 and $847, respectively, which represents the allocation of the director fees to the Company. As of March 31, 2017, there was $0 of expenses payable relating to director fees.

Expense Limits and Reimbursements

Pursuant to an expense limitation agreement, the Adviser is contractually obligated to waive fees and, if necessary, pay or reimburse certain other expenses to limit the ordinary “Other Expenses” to 1.0% of the quarter-end value of the Company’s gross assets through the one year anniversary of the effective date of the registration statement (the “Expense Limitation Agreement”). Under the Expense Limitation Agreement, “Other Expenses” are all expenses with the exception of advisor and administration fees, organization and offering costs and the following: (i) interest, taxes, dividends tied to short sales, brokerage commissions, and other expenditures which are capitalized in accordance with U.S. GAAP; (ii) expenses incurred indirectly as a result of investments in other investment companies and pooled investment vehicles; (iii) other expenses attributable to, and incurred as a result of, our investments; (iv) expenses payable to the Adviser, as administrator, for providing significant managerial assistance to our portfolio companies; and (v) other extraordinary expenses (including litigation expenses) not incurred in the ordinary course of our business. The obligation will automatically renew for one-year terms unless it is terminated by the Company or the Adviser upon written notice within 120 days of the end of the current term or upon termination of the Investment Advisory Agreement. The Expense Limitation Agreement will continue through at least April 30, 2017.

Any expenses waived or reimbursed by the Adviser pursuant to the Expense Limitation Agreement are subject to possible recoupment by the Adviser within three years from the date of the waiver or reimbursement. The recoupment by the Adviser will be limited to the amount of previously waived or reimbursed expenses and cannot cause the Company’s expenses to exceed any expense limitation in place at the time of recoupment or waiver.

Reimbursable Expenses Table

The cumulative total of fees waived by the Adviser under the Expense Limitation Agreement, which are recoupable as of March 31, 2017 are $2,113,172. This balance, and the balances in the tables below, only include amounts pertaining to the Expense Limitation Agreement, and do not include waived advisory and administration fees subject to recoupment discussed earlier in Note 4. The following table reflects the fee waivers and expense reimbursements due from the Adviser as of March 31, 2017, which may become subject to recoupment by the Adviser.

Period ended

Yearly cumulative
other expense

Yearly expense
limitation

Yearly cumulative
expense
reimbursement

Quarterly
recoupable
amount

Recoupment

eligibility

expiration

March 31, 2017

329,791

182,226

147,565

March 31, 2020

The following table reflects the fee waivers and expense reimbursements due from the Adviser as of December 31, 2016, September 30, 2016, June 30, 2016 and March 31, 2016, which may become subject to recoupment by the Adviser.


Period ended	Yearly cumulative other expense		Yearly expense limitation		Yearly cumulative expense reimbursement		Quarterly recoupable amount		Recoupment eligibility expiration
December 31, 2016	$	1,263,735	$	835,904	$	427,831	$	147,943	December 31, 2019
September 30, 2016		803,909		524,021		279,888		32,663	September 30, 2019
June 30, 2016		567,248		320,023		247,225		90,124	June 30, 2019
March 31, 2016		259,420		102,319		157,101		157,101	March 31, 2019

The following table reflects the fee waivers and expense reimbursements due from the Adviser as of December 31, 2015, September 30, 2015, June 30, 2015 and March 31, 2015, which may become subject to recoupment by the Adviser.


Period ended	Yearly cumulative other expense		Yearly expense limitation		Yearly cumulative expense reimbursement		Quarterly recoupable amount		Recoupment eligibility expiration
December 31, 2015	$	1,440,686	$	309,265	$	1,131,421	$	23,484	December 31, 2018
September 30, 2015		1,272,439		164,502		1,107,937		434,917	September 30, 2018
June 30, 2015		771,350		98,330		673,020		414,551	June 30, 2018
March 31, 2015		353,760		95,291		258,469		258,469	March 31, 2018

The following table reflects the fee waivers and expense reimbursements due from the Adviser as of December 31, 2014 and September 30, 2014, which may become subject to recoupment by the Adviser.


Period ended	Yearly cumulative other expense		Yearly expense limitation		Yearly cumulative expense reimbursement		Quarterly recoupable amount		Recoupment eligibility expiration
December 31, 2014	$	463,303	$	56,948	$	406,355	$	321,712		December 31, 2017
September 30, 2014		98,723		14,081		84,642		84,642		September 30, 2017

There can be no assurance that the Expense Limitation Agreement will remain in effect or that the Adviser will reimburse any portion of our expenses in future quarters not covered by the Expense Limitation Agreement. Amounts shown do not include the amounts committed by the Adviser to voluntarily reimburse the Company for unrealized losses, all of which are not recoupable.

Net Increase from Amounts Committed by Affiliates

For the three months ended March 31, 2017 and March 31, 2016, the Adviser committed $0 and $872,000, respectively, to the Company to voluntarily reimburse the Company for unrealized losses sustained. Cumulatively since inception, the Adviser has committed $2,275,000 to voluntarily reimburse the Company for such losses. Had these commitments not been made, the net asset value (“NAV”) as of March 31, 2017 would have been lower. These commitments are shown in the Statements of Operations as net increase from amounts committed by affiliates and are not recoupable.

Amounts committed and paid by the Adviser to reimburse for unrealized losses are nonrecurring, and investors should not expect the Adviser to make similar commitments or payments in the future.

Receivable from Adviser

The table below provides a breakdown of the various amounts that make up the $4,177,196 and $4,096,447 shown on the Statements of Assets and Liabilities as of March 31, 2017 and December 31, 2016, respectively.


Description	March 31, 2017			December 31, 2016
Amounts committed by affiliates	$	2,275,000		$	2,275,000
Fees waived under the Expense Limitation Agreement		2,113,172			1,965,606
Organization and offering costs paid directly by the Company, to be reimbursed by Adviser		405,913			405,913
Commissions paid in excess of maximum, reimbursed by Adviser		153,792			128,793
Payable to Adviser for reimbursement of organization and offering costs		(770,681	)		(678,865	)

Totals	$	4,177,196		$	4,096,447

As described in Note 11, on May 11, 2017 the Adviser paid to the Company in full the receivable from Adviser balance as of March 31, 2017, together with interest of $56,480.

Indemnification

Under the Company’s organizational documents, the officers and Directors have been granted certain indemnification rights against certain liabilities that may arise out of performance of their duties to the Company. Additionally, in the normal course of business, the Company may enter into contracts with service providers that contain a variety of indemnification clauses. The Company’s maximum exposure under these arrangements is dependent on future claims that may be made against the Company and, therefore, cannot be estimated.

Note 5 — U.S. Federal Income Tax Information

The Company has elected to be treated for federal income tax purposes, and intends to qualify annually, as a RIC under Subchapter M of the Code. To maintain its qualification as a RIC, the Company must, among other things, meet certain source-of-income and asset diversification requirements and distribute to its stockholders, for each taxable year, at least 90% of its “investment company taxable income,” which is generally the Company’s net ordinary income plus the excess, if any, of realized net short-term capital gains over realized net long-term capital losses. As a RIC, the Company will not be subject to corporate-level federal income taxes on any income that it timely distributes to its stockholders. The Company intends to make distributions in an amount sufficient to maintain its RIC status each year and to avoid any federal income taxes on income so distributed. The Company will also be subject to nondeductible federal excise taxes if it does not distribute at least 98% of net ordinary income, 98.2% of any capital gain net income, if any, and any recognized and undistributed income from prior years on which it paid no federal income taxes.

The character of income and capital gains to be distributed is determined in accordance with the Code, U.S. Treasury regulations, and other applicable authority, which may differ from U.S. GAAP. These differences include (but are not limited to) investments organized as partnerships for tax purposes, defaulted bonds, losses deferred to off-setting positions, and losses deferred due to wash sale transactions. Reclassifications are made to the Company’s capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under the Code, U.S. Treasury regulations, and other applicable authority. These reclassifications have no impact on net investment income, realized gains or losses, or net asset value of the Company. The calculation of net investment income per share in the Financial Highlights table excludes these adjustments.

Uncertainty in Income Taxes

The Company will evaluate its tax positions to determine if the tax positions taken meet the minimum recognition threshold in connection with accounting for uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing tax benefits or liabilities in the financial statements. Recognition of a tax benefit or liability with respect to an uncertain tax position is required only when the position is “more likely than not” to be sustained assuming examination by taxing authorities. The Company’s tax returns are subject to examination by the Internal Revenue Service for a period of three fiscal years after they are filed. The Company recognizes interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in the Statements of Operations. During the three months ended March 31, 2017 and the three months ended March 31, 2016, the Company did not incur any interest or penalties. Furthermore, the company is not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly change in the next 12 months.

Note 6 — Share Repurchase Program

On a quarterly basis, the Company intends to offer to repurchase shares of common stock on such terms as may be determined by the Board in its complete and absolute discretion unless, in the judgment of the Independent Directors of the Board, such repurchases would not be in the best interests of the Company’s stockholders or would violate applicable law. The Company will conduct such repurchase offers in accordance with the requirements of Rule 13e-4 of the Securities Exchange Act of 1934, as amended (“the Exchange Act”), and the 1940 Act. In months in which the Company repurchases shares of common stock, it will conduct repurchases on the same date that it holds its first weekly closing for the sale of shares of common stock in its public offering. Any offer to repurchase shares of common stock will be conducted solely through tender offer materials mailed to each stockholder.

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 sale of shares of common stock under its distribution reinvestment plan. At the discretion of the Board, the Company may also use cash on hand, cash available from borrowings and cash from 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 10.0% of the weighted average number of shares of common stock outstanding in the prior calendar year, or 2.5% in each 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. The Company intends to offer to repurchase such shares of common stock at a price equal to 90% of the offering price in effect on each date of repurchase. The Board may amend, suspend or terminate the share repurchase program at any time, upon 30 days’ notice.

The Company conducted its quarterly tender offer from March 1, 2017, until expiration of March 31, 2017 at 5:00p.m. New York City time, during which the Company offered to purchase for cash up to 2.5% of its outstanding shares of common stock. During the first quarter tender offer, 58,893 shares of the Company were tendered for repurchase, constituting approximately 0.74% of the Company’s outstanding shares.

For the three months ended March 31, 2017, the Company did not repurchase any shares as part of its death and disability repurchase program.

Note 7 — Credit Facility

On January 6, 2015, the Company entered into a senior, secured revolving credit facility (the “Credit Facility”) with State Street Bank and Trust Company (“State Street”), as lender and agent. Under the Credit Facility, State Street had agreed to extend credit to the Company in an aggregate principal amount of up to $25 million at a rate of L + 1.15%, subject to borrowing base availability and restrictions on the Company’s total outstanding debt.

On January 5, 2016, the Company entered into an amendment to the Credit Facility to, among other things, increase the unused commitment fee from 0.15% to 0.25% and extend the final maturity date to January 3, 2017.

On January 3, 2017, the Company entered into an amendment to the Credit Facility to extend the final maturity date to March 20, 2017. The Credit Facility was fully paid down on February 24, 2017, and expired on March 20, 2017.

For the three months ended March 31, 2017 and March 31, 2016, the components of total interest expense were as follows:


	Three Months Ended
	March 31, 2017			March 31, 2016
Direct interest expense	$	42,325		$	7,907
Commitment fees		8,054			14,276
Amortization of financing costs		—			—

Total interest expense	$	50,379		$	22,183

Average daily amount outstanding		8,824,444			1,969,231
Weighted average interest rate		1.95	%		1.61	%

The Company was required to maintain 300% asset coverage with respect to amounts outstanding under the Credit Facility. Asset coverage was calculated by subtracting the Company’s total liabilities, not including any amount representing bank loans and senior securities, from the Company’s total assets and dividing the result by the principal amount of the borrowings outstanding.

Note 8 — Economic Dependency and Commitments and Contingencies

Under various agreements, the Company has engaged the Adviser and its affiliates to provide certain services that are essential to the Company, including asset management services, asset acquisition and disposition decisions, the sale of shares of the Company’s common stock available for issue, as well as other administrative responsibilities for the Company including accounting services and investor relations. Additionally, the Adviser pays all of the Company’s organization and offering costs subject to reimbursement to the extent organization and offering costs paid by the Adviser do not exceed 1% of gross proceeds raised.

The Company’s organization and offering costs together are limited to 1% of total proceeds raised and are not due and payable to the Adviser to the extent they exceed that amount. Currently, the cumulative aggregate amount of organization and offering costs exceeds 1% of total proceeds raised. As of March 31, 2017, $3,660,521 of organization and offering costs could become payable to the Adviser contingent upon the amount of future proceeds raised. See Note 4 for a discussion of Related Party Transactions and Arrangements, including a description of amounts waived and subject to recoupment.

As a result of these relationships, the Company is dependent upon the Adviser and its affiliates. In the event that these companies are unable to provide the Company with the respective services, the Company will be required to find alternative providers of these services.

From time to time, the Company may be involved in legal proceedings in the normal course of its business. Although the outcome of such litigation cannot be predicted with any clarity, management is of the opinion, based on the advice of legal counsel, that final dispositions of any litigation should not have a material adverse effect on the financial position of the Company as of March 31, 2017.

In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties that provide general indemnification. The Company’s maximum exposure under these agreements is unknown, as this would involve future claims that may be made against the Company that have not occurred. The Company believes the risk of material obligations under these indemnities to be low.

Note 9 — Market and Other Risk Factors

The primary risks of investing in the Company are described below in alphabetical order:

Concentration Risk

The Company is classified as a non-diversified investment company within the meaning of the 1940 Act, which means that it is not limited by the 1940 Act with respect to the proportion of the Company’s assets that it may invest in securities of a single issuer. To the extent that the Company assumes large positions in the securities of a small number of issuers, the Company’s net asset value may fluctuate to a greater extent than that of a diversified investment company as a result of changes in the financial condition or the market’s assessment of the issuer. The Company may also be more susceptible to any single economic or regulatory occurrence than a diversified investment company. Beyond the asset diversification requirements associated with the Company’s qualification as a RIC under the Code and certain contractual diversification requirements under a credit facility or other agreements, the Company does not have fixed guidelines for diversification, and its investments could be concentrated in relatively few portfolio companies. As a result, the aggregate returns the Company realizes may be significantly adversely affected if a small number of investments perform poorly or if the Company needs to write down the value of any one investment. Additionally, the Company’s investments may be concentrated in relatively few industries. As a result, a downturn in any particular industry in which the Company is invested could also significantly impact the aggregate returns realized.

Counterparty Credit Risk

Counterparty credit risk is the potential loss the Company may incur as a result of the failure of a counterparty or an issuer to make payments according to the terms of a contract. Counterparty credit risk is measured as the loss the Company would record if its counterparties failed to perform pursuant to the terms of their obligations to the Company. Because the Company may enter into over-the-counter forwards, options, swaps and other derivative financial instruments, the Company may be exposed to the credit risk of its counterparties. To limit the counterparty credit risk associated with such transactions, the Company conducts business only with financial institutions judged by the Adviser to present acceptable credit risk.

Credit Risk

Investments rated below investment grade are commonly referred to as high-yield, high risk or “junk debt.” They are regarded as predominantly speculative with respect to the issuing company’s continuing ability to meet principal and/or interest

payments. Investments in high yield debt and high yield senior loans may result in greater net asset value fluctuation than if the Company did not make such investments. Corporate debt obligations, including senior loans, are subject to the risk of non-payment of scheduled interest and/or principal.

Non-payment would result in a reduction of income to the Company, a reduction in the value of the corporate debt obligation experiencing non-payment and a potential decrease in the net asset value of the Company. Some of the loans the Company makes or acquires may provide for the payment by borrowers of Payment-In-Kind (“PIK”) interest or accreted original issue discount at maturity. Such loans have the effect of deferring a borrower’s payment obligation until the end of the term of the loan, which may make it difficult for the Company to identify and address developing problems with borrowers in terms of their ability to repay debt. Particularly in a rising interest rate environment, loans containing PIK and original issue discount provisions can give rise to negative amortization on a loan, resulting in a borrower owing more at the end of the term of a loan than what it owed when the loan was originated. Any such developments may increase the risk of default on the Company’s loans by borrowers.

Because loans are not ordinarily registered with the SEC or any state securities commission or listed on any securities exchange, there is usually less publicly available information about such instruments. In addition, loans may not be considered “securities” for purposes of the anti-fraud protections of the federal securities laws and, as a result, as a purchaser of these instruments, the Company may not be entitled to the anti-fraud protections of the federal securities laws. In the course of investing in such instruments, the Company may come into possession of material nonpublic information and, because of prohibitions on trading in securities of issuers while in possession of such information, the Company may be unable to enter into a transaction in a publicly-traded security of that issuer when it would otherwise be advantageous for us to do so. Alternatively, the Company may choose not to receive material nonpublic information about an issuer of such loans, with the result that the Company may have less information about such issuers than other investors who transact in such assets.

Foreign Securities Risk

Investments in foreign securities involve certain factors not typically associated with investing in U.S. securities, such as risks relating to (i) currency exchange matters, including fluctuations in the rate of exchange between the U.S. dollar (the currency in which the books of the Company are maintained) and the various foreign currencies in which the Company’s portfolio securities will be denominated and costs associated with conversion of investment principal and income from one currency into another; (ii) differences between the U.S. and foreign securities markets, including the absence of uniform accounting, auditing and financial reporting standards and practices and disclosure requirements, and less government supervision and regulation; (iii) political, social or economic instability; and (iv) the extension of credit, especially in the case of sovereign debt.

Illiquid Securities Risk

The Company will generally make investments in private companies. Substantially all of these investments will be subject to legal and other restrictions on resale or will otherwise be less liquid than publicly traded securities. The illiquidity of the Company’s investments may make it difficult for the Company to sell such investments if the need arises. In addition, if it is required to liquidate all or a portion of its portfolio quickly, the Company may realize significantly less than the value at which it has previously recorded its investments. In addition, it may face other restrictions on its ability to liquidate an investment in a portfolio company to the extent that it has material non-public information regarding such portfolio company or if an investment is held by one of its subsidiaries and is subject to contractual limitations on sale, such as the limitations on transfer of assets under certain circumstances under a credit facility.

Because loan transactions often take longer to settle than transactions in other securities, the Company may not receive the proceeds from the sale of a loan for a significant period of time. As a result, the Company may maintain higher levels of cash and short-term investments than funds that invest in securities with shorter settlement cycles and/or may use the Credit Facility to permit the Company to meet its obligations pending settlement of the sale of portfolio securities, each of which may adversely affect the Company’s performance.

The company seeks to address its short-term liquidity needs by carefully managing the settlements of its portfolio transactions, including transactions in loans, by maintaining short-term liquid assets sufficient to meet reasonably anticipated obligations, and by maintaining the Credit Facility.

Investments in Foreign Markets Risk

Investments in foreign markets involve special risks and considerations not typically associated with investing in the United States. These risks include revaluation of currencies, high rates of inflation, restrictions on repatriation of income and capital, and adverse political and economic developments. Moreover, securities issued in these markets may be less liquid, subject to government ownership controls, tariffs and taxes, subject to delays in settlements, and their prices may be more volatile. The Company may be subject to capital gains and repatriation taxes imposed by certain countries in which they invest. Such taxes are generally based on income and/or capital gains earned or repatriated. Taxes are accrued based upon net investment income, net realized gains and net unrealized appreciation as income and/or capital gains are earned.

Leverage Risk

The Company may use leverage in its investment program, including the use of borrowed funds and investments in certain types of options, such as puts, calls and warrants, which may be purchased for a fraction of the price of the underlying securities. While such strategies and techniques increase the opportunity to achieve higher returns on the amounts invested, they also increase the risk of loss. To the extent the Company purchases securities with borrowed funds, its net assets will tend to increase or decrease at a greater rate than if borrowed funds are not used. If the interest expense on borrowings were to exceed the net return on the portfolio securities purchased with borrowed funds, the Company’s use of leverage would result in a lower rate of return than if the Company were not leveraged.

Options Risk

There are several risks associated with transactions in options on securities. For example, there are significant differences between the securities and options markets that could result in an imperfect correlation between these markets, causing a given transaction not to achieve its objectives. A transaction in options or securities may be unsuccessful to some degree because of market behavior or unexpected events.

When the Company writes a covered call option, the Company forgoes, during the option’s life, the opportunity to profit from increases in the market value of the security covering the call option above the sum of the premium and the strike price of the call, but retains the risk of loss should the price of the underlying security decline. The writer of an option has no control over the time when it may be required to fulfill its obligation and once an option writer has received an exercise notice, it must deliver the underlying security in exchange for the strike price.

When the Company writes a covered put option, the Company bears the risk of loss if the value of the underlying stock declines below the exercise price minus the put premium. If the option is exercised, the Company could incur a loss if it is required to purchase the stock underlying the put option at a price greater than the market price of the stock at the time of exercise plus the put premium the Company received when it wrote the option. While the Company’s potential gain in writing a covered put option is limited to distributions earned on the liquid assets securing the put option plus the premium received from the purchaser of the put option, the Company risks a loss equal to the entire exercise price of the option minus the put premium.

Short-Selling Risk

Short sales by the Company that are not made where there is an offsetting long position in the asset that it is being sold short theoretically involve unlimited loss potential since the market price of securities sold short may continuously increase. Short selling allows the Company to profit from declines in market prices to the extent such decline exceeds the transaction costs and costs of borrowing the securities. However, since the borrowed securities must be replaced by purchases at market prices in order to close out the short position, any appreciation in the price of the borrowed securities would result in a loss. Purchasing securities to close out the short position can itself cause the price of securities to rise further, thereby exacerbating the loss. The Company may mitigate such losses by replacing the securities sold short before the market price has increased significantly. Under adverse market conditions, the Company might have difficulty purchasing securities to meet margin calls on its short sale delivery obligations, and might have to sell portfolio securities to raise the capital necessary to meet its short sale obligations at a time when fundamental investment considerations would not favor such sales.

Note 10 — Financial Highlights

Selected data for a share outstanding throughout the three months ended March 31, 2017 and March 31, 2016 is as follows:


	For the Three Months Ended			For the Three Months Ended
	March 31, 2017 (Unaudited)			March 31, 2016 (Unaudited)
Common shares per share operating performance:
Net asset value, beginning of period	$	9.47		$	8.02
Income from investment operations:
Net investment income⁽¹⁾		0.27			0.18
Net realized and unrealized gain (loss)		0.08			0.35
Commitments by affiliates		—			0.29

Total from investment operations		0.35			0.82

Less distribution declared to common shareholders:
From net investment income		(0.18	)		(0.17	)
From net realized gains		—			—

Total distributions declared to common shareholders		(0.18	)		(0.17	)

Capital share transactions
Issuance of common stock⁽²⁾		0.01			0.02
Shares tendered⁽¹⁾		0.00	⁽³⁾		0.00	⁽³⁾

Net asset value, end of period	$	9.65		$	8.69
Net asset value total return⁽⁴⁾⁽⁶⁾		3.75	%		10.53	%⁽⁵⁾

Ratio and supplemental data:
Net assets, end of period (in 000’s)	$	77,011		$	30,461
Shares outstanding, end of period		7,979,704			3,506,963
Common share information at end of period:
Ratios based on weighted average net assets of common shares:
Gross operating expenses⁽⁷⁾		6.22	%		7.92	%
Fees and expenses waived or reimbursed⁽⁷⁾		(4.11	)%		(5.80	)%
Net operating expenses⁽⁷⁾		2.11	%		2.12	%
Net investment income (loss) before fees waived or reimbursed⁽⁷⁾		7.23	%		2.88	%
Net investment income (loss) after fees waived or reimbursed⁽⁷⁾		11.33	%		8.69	%
Ratio of interest and credit facility expenses to average net assets⁽⁷⁾		0.28	%		0.35	%
Ratio of incentive fees to average net assets⁽⁷⁾⁽⁸⁾		0.53	%		—	%
Portfolio turnover rate⁽⁶⁾		24	%		31	%
Asset coverage ratio		N/A			946	%

⁽¹⁾	Per share data was calculated using weighted average shares outstanding during the period.

⁽²⁾

The continuous issuance of common stock may cause an incremental increase in net asset value per share due to the sale of shares at the then prevailing public offering price and the receipt of net proceeds per share by the Company in excess of net asset value per share on each subscription closing date. The per share data was derived by computing (i) the sum of (A) the number of shares issued in connection with subscriptions and/or distribution reinvestment on each share transaction date times (B) the differences between the net proceeds per share and the net asset value per share on each share transaction date, divided by (ii) the total shares outstanding at the end of the period.

⁽³⁾	Amount rounds to less than $0.005 per share.

⁽⁴⁾

Total returns are historical and assume changes in share price and reinvestment of dividends and capital gains distributions, and assume no sales charge. Distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the Company’s Dividend Reinvestment Plan. Had the Adviser not absorbed a portion of expenses, total returns would have been lower.

⁽⁵⁾	For the three months ended March 31, 2016, 3.17% of the fund’s total return consists of a voluntary reimbursement by the adviser for unrealized investment losses, and is included in Net realized and unrealized gain (loss). Excluding this item, total return would have been 7.36%.

⁽⁶⁾	Not annualized.

⁽⁷⁾	Annualized.

⁽⁸⁾	All incentive fees were waived for the three months ended March 31, 2017.

Note 11 — Subsequent Events

The Company has evaluated subsequent events through the date on which these financial statements were issued.

On March 21, 2017, the Board declared a cash distribution of $0.013846 per share of the Company’s common stock, par value $0.001 per share, paid on April 26, 2017, to the stockholders of record on April 3, 2017, April 10, 2017, April 17, 2017, and April 24, 2017.

On April 13, 2017, the Board declared a cash distribution of $0.013846 per share of the Company’s common stock, par value $0.001 per share, to be paid on May 31, 2017, to the stockholders of record on May 1, 2017, May 8, 2017, May 15, 2017, May 22, 2017, and May 30, 2017.

On April 26, 2017, the Company decreased its public offering price from $10.66 per share to $10.50 per share. This decrease in the public offering price was effective as of our April 26, 2017 closing and first applied to subscriptions received from April 19, 2017 through April 25, 2017.

On May 10, 2017, the Company declared a cash distribution of $0.013846 per share of the Company’s common stock, par value $0.001 per share, to be paid on June 28, 2017, to the stockholders of record on June 5, 2017, June 12, 2017, June 19, 2017, and June 26, 2017.

On May 11, 2017, the Adviser paid to the Company in full the receivable from Adviser balance of $4,177,196 as of March 31, 2017, together with interest of $56,480.

Item 2.

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

The information contained in this section should be read in conjunction with our unaudited financial statements and related notes thereto included elsewhere in this quarterly report on Form 10-Q. In this report, “we,” “us” and “our” refer to NexPoint Capital, Inc.

Forward-Looking Statements

Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements because they relate to future events or our future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q may include statements as to:

•

our future operating results;

•

changes in healthcare technologies, finance and regulations adversely affecting our portfolio companies or financing model;

•

changes in political, economic or industry conditions, the interest rate environment or conditions affecting the financial and capital markets, which could result in changes to the value of our assets;

•

our business prospects and the prospects of the companies in which we may invest;

•

the impact of the investments that we expect to make;

•

the impact of increased competition;

•

our contractual arrangements and relationships with third parties;

•

the dependence of our future success on the general economy and its effect on the industries in which we may invest;

•

the ability of our portfolio companies to achieve their objectives;

•

our current and expected financings and investments;

•

the adequacy of our cash resources, financing sources and working capital;

•

the timing and amount of cash flows, distributions and dividends, if any, from our portfolio companies;

•

our use of financial leverage;

•

the ability of the Adviser, to locate suitable investments for us and to monitor and administer our investments;

•

the ability of the Adviser or its affiliates to attract and retain highly talented professionals;

•

our ability to maintain our qualification as a regulated investment company, or RIC, and as a business development company, or BDC;

•

the impact on our business of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and regulations issued thereunder;

•

the effect of changes to tax legislation and our tax position; and

•

the tax status of the enterprises in which we may invest.

Such forward-looking statements may include statements preceded by, followed by or that otherwise include the words “may,” “might,” “will,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “estimate,” “anticipate,” “predict,” “potential,” “plan” or similar words. The forward-looking statements contained in this quarterly report on Form 10-Q 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 elsewhere in this quarterly report on Form 10-Q and as “Risk Factors” in the prospectus relating to the continuous public offering of our common stock.

We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q. Except as required by the federal securities laws, we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise. Stockholders are advised to consult any additional disclosures that we may make directly to stockholders or through reports that we may file in the future with the U.S. Securities and Exchange Commission, or the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The forward-looking statements and projections contained in this quarterly report on Form 10-Q are excluded from the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This quarterly report on Form 10-Q may contain statistics and other data that have been obtained from or compiled from information made available by third-party service providers. We have not independently verified such statistics or data.

Overview

We were formed in Delaware on September 30, 2013 and formally commenced operations on September 2, 2014. We are an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development company (a “BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, for U.S. federal income tax purposes, we have elected to be treated as a RIC under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”) with retroactive effect to the date we elected to be treated as a BDC. As a BDC, we are also subject to certain constraints, including limitations imposed by the 1940 Act and the Code.

Our investment activities are managed by NexPoint Advisors, L.P. (our “Adviser”) and supervised by our board of directors (the “Board”) a majority of the members of which are independent of us.

Our investment objective is to generate high current income and long-term capital appreciation. We seek to achieve our objective by using the experience of the healthcare, credit and structured products teams of Highland Capital Management, L.P. (“Highland”) to source, evaluate and structure investments, identify attractive investment opportunities that are primarily debt investments that generate high income without creating undue risk for the portfolio, make equity investments where we believe there will be attractive risk-adjusted returns that compensate for the lack of current income, and make investments in debt and equity tranches of collateralized loan obligations, or CLOs, that deliver income and high relative value. We will focus on companies that are stable, have positive cash flow and the ability to grow their business model.

Our investment policy is to invest, under normal circumstances, at least 80% of our total assets in debt and equity of middle-market companies, with an emphasis on healthcare companies, syndicated floating rate debt of large public and nonpublic companies and mezzanine and equity tranches of CLOs. Middle-market companies include companies with annual revenues between $50,000,000 and $2,500,000,000 and syndicated floating rate debt refers to loans and other instruments originated by a bank to a corporation that are sold off, or syndicated, to investors in pieces. We consider a healthcare company to be a company that is engaged in the design, development, production, sale, management or distribution of products, services or facilities used for or in connection with the healthcare industry. Additionally, we consider companies that are materially impacted by the healthcare industry (such as a contractor that derives significant revenue or profit from the construction of hospitals) as being engaged in the healthcare industry. We may invest without limit in companies that are not in the healthcare sector.

We will leverage the expertise of Highland with regard to distressed investing and restructuring to make opportunistic investments in distressed companies. We will utilize the Highland credit underwriting capability to identify the types of companies we believe will provide high current income and/or long-term capital appreciation. In addition to the investments in the healthcare industry, we may invest a portion of our capital in other opportunistic investments in which the Adviser has expertise and where we believe an opportunity exists to achieve above average risk adjusted yields and returns. These types of opportunities may include: (1) direct lending or origination investments, (2) investments in stressed or distressed situations, (3) structured product investments, (4) equity investments and (5) other investment opportunities not typically available in other BDCs. Opportunistic investments may range from broadly syndicated deals to direct lending deals in both private and public companies and may include foreign investments. We believe this is the best approach to achieving our dual mandate of attempting to generate a high yield while also attempting to produce capital appreciation.

We seek to invest primarily in securities deemed by the Adviser to be high income generating debt investments and income generating equity securities of privately held companies in the United States. We expect the portfolio will be concentrated primarily in senior floating rate debt securities, although we may invest without limit in securities which rank lower than senior secured instruments and may invest without limit in investments with a fixed rate of interest. We will buy syndicated loans, various tranches of CLOs and other debt instruments in the secondary market as well as originate debt so we can tailor the investment parameters more precisely to our needs. We also intend to invest a portion of the portfolio in equity securities that are non-income producing, when doing so will help us achieve our objective of long-term capital appreciation. We expect the size of our positions will range from $2,000,000 to $25,000,000, although investments may be larger as our asset base increases. We may selectively make investments in amounts larger than $25,000,000 in some of our portfolio companies. While our asset base increases, we may make smaller investments.

We expect that many of the securities in which we invest will be rated below investment grade by independent rating agencies or would be rated below investment grade if they were rated. These securities, which may be referred to as “junk,” have predominantly speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal. In addition, we expect that many of our debt investments will include floating interest rates that reset on a periodic basis and typically will not require the borrowers to pay down the outstanding principal of such debt prior to maturity.

Public Offering

We are offering on a continuous basis up to $1.6 billion of our common stock, inclusive of shares already sold, based on an offering price of $10.66 as of March 31, 2017, and a par value of $0.001 per share, pursuant to a registration statement on Form N-2 filed with the U.S. Securities and Exchange Commission (the “SEC”) under the Securities Act. The SEC declared our registration statement effective on April 29, 2016, as supplemented. We are also authorized to issue 25,000,000 shares of preferred stock, par value $0.001 per share. However, we currently do not anticipate issuing any preferred stock.

As a result of a series of private placements to the Adviser, we successfully satisfied the minimum offering requirement and officially commenced operations on September 2, 2014. In connection with the satisfaction of the minimum offering requirement and the commencement of our operations, the Investment Advisory Agreement became effective and the base management fee and any incentive fees, as applicable, payable to the Adviser under the Investment Advisory Agreement began to accrue. In aggregate through March 31, 2017 we have issued 2,041,174 shares to the Adviser, including reinvestment of dividends, for net proceeds of approximately $18.7 million and we have issued net 5,938,530 shares, including reinvestment of dividends, to unaffiliated investors for net proceeds of approximately $55.5 million.

The Dealer Manager, an entity under common ownership with the Adviser, serves as the dealer manager of our continuous public offering. The shares are being offered on a “best efforts” basis, which means generally that the Dealer Manager is required to use only its best efforts to sell the shares and it has no firm commitment or obligation to purchase any of the shares. The Adviser and the Dealer Manager are related parties and will receive fees, distributions and other compensation for services related to our public offering and the management of our assets.

We, Highland and the Adviser have obtained an exemptive order dated April 19, 2016 from the SEC to permit co-investments among the Company and certain other accounts managed by the Adviser or its affiliates, subject to certain conditions.

On August 28, 2015, the Company filed its application with the SEC pursuant to Section 6(c) of the 1940 Act, requesting exemptions from Sections 18(c), 18(i) and 61(a) of the 1940 Act and pursuant to Sections 17(d) and 57(i) of the 1940 Act and Rule 17d-1 under the 1940 Act, to permit the Company to offer investors multiple classes of shares, interests or units, as the case may be, with varying sales loads and asset-based service and/or distribution fees (the “Multi-Class Application”). The Company may revise the Multi-Class Application in response to comments from the SEC staff.

Revenues

We generate a significant portion of our total revenue in the form of interest on the debt securities that we hold. We expect that the senior debt we invest in will generally have stated terms of 3 to 5 years and that the subordinated debt we invest in will generally have stated terms of 5 to 7 years. Our senior and subordinated debt investments bear interest at a fixed or floating rate. Interest on debt securities is generally payable monthly, quarterly or semiannually. In addition, some of our investments provide for deferred interest payments or payment-in-kind, or PIK, interest. We may also generate revenues in the form of dividends and other distributions on the equity or other securities we may hold. In addition, we may generate revenues in the form of commitment, closing, origination, structuring or diligence fees, monitoring fees, fees for providing managerial assistance, consulting fees, prepayment fees and performance-based fees. Any such fees generated in connection with our investments will be recognized as earned.

Expenses

We expect that our primary operating expenses will include the payment of fees to the Adviser under the Investment Advisory Agreement, our allocable portion of overhead expenses under the Administration Agreement and other operating costs described below. However, at this time our Adviser is waiving most fees. We bear all out-of-pocket costs and expenses of our operations and transactions, including:

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our organization (expenses initially paid by the Adviser until sufficient equity proceeds are raised);

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calculating our net asset value and net asset value per share (including the costs and expenses of independent valuation firms);

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fees and expenses, including travel expenses, incurred by the Adviser or payable to third parties in performing due diligence on prospective portfolio companies, monitoring our investments and, if necessary, enforcing our rights;

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interest payable on debt, if any, incurred to finance our investments;

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the costs of this and all future offerings of common shares and other securities, and other incurrence of debt;

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the base management fee and any incentive fee;

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distributions on our shares;

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administration fees payable to the Adviser under the Administration Agreement;

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transfer agent and custody fees and expenses;

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the actual costs incurred by the Adviser as our administrator in providing managerial assistance to those portfolio companies that request it;

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amounts payable to third parties relating to, or associated with, evaluating, making and disposing of investments;

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brokerage fees and commissions;

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registration fees;

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listing fees;

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taxes;

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independent director fees and expenses;

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costs associated with our reporting and compliance obligations under the 1940 Act and applicable U.S. federal and state securities laws;

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the costs of any reports, proxy statements or other notices to our stockholders, including printing costs;

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costs of holding stockholder meetings;

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our fidelity bond;

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

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litigation, indemnification and other non-recurring or extraordinary expenses;

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direct costs and expenses of administration and operation, including audit and legal costs;

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fees and expenses associated with marketing efforts, including deal sourcing fees and marketing to financial sponsors;

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dues, fees and charges of any trade association of which we are a member; and

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all other expenses reasonably incurred by us or the Adviser in connection with administering our business.

During periods of asset growth, we expect our general and administrative expenses to be relatively stable or decline as a percentage of total assets and increase during periods of asset declines.

Expense Limitation

Pursuant to an expense limitation agreement (the “Expense Limitation Agreement”), the Adviser is contractually obligated to waive fees and, if necessary, pay or reimburse certain other expenses to limit ordinary “Other Expenses” to 1.0% of the quarter-end value of the Company’s gross assets through the one year anniversary of the effective date of the registration statement. Under the Expense Limitation Agreement, “Other Expenses” are all expenses with the exception of advisor and administration fees, organization and offering costs and the following: (i) interest, taxes, dividends tied to short sales, brokerage commissions, and other expenditures which are capitalized in accordance with U.S. GAAP; (ii) expenses incurred indirectly as a result of investments in other investment companies and pooled investment vehicles; (iii) other expenses attributable to, and incurred as a result of, our investments; (iv) expenses payable to the Adviser, as administrator, for providing significant managerial assistance to our portfolio companies; and (v) other extraordinary expenses (including litigation expenses) not incurred in the ordinary course of our business. The obligation will automatically renew for one-year terms unless it is terminated by the Company or the Adviser upon written notice within 120 days of the end of the current term or upon termination of the Investment Advisory Agreement. The Expense Limitation Agreement will continue through at least April 30, 2018.

Reimbursable Expenses Table

The cumulative total of fees waived by the Adviser under the Expense Limitation Agreement which are recoupable as of March 31, 2017 are $2,113,172. This balance, and the balances in the tables below, only include amounts pertaining to the Expense Limitation Agreement, and do not include waived advisory and administration fees subject to recoupment discussed elsewhere herein.

The following table reflects the 2017 quarterly fee waivers and expense reimbursements due from the Adviser as of March 31, 2017, which are subject to recoupment by the Adviser.


Period Ended	Yearly Cumulative Other Expenses		Yearly Expense Limitation		Yearly Cumulative Expense Limitation		Quarterly Recoupable Amount		Recoupment Eligibility Expiration
March 31, 2017	$	329,791	$	182,226	$	147,565	$	147,565		March 31, 2020

The following table reflects the 2016 quarterly fee waivers and expense reimbursements due from the Adviser as of December 31, 2016, September 30, 2016, June 30, 2016 and March 31, 2016, which are subject to recoupment by the Adviser.


Quarter Ended	Yearly Cumulative Other Expenses		Yearly Expense Limitation		Yearly Cumulative Expense Reimbursement		Quarterly Recoupable Amount		Recoupment Eligibility Expiration
December 31, 2016	$	1,263,735	$	835,904	$	427,831	$	147,943		December 31, 2019
September 30, 2016		803,909		524,021		279,888		32,663		September 30, 2019
June 30, 2016		567,248		320,023		247,225		90,124		June 30, 2019
March 31, 2016		259,420		102,319		157,101		157,101		March 31,2019

The following table reflects the 2015 quarterly fee waivers and expense reimbursements due from the Adviser as of December 31, 2015, September 30, 2015, June 30, 2015, and March 31, 2015, which are subject to recoupment by the Adviser.


Quarter Ended	Yearly Cumulative Other Expenses		Yearly Expense Limitation		Yearly Cumulative Expense Reimbursement		Quarterly Recoupable Amount		Recoupment Eligibility Expiration
December 31, 2015	$	1,440,686	$	309,265	$	1,131,421	$	23,484		December 31, 2018
September 30, 2015		1,272,439		164,502		1,107,937		434,917		September 30, 2018
June 30, 2015		771,350		98,330		673,020		414,551		June 30, 2018
March 31, 2015		353,760		95,291		258,469		258,469		March 31,2018

The following table reflects the 2014 quarterly fee waivers and expense reimbursements due from the Adviser as of December 31, 2014 and September 30, 2014, which are subject to recoupment by the Adviser.


Quarter Ended	Yearly Cumulative Other Expenses		Yearly Expense Limitation		Yearly Cumulative Expense Reimbursement		Quarterly Recoupable Amount		Recoupment Eligibility Expiration
December 31, 2014	$	463,303	$	56,948	$	406,355	$	321,712		December 31, 2017
September 30, 2014		98,723		14,081		84,642		84,642		September 30, 2017

There can be no assurance that the Expense Limitation Agreement will remain in effect beyond April 30, 2018 or that the Adviser will reimburse any portion of our expenses in future quarters not covered by the Expense Limitation Agreement. Amounts shown do not include the amounts committed by the Adviser to voluntarily reimburse the Company for unrealized losses, all of which are not recoupable.

Portfolio Investment Activity for the three months ended March 31, 2017 and March 31, 2016.

During the three months ended March 31, 2017, we made long investments in portfolio companies and other investments totaling $17,524,104. During the same period, we generated proceeds from sales and principal repayments on long investments of $33,994,813. As of March 31, 2017, our investment portfolio, with a total fair value of $63,115,536, consisted of 38 interests in portfolio companies (calculated as a percentage of total investments: 25.8% in first lien senior secured loans, 16.0% in second lien senior secured loans, 38.2% in corporate bonds, 3.3% in asset-backed securities, 1.9% in warrants, 14.7% in common stock, and 0.1% in rights). As of March 31, 2017, the investments in our portfolio were purchased at a weighted average price of 80.00% of par or stated value, as applicable, and our estimated gross annual portfolio yield (which represents the expected yield to be generated by us on our investment portfolio based on the composition of our portfolio as of such date), prior to leverage, was 9.01% based upon the amortized cost of our investments. The portfolio yield does not represent an actual investment return to stockholders and does not include income from CLO equity.

During the three months ended March 31, 2016, we made investments in portfolio companies and other investments totaling $15,827,260, and received proceeds from securities sold short of $165,454. During the same period, we sold investments for proceeds of $8,437,380. As of March 31, 2016 our investment portfolio, with a total fair value of $31,271,267 in long securities and ($204,000) in securities sold short, consisted of interests in 21 portfolio companies (25.4% in first lien senior secured loans, 33.4% in second lien senior secured loans, 31.8% in corporate bonds, 5.5% in asset-backed securities, 4.4% in warrants, 0.2% in common stock, and (0.7%) in common stock - short). As of March 31, 2016, the investments in our portfolio were purchased at a weighted average price of 82.92% of par or stated value, as applicable, and our estimated gross annual portfolio yield (which represents the expected yield to be generated by us on our investment portfolio based on the composition of our portfolio as of such date), prior to leverage, was 7.59% based upon the amortized cost of our investments. The portfolio yield does not represent an actual investment return to stockholders.

Total Portfolio Activity

The following table’s present selected information regarding our portfolio investment activity for the three months ended March 31, 2017 and March 31, 2016:


Net Investment Activity	For the Three Months Ended March 31, 2017			For the Three Months Ended March 31, 2016
Purchases	$	17,524,104		$	15,827,260
Proceeds from Securities Sold Short		—			165,454
Purchases of Securities Sold Short		—			—
Sales and Principal Repayments		(33,994,813	)		(8,437,380	)

Net Portfolio Activity	$	(16,470,709	)	$	7,555,334


	For the Three Months Ended March 31, 2017					For the Three Months Ended March 31, 2016
New Investment Activity by Asset Class	Purchases		Percentage			Purchases		Percentage
Senior Secured Loans—First Lien	$	2,118,600		12.1	%	$	6,913,411		43.7	%
Corporate Bonds – Senior Unsecured		9,227,770		52.6	%		5,603,750		35.4	%
Convertible Bonds – Senior Unsecured		—		0.0	%		560,000		3.5	%
Equities (1)		6,177,734		35.3	%		2,750,099		17.4	%

Total Investments	$	17,524,104		100.0	%	$	15,827,260		100.0	%

(1)	In addition to the purchase amount shown here, the Company also sold securities sold short for proceeds of $165,454 during the three months ended March 31, 2016.

The following tables summarize the composition of our investment portfolio at amortized cost and fair value as of March 31, 2017 and December 31, 2016:


	March 31, 2017
Portfolio Composition by Investment Type	Amortized Cost⁽¹⁾		Fair Value		Percentage of Portfolio (at fair value)
Senior Secured Loans — First Lien	$	15,664,384	$	16,262,384		25.8	%
Senior Secured Loans — Second Lien		10,040,030		10,060,976		16.0	%
Senior Secured Loans — Escrow Loan		87,816		13,125		0.0	%
Asset-Backed Securities		2,104,800		2,093,526		3.3	%
Corporate Bonds		24,572,658		24,110,996		38.2	%
Common Stocks		11,160,214		9,271,412		14.7	%
Rights		154,404		82,808		0.1	%
Warrants		—		1,220,309		1.9	%

Total Investments	$	63,784,306	$	63,115,536		100.0	%

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


	December 31, 2016
Portfolio Composition by Investment Type	Amortized Cost⁽¹⁾		Fair Value		Percentage of Portfolio (at fair value)
Senior Secured Loans — First Lien	$	27,394,540	$	28,864,108		36.9	%
Senior Secured Loans — Second Lien		12,790,248		12,673,072		16.2	%
Senior Secured Loans — Escrow Loan		87,816		17,500		0.0	%
Asset-Backed Securities		2,576,709		2,614,217		3.3	%
Convertible Bonds		569,431		700,625		0.9	%
Corporate Bonds		28,847,813		28,113,471		35.9	%
Common Stocks		6,170,708		4,532,375		5.8	%
Rights		154,404		96,288		0.1	%
Warrants		—		678,940		0.9	%

Total Investments	$	78,591,669	$	78,290,596		100.0	%

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

The following table presents certain selected information regarding the composition of our investment portfolio as of March 31, 2017 and December 31, 2016:


	March 31, 2017			December 31, 2016
Number of Investments		38			42
% Variable Rate (based on fair value)		44	%		53	%
% Non-Income Producing Equity or Other Investments (based on fair value)		8	%		3	%
Weighted Average Purchase Price of Investments (as a % of par or stated value)		80.00	%		87.40	%
Weighted Average Credit Rating of Investments that were Rated		Caa2			Caa1
% of Fixed Income Investments on Non-Accrual (based on fair value)		0	% ⁽¹⁾		0	% ⁽¹⁾

(1)	Represents less than 0.5%.

Portfolio Composition by Strategy and Industry

The table below summarizes the composition of our investment portfolio by strategy and enumerates the percentage, by fair value, of the total portfolio assets in such strategies as of March 31, 2017 and December 31, 2016:


	March 31, 2017					December 31, 2016
Portfolio Composition by Strategy	Fair Value		Percentage of Portfolio			Fair Value		Percentage of Portfolio
Broadly Syndicated — Private	$	5,547,257		8.8	%	$	3,639,776		4.7	%
Broadly Syndicated – Public		7,099,319		11.3	%		8,548,645		10.9	%
Middle-Market		48,375,434		76.6	%		63,487,958		81.1	%
Other		2,093,526		3.3	%		2,614,217		3.3	%

Total	$	63,115,536		100.0	%	$	78,290,596		100.0	%

Broadly, syndicated debt refers to loans and other instruments originated by a bank to a large corporation (both private and public) that are sold off, or syndicated, to investors in pieces. Middle-Market companies include companies with annual revenues between $50 million and $2.5 billion.

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 March 31, 2017 and December 31, 2016:


	March 31, 2017					December 31, 2016
Industry Classifications	Fair Value		Percentage of Portfolio			Fair Value		Percentage of Portfolio
Chemicals	$	80,750		0.1	%	$	73,665		0.1	%
Energy		5,594,264		8.9	%		5,293,496		6.8	%
Financials		2,093,526		3.3	%		2,614,217		3.3	%
Healthcare		32,151,096		50.9	%		48,076,536		61.5	%
Media/Telecommunications		7,404,125		11.7	%		4,087,500		5.2	%
Real Estate Investment Trusts (REITs)		2,311,832		3.7	%		2,200,805		2.8	%
Retail		3,226,114		5.1	%		4,105,999		5.2	%
Service		487,750		0.8	%		3,791,110		4.8	%
Technology		5,081,842		8.1	%		5,120,935		6.5	%
Telecommunication Services		526,844		0.8	%		943,020		1.2	%
Utility		4,157,393		6.6	%		1,983,313		2.6	%

Total Assets	$	63,115,536		100.0	%	$	78,290,596		100.0	%

As of March 31, 2017, we did not “control” and were not an “affiliated person,” each as defined in the 1940 Act, of any of our portfolio companies. In general, under the 1940 Act, we would be presumed to “control” a portfolio company if we owned 25% or more of its voting securities or we had the power to exercise control over the management or policies of such portfolio company, and would be an “affiliated person” of a portfolio company if we owned 5% or more of its voting securities.

Summary Description of Portfolio Companies/Investments

Our primary focus is to invest a majority of the portfolio in direct lending or originated opportunities over time. However, during the “ramp up phase,” the portfolio will consist primarily of middle-market loans as well as broadly syndicated bank loans (both private and public), corporate bonds, cash and cash equivalents and U.S. government securities. The ramp up phase will begin to wind down now that $50 million of total capital has been raised. We will begin deploying a portion of the portfolio into direct lending or originated opportunities (including, secured and unsecured debt and mezzanine financing) and equity investments (including warrants received in connection with originated debt investments).

Our primary holdings currently include senior secured first and second lien bank loans and bonds. Bank loans typically accrue interest at variable rates determined by reference to a base lending rate, such as LIBOR. The base rate typically resets every three months, such that bank loans have a very short duration of 90 days on average and typically have maturities of 3 to 5 years. Corporate notes and bonds typically accrue a fixed rate of interest with maturities of 5 to 7 years.

We focus on healthcare investments, although we may invest without limit in non-healthcare related investments and portfolio companies. The Adviser believes there is an excellent opportunity in the healthcare sector as a result of the aging population (Americans are turning age 65 at a rate of approximately 10,000 per day) and the longer life span of the average American due to increased usage of technology and pharmaceuticals in healthcare. Overarching all of this is the multi-year long implementation of the Affordable Care Act (“ACA”), the largest structural change to the U.S. healthcare sector since the passage of Medicare and Medicaid in the mid 1960’s. The Adviser believes these macro factors will combine to produce above average growth in the healthcare sector for at least the next decade.

The healthcare sector has traditionally been a stable, defensive sector. However, with the macro influences affecting the sector, particularly implementation of the ACA, we believe there will be more volatility and upheaval in the sector than historically has been the case. Investing in credit potentially minimizes unwanted volatility while also positioning the portfolio to participate in the potential growth of the healthcare sector while earning income. We believe lending to middle-market healthcare companies may potentially generate a higher risk adjusted yield. As we grow, it is our intention to do more origination and direct lending, predominantly to healthcare companies, although we will also make investments in non-healthcare companies where an opportunity exists to achieve above average risk adjusted yields and returns.

Summary Description of Top Portfolio Companies/Investments

As of March 31, 2017 and December 31, 2016, 54% and 65% (based on fair value), respectively, of our portfolio consisted of healthcare related and opportunistic investments. Information regarding these investments is provided below. Information regarding these investments is provided below. This additional information is limited to publicly available information, and does not address credit worthiness or financial viability of the issuer, or our future plans as it relates to a specific investment:

Healthcare Investments

Ortho-Clinical Diagnostics: As of March 31, 2017 and December 31, 2016, we held corporate bonds of Ortho-Clinical Diagnostics (“Ortho-Clinical”) having an aggregate fair value of $8.6 million and $11.3 million, respectively. Ortho-Clinical is a provider of in-vitro diagnostic solutions for screening, diagnosing, monitoring and confirming diseases, as well as immunohematology to ensure compatibility for blood transfusions and plasma screening for infectious diseases.

iHeart Communications, Inc.: As of March 31, 2017 and December 31, 2016 we held first lien senior secured loans of iHeart Communications, Inc. (“iHeart”) having an aggregate fair value of $4.3 million and $4.1 million, respectively. iHeart is the largest broadcast radio and events business in the US, and owns 90% of Clear Channel Outdoor, one of the world’s largest outdoor advertising companies. The company owns and operates approximately 850 broadcast radio stations in the US and almost 1 million outdoor advertising displays in 45 countries. iHeartMedia also operates the iHeartRadio streaming app with 96 million registered users.

U.S. Renal Care: As of March 31, 2017 and December 31, 2016, we held second lien senior secured loans in US Renal Care, Inc. (“U.S. Renal Care”) having an aggregate fair value of $4.0 million and $4.0 million, respectively. U.S. Renal Care develops, acquires, and operates a network of outpatient, home, and specialty dialysis centers for serving patients suffering from chronic kidney failures in the United States. The company provides in-center and at-home hemodialysis and peritoneal dialysis services for end stage renal diseases. It operates outpatient, home, and specialty dialysis programs. The company also manages various acute setting dialysis programs in conjunction with local community hospitals. It also serves families, caregivers and physicians. U.S. Renal Care was founded in 2000 and is based in Plano, Texas. Upon completing an acquisition of DSI Renal in January 2016, U.S. Renal Care became third-largest provider of dialysis services in the United States, with 300 outpatient dialysis facilities across 34 states/territories.

Radnet Inc: As of March 31, 2017 and December 31, 2016, we held second lien senior secured loans in Radnet Inc. (“Radnet”) with an aggregate fair value of $3.5 million and $5.4 million, respectively. Radnet provides outpatient diagnostic imaging services in the United States. It offers various imaging services, including magnetic resonance imaging, computed tomography, positron emission tomography, nuclear medicine, mammography, ultrasound, diagnostic radiology (X-ray), fluoroscopy, and other related procedures, as well as multi-modality imaging services. The company also develops and sells computerized systems for the imaging industry, including picture archiving communications systems, and provides teleradiology services for remote interpretation of images on behalf of radiology groups, hospitals, and imaging center customers. As of January 24, 2017, it owned and/or operated 306 outpatient-imaging centers located in California, Maryland, Delaware, New Jersey, New York, and Rhode Island. The company was founded in 1981 and is headquartered in Los Angeles, California.

Valeant Pharmaceuticals International, Inc.: As of March 31, 2017 and December 31, 2016, we held corporate bonds of Valeant Pharmaceuticals, Inc. (“Valeant”) having an aggregate fair value of $3.5 million and $3.4 million, respectively. Valeant is a multinational, specialty pharmaceutical and medical device company that develops, manufacturers, and markets a broad range of branded, generic and branded generic pharmaceuticals, over-the-counter products, and medical devices, which are marketed directly or indirectly in over 100 countries. The company’s broad portfolio of >1,800 products is primarily focused in the areas of dermatology, gastrointestinal disorders, eye health (including Bausch + Lomb), neurology and branded generics. Valeant is headquartered in Laval, Quebec.

Quorum Health Corp.: As of March 31, 2017 and December 31, 2016, we held first lien senior secured loans and corporate bonds of Quorum Health Corp. (“Quorum”) having an aggregate fair value of $6.4 million and $11.7 million, respectively. Quorum Health Corporation is a leading provider of hospital and outpatient healthcare services focused on facility-based acute care in rural and mid-sized markets. As of December 31, 2016, the company owned or leased 36 hospitals located across 16 states and licensed for 3,459 beds. Approximately 84% of the company’s hospitals are sole providers in their local markets. Quorum also provides hospital management advisory and healthcare consulting services through its wholly-owned subsidiary, Quorum Health Resources. Quorum was formed through a spin-off of select assets from Community Health Systems Inc. completed in April 2016. The company is headquartered in Nashville, TN.

Opportunistic Investments

The Adviser makes opportunistic investments when it believes it has a differentiated view on an investment, has sourced a unique opportunity, or an investment has, in the Adviser’s opinion, an outsized return for the risk assumed. We will typically limit opportunistic investments to 20% or less of the portfolio, although we may invest more from time to time. The objective of opportunistic investments is primarily to generate capital appreciation, however, some opportunities may produce income as well.

Vistra Energy: As of March 31, 2017 and December 31, 2016, we held common stock and rights shares of Vistra Energy (OTC:VSTE) (“Vistra Energy”) having an aggregate fair value of $3.2 million and $1.0 million, respectively. Vistra Energy is the largest electric power generator and retail electric provider in Texas, with other 16 GW of generation capacity and over 1.7 million retail customers. Vistra Energy was formerly named Texas Competitive Electric Holdings. The company emerged from bankruptcy on October 3, 2016. Upon emergence from bankruptcy, 1st lien creditor interests were converted into equity in the reorganized company. The reorganized equity currently trades publicly over the counter and is anticipated to be listed on a major stock exchange in the second quarter of 2017.

Results of Operations for the three months ended March 31, 2017 and March 31, 2016

Revenues

We generate a significant portion of our investment income in the form of interest on the debt securities we purchase or originate. During the ramp up phase, we have invested primarily in broadly syndicated bank loans of private companies. Bank loans generally pay interest at rates which are periodically determined by reference to a base lending rate plus a spread. The base lending rate is typically the three-month LIBOR. The settlement of bank loans differs from the settlement of many other equity or debt instruments. Bank loans are manually settled through the agent by assignment. As a result, settlement can take an undetermined amount of time. Currently, according to data provided by Markit Partners, bank loans settle, on average, on the seventeenth day after the trade date. Generally, interest does not begin to accrue to the buyer until seven business days after the trade date.

Our CLO equity pays quarterly dividends based on excess cash flow available after the CLO’s payment “waterfall” provisions. Both Grayson and PAMCO CLOs are past their respective investment periods, and as a result, excess cash flow is expected to decline over time. We, therefore, expect that the quarterly dividends paid by the investment will similarly decline.

Expenses

For the three months ended March 31, 2017 and March 31, 2016, respectively, we had total net operating expenses of $379,472 or $0.05 per share and $132,460 or $0.04 per share. Our operating expenses include base management fees attributed to the Adviser of $411,325 and $171,353 for the three months ended March 31, 2017 and March 31, 2016, respectively, which were voluntarily waived for both periods. Our expenses also include administrative services expenses attributed to the Adviser of $82,265 and $34,268 for the three months ended March 31, 2017 and March 31, 2016, respectively, which were voluntarily waived for both periods. Amounts waived for management fees or administrative services expenses pertaining to periods prior to June 10, 2016 are not recoupable, but amounts waived for management fees or administrative services expenses pertaining to periods from and after June 10, 2016 are subject to recoupment by the Adviser within three years from the date that such fees were otherwise payable, provided that the recoupment will be limited to the amount of such voluntarily waived fees from and after June 10, 2016 and will not cause the sum of the Company’s advisory fees, administration fees, Other Expenses, and any recoupment to exceed the annual rate of 3.40% of average gross assets.

Amounts waived and subject to recoupment pertaining to advisory and administration fees are shown below:


Period Ended	Advisory Fees Waived and Subject to Recoupment ⁽¹⁾		Administrator fees Waived and Subject to Recoupment ⁽¹⁾		Recoupment Eligibility Expiration
March 31, 2017	$	390,969	$	78,194	March 31, 2020
December 31, 2016		366,861		73,372	December 31, 2019
September 30, 2016		343,320		68,664	September 30, 2019
June 30, 2016		74,421		14,884	June 30, 2019

Total	$	1,175,571	$	235,114

(1)	The Advisor has permanently waived the recoupment of any advisory fees or administration fees calculated on the portion of gross assets attributable to the receivable from Advisor balance on the Statement of Assets and Liabilities. The amounts shown have been reduced by this waiver.

Our other expenses subject to the Expense Limitation Agreement for three months ended March 31, 2017 and March 31, 2016 were $329,791 and $259,420, respectively, and consisted of the following:


	For the Three Months Ended March 31, 2017		For the Three Months Ended March 31, 2016
Audit and tax fees	$	51,287	$	48,175
Legal fees		60,904		65,078
Custodian and accounting service fees		76,886		54,533
Reports to stockholders		47,679		26,353
Stock transfer fee		79,911		61,451
Directors’ fees		2,867		847
Other expenses		10,257		2,983

Total	$	329,791	$	259,420

Please refer to the Expense Limitation section above for further details on expense reimbursements.

Net Investment Income

We earned net investment income of $2,034,334 or $0.27 per share, and $542,973, or 0.18 per share for the three months ended March 31, 2017 and March 31, 2016, respectively.

Net Realized Gains or Losses

We had sales or principal repayments of $33,994,813 and $8,437,380 during the three months ended March 31, 2017 and March 31, 2016, respectively, from which we realized a net gains/(losses) of $846,625 and ($539,824), respectively.

Net Change in Unrealized Appreciation (Depreciation) on Investments

For the three months ended March 31, 2017 and March 31, 2016, the net change in unrealized appreciation (depreciation) on investments totaled $(367,697) or $(0.05) per share, and $1,744,425 or $0.57 per share, respectively. The net change in unrealized appreciation (depreciation) on our investments during the three months ended March 31, 2017 and March 31, 2016 was primarily driven by the performance of CareDx, Inc. common stock and warrants in Galena Pharma, Inc., respectively.

Net Increase from Payment from Affiliates

For the three months ended March 31, 2017 and March 31, 2016, the Adviser committed $0 and $872,000, respectively to the Company to voluntarily reimburse the Company for unrealized losses sustained. Cumulatively since inception, the Adviser has committed $2,275,000 to voluntarily reimburse the Company for such losses. Had these commitments not been made, the NAV as of March 31, 2017 would have been lower. These commitments are shown in the Statement of Operations as net increase from amounts committed by affiliates and are not recoupable.

Amounts committed and paid by the Adviser to reimburse for unrealized losses are nonrecurring, and investors should not expect the Adviser to make similar commitments or payments in the future.

Net Increase (Decrease) in Net Assets Resulting from Operations

For the three months ended March 31, 2017 and March 31, 2016, the net increase/(decrease) in net assets resulting from operations was $2,513,262 or $0.34 per share, and $2,619,574, or $0.86 per share, respectively.


	For the Three Months Ended March 31, 2017			For the Three Months Ended March 31, 2016
Income	$	2,413,806		$	675,433
Net expenses		(379,472	)		(132,460	)
Net realized gain/(loss)		846,625			(539,824	)
Net unrealized appreciation (depreciation)		(367,697	)		1,744,425
Net increase from amounts committed by affiliates		—			872,000

Total	$	2,513,262		$	2,619,574

Financial Condition, Liquidity and Capital Resources

As of March 31, 2017 and December 31, 2016, we had cash and cash equivalents of $9,418,996 and $3,948,113, respectively. As of March 31, 2017 and December 31, 2016, $9,352,714 and $3,913,546 was held in the State Street U.S. Government Money Market Fund, and $66,282 and $34,567 was held in a custodial account with State Street Bank and Trust Company, respectively. Cash and cash equivalents are available to fund new investments, pay operating expenses and pay distributions.

In aggregate through March 31, 2017 we have issued 2,041,174 shares to the Adviser, including reinvestment of dividends, for net proceeds of approximately $18.7 million and we have issued net 5,938,530 shares, including reinvestment of dividends, to unaffiliated investors for net proceeds of approximately $55.5 million.

The sales commissions and dealer manager fees related to the sale of our common stock were $691,260 and $443,198 for the three months ended March 31, 2017 and March 31, 2016, and were offset against capital in excess of par value on the financial statements.

We expect to generate cash primarily from the net proceeds of our continuous public offering and from cash flows from fees, interest and dividends earned from our investments, as well as principal repayments and proceeds from sales of our investments. We are engaged in a continuous public offering of shares of common stock. Through September 30, 2015 we accepted subscriptions on a continuous basis and issued shares at monthly closings at prices that, after deducting selling commissions and dealer manager fees, must be above our net asset value per share. Effective October 1, 2015, we changed the frequency of our closings, which now occur weekly.

Prior to investing in securities of portfolio companies, we invest the net proceeds from our continuous public offering, from the issuance of shares of common stock under our distribution reinvestment plan and from sales and paydowns of existing investments primarily in cash, cash equivalents, U.S. government securities, repurchase agreements, high-quality debt instruments maturing in one year or less from the time of investment, consistent with our BDC election and our election to be treated as a RIC. Additionally, we may invest in higher yielding, liquid credit investments such as bank loans and corporate notes and bonds, which are considered “junk” as they are rated below investment grade, to the extent that at time of purchase 70% of our portfolio is in qualified investments as required by rules and regulations under the 1940 Act.

We may borrow funds to make investments, including before we have fully invested the proceeds of our continuous public offering, to the extent we determine that additional capital would allow us to take advantage of additional investment opportunities. On January 6, 2015, we entered into a senior, secured revolving credit facility (the “Credit Facility”) with State Street Bank and Trust Company (“State Street”) as lender and agent. Under the Credit Facility, State Street had agreed to extend credit to us, in an aggregate principal amount of up to $25 million, subject to borrowing base availability and restrictions on our total outstanding debt. Loans under

the Credit Facility bore interest (at our election) at either (1) the higher of (i) the federal funds rate plus 1.25% per annum and (ii) the daily one-month London Interbank Offered Rate (“LIBOR”) plus 1.25% per annum or (2) one-, two- or three-month LIBOR plus 1.15% per annum. Interest was payable monthly in arrears. On January 5, 2016, the Company amended the Credit Facility with State Street and extended the maturity to January 3, 2017. The amendment to the Credit Facility did not contain any other material changes to the original agreement which was entered into on January 6, 2015 other than increasing the commitment fee from 0.15% to 0.25% per annum on the daily unutilized portion of the $25 million program amount. On January 3, 2017, the Company amended the Credit Facility with State Street and extended the maturity to March 20, 2017. The Credit Facility was fully paid down on February 24, 2017, and expired on March 20, 2017.

As of March 31, 2017 and December 31, 2016, $0 and $11,200,000, respectively, were outstanding under the Credit Facility. The Company incurred costs of $25,000 in connection with obtaining the Credit Facility. As of March 31, 2017, all such financing costs have been amortized to interest expense.

For the three months ended March 31, 2017 and March 31, 2016 the components of total interest expense were as follows:


	For the Three Months Ended March 31, 2017		For the Three Months Ended March 31, 2016
Direct interest expense	$	42,325	$	7,907
Commitment fees		8,054		14,276
Amortization of financing costs		—		0

Total	$	50,379	$	22,183

While we are authorized to issue preferred stock, we do not currently anticipate issuing any.

Contractual Obligations and Off-Balance Sheet Arrangements

We may become a party to financial instruments with off-balance sheet risk in the normal course of our business to meet the financial needs of our portfolio companies. These instruments may include commitments to extend credit and involve, to varying degrees, elements of liquidity and credit risk in excess of the amount recognized in the balance sheet. As of March 31, 2017 and December 31, 2016, we had no outstanding commitments to fund investments.

We have certain contracts under which we have material future commitments. We have entered into the Investment Advisory Agreement with the Adviser in accordance with the 1940 Act. Under the Investment Advisory Agreement, the Adviser provides us with investment advisory and management services. For these services, we pay (1) a management fee equal to a percentage of the average value of our gross assets and (2) an incentive fee based on our performance.

The incentive fee consists of two parts. The first part, which is calculated and payable quarterly in arrears, equals Pre-Incentive Fee Net Investment Income for the immediately preceding calendar quarter and is subject to a hurdle rate, expressed as a rate of return on our net assets, equal to 1.875% per quarter. As a result, the Adviser will not earn this incentive fee for any quarter until our pre-incentive fee net investment income for such quarter exceeds the hurdle rate of 1.875%. Once our pre-incentive fee net investment income in any quarter exceeds the hurdle rate, the Adviser will be entitled to a “catch-up” fee equal to the amount of the pre-incentive fee net investment income in excess of the hurdle rate, until our pre-incentive fee net investment income for such quarter equals 2.34375% of the Company’s net assets at the end of such quarter. This “catch-up” feature allows the Adviser to recoup the fees foregone as a result of the existence of the hurdle rate. Thereafter, the Adviser will receive 20.0% of our pre-incentive fee net investment income. For purposes of calculating this part of the incentive fee, “Pre-Incentive Fee Net Investment Income” means interest income, distribution income and any other income (including any other fees, other than fees for providing managerial assistance, such as commitment, origination, structuring, diligence and consulting fees or other fees that we receive from portfolio companies) accrued during the calendar quarter, minus our operating expenses for the quarter (including the base management fee, expenses payable under the Administration Agreement and any interest expense and any dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-Incentive Fee Net Investment Income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with PIK interest and zero coupon securities), accrued income that we have not yet received in cash. Pre-Incentive Fee Net Investment Income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation.

The second part of the incentive fee, which is referred to as the incentive fee on capital gains, is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement). This fee equals 20.0% of our incentive fee capital gains, which will equal our realized capital gains on a cumulative basis from formation, calculated as of the end of the applicable period, computed net of all realized capital losses (proceeds less amortized cost) and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gains incentive fees. We will accrue for the capital gains incentive fee, which, if earned, will be paid annually. We will accrue for the capital gains incentive fee based on net realized and unrealized gains; however, under the terms of the Investment Advisory Agreement, the fee payable to the Adviser will be based on realized gains and no such fee will be payable with respect to unrealized gains unless and until such gains are actually realized. For the three months ended March 31, 2017 and March 31, 2016, the Company accrued $95,785 and $0 of incentive fees on capital gains, respectively, all of which was voluntarily waived.

Under the Administration Agreement, the Adviser furnishes us with office facilities and equipment, provides us clerical, bookkeeping and record keeping services at such facilities and provides us with other administrative services necessary to conduct our day-to-day operations. We will reimburse the Adviser for the allocable portion (subject to the review and approval of the Board) of overhead and other expenses incurred by it in performing its obligations under the Administration Agreement, including rent, the fees and expenses associated with performing compliance functions and our allocable portion of the cost of our chief financial officer and chief compliance officer and their respective staffs, to the extent that such expenses do not exceed an annual rate of 0.4% of our gross assets. The Adviser also provides on our behalf significant managerial assistance to those portfolio companies to which we are required to offer to provide such assistance and any expenses payable to the Adviser for such managerial assistance are not subject to the cap on reimbursement.

Our organization and offering costs together are limited to 1% of total gross proceeds raised and are not due and payable to the Adviser to the extent they exceed that amount. Currently, the cumulative aggregate amount of organization and offering costs exceeds 1% of total proceeds raised. As of March 31, 2017, $3,660,521 of organization and offering costs could become payable to the Adviser contingent upon the amount of future proceeds raised.

If any of the contractual obligations discussed above is terminated, our costs under any new agreements that we enter into may increase. In addition, we would likely incur significant time and expense in locating alternative parties to provide the services we receive under our Investment Advisory Agreement and our Administration Agreement. Any new investment advisory agreement would also be subject to approval by our stockholders.

If for any taxable year we were not a “publicly offered” RIC within the meaning of Code Section 67(c)(2)(B), certain of our direct and indirect expenses, including the management fee, the incentive fee and certain other advisory expenses, would be subject to special “pass-through” rules. Such rules would treat these expenses as additional dividends to certain of our direct or indirect stockholders (generally including individuals and entities that compute their taxable income in the same manner as an individual) and as deductible by those stockholders, subject to the 2% “floor” on miscellaneous itemized deductions and other significant limitations on itemized deductions set forth in the Code.

Distributions

In order to qualify for the special tax treatment accorded RICs and their shareholders, we are required under the Code, among other things, to distribute at least 90% of our net ordinary income and net short-term capital gains in excess of net long-term capital losses, or “investment company taxable income,” to our stockholders on an annual basis. We intend to authorize and declare weekly distributions to be paid monthly to our stockholders as determined by the Board. In addition, we also intend to distribute any realized net capital gains (i.e., realized net long-term capital gains in excess of realized net short-term capital losses) at least annually.

We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of our distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage requirements applicable to us as a BDC under the 1940 Act. If we do not distribute a certain percentage of our income annually, we will suffer adverse U.S. federal income tax consequences, including possible failure to qualify for the special tax treatment accorded RICs and their shareholders. We cannot assure stockholders that they will receive any distributions.

To the extent our taxable earnings fall below the total amount of our distributions for a taxable year, a portion of those distributions may be deemed a return of capital to our stockholders for U.S. federal income tax purposes. Thus, the source of a

distribution to our stockholders may be the original capital invested by the stockholder rather than our income or gains. Stockholders should read any written disclosure accompanying a distribution payment carefully and should not assume that the source of any distribution is our ordinary income or gains. Required distributions are driven by tax laws and thus tax accounting applies, not GAAP. Therefore, it is possible that we pay more in required distributions than we earn for book purposes. For the three months ended March 31, 2017 the Company did not distribute in excess of net investment income. For the three months ended March 31, 2016, the Company made $76,202 of distributions in excess of net investment income.

We have adopted an “opt in” distribution reinvestment plan for our stockholders. As a result, if we declare a cash distribution, our 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. 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 our distribution reinvestment plan. Although distributions paid in the form of additional shares of our common stock will generally be subject to U.S. federal, state and local taxes in the same manner as cash distributions, stockholders participating in our dividend reinvestment plan will not receive any corresponding cash distributions with which to pay any such applicable taxes.

For the three months ended March 31, 2017, the Company made the following distributions:


Payable Date	Dividend/ Share		Total Dividend ¹		Dividends Reinvested
3/29/2017	$	0.055	$	431,714	$	286,868
3/1/2017		0.055		418,078		277,772
2/1/2017		0.069		499,353		332,190

Total	$	0.179	$	1,349,145	$	896,830

¹	For the current period, there were no dividends classified as a return of capital.

For the year ended December 31, 2016, the Company made the following distributions:


Payable Date	Dividend/ Share		Total Dividend¹		Dividends Reinvested
12/31/2016	$	0.055	$	382,152	$	255,650
11/30/2016		0.055		368,541		247,396
10/30/2016		0.069		430,784		292,800
9/30/2016		0.055		321,955		220,312
8/31/2016		0.069		377,172		261,451
7/31/2016		0.055		277,907		200,860
6/29/2016²		0.055		255,731		190,535
6/1/2016³		0.067		280,557		216,628
4/29/2016		0.058		228,769		177,275
3/31/2016		0.058		196,318		161,095
2/29/2016		0.058		178,122		152,304
1/29/2016		0.058		166,836		146,197

Total	$	0.712	$	3,464,844	$	2,522,503

¹	For the year ended December 31, 2016, there were no dividends classified as a return of capital.

²	On May 12, 2016, the Board approved a $0.002 per share monthly increase to the dividend, which was normalized to the weekly distribution schedule starting in June 2016.

³	Beginning in May 2016, we began declaring dividends weekly.

For the year ended December 31, 2015, the Company made the following distributions:


Payable Date	Dividend/ Share		Total Dividend¹		Dividends Reinvested
12/31/2015	$	0.058	$	155,396	$	139,260
11/30/2015		0.058		147,122		137,008
10/30/2015		0.058		141,377		134,845
9/30/2015		0.058		134,498		130,315
8/31/2015		0.058		128,773		124,959
7/31/2015		0.058		125,195		122,496
6/30/2015		0.058		117,215		115,203
5/29/2015		0.058		114,540		112,647
4/30/2015		0.058		108,525		107,595
3/31/2015		0.058		104,842		104,543
2/27/2015		0.058		100,082		100,044
1/30/2015		0.050		69,054		69,022

Total	$	0.688	$	1,446,619	$	1,397,937

¹	Of the total dividends shown, $262,760 was classified as a return of capital.

Related Party Transactions

We have entered into a number of business relationships with affiliated or related parties, including the following:

•

We entered into the Investment Advisory Agreement with the Adviser. James Dondero, our president, controls the Adviser by virtue of his control of its general partner, NexPoint Advisors GP, LLC.

•

Pursuant to an expense limitation agreement, the Adviser has agreed to waive fees or, if necessary, reimburse us to limit certain expenses to 1.0% of the quarter-end value of our gross assets.

•

The Adviser provides us with the office facilities and administrative services necessary to conduct our day-to-day operations pursuant to the Administration Agreement.

•

The Adviser has entered into an agreement with Highland, its affiliate, pursuant to which Highland makes available to the Adviser experienced investment professionals and other resources of Highland and its affiliates.

•

The dealer manager for our continuous public offering, Highland Capital Funds Distributor, Inc., is an affiliate of the Adviser.

•

In aggregate through March 31, 2017 we have issued 2,041,174 shares to the Adviser, including reinvestment of dividends, for proceeds of approximately $18.7 million.

•

For the years ended December 31, 2015 and December 31, 2016, the Adviser committed $1,403,000 and $872,000 to the Company to voluntarily reimburse the Company for unrealized losses sustained. Cumulatively since inception, the Adviser has committed $2,275,000 to voluntarily reimburse the Company for such losses. There were no commitments for the three months ended March 31, 2017 and $872,000 for the three months ended March 31, 2016. Had these commitments not been made, the NAV as of March 31, 2017 would have been lower. These commitments are shown in the Statement of Operations as net increase from amounts committed by affiliates and are not recoupable.

The Adviser and its affiliates also sponsor, or manage, and may in the future sponsor or manage, other investment funds, accounts or investment vehicles (together referred to as “accounts”) that have investment mandates that are similar, in whole and in part, with ours. The Adviser and its affiliates may determine that an investment is appropriate for us and for one or more of those other accounts. In such event, depending on the availability of such investment and other appropriate factors, and pursuant to the Adviser’s allocation policy and co-investment relief, the Adviser or its affiliates may determine that we should invest side-by-side with one or more other accounts. We do not intend to make any investments if they are not permitted by applicable law and interpretive positions of the SEC and its staff, or if they are inconsistent with the Adviser’s allocation procedures and co-investment relief.

In addition, we and the Adviser have adopted a formal code of ethics that governs the conduct of our and the Adviser’s officers, directors and employees. Our officers and directors also remain subject to the duties imposed by both the 1940 Act and the Delaware General Corporations Law.

Critical Accounting Policies

The preparation of the financial statements in accordance with accounting principles generally accepted in the United States requires 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. We have identified the following as critical accounting policies.

Fair Value of Financial Instruments

We will value our investments in accordance with ASC Topic 820, Fair Value Measurements and Disclosure, or ASC Topic 820. ASC Topic 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about assets and liabilities measured at fair value. ASC Topic 820’s definition of fair value focuses on exit price in the principal, or most advantageous, market and prioritizes the use of market-based inputs over entity-specific inputs within a measurement of fair value.

Once fully ramped, the portfolio will consist primarily of debt investments and equity investments that are fair valued. The portion of our portfolio that receives values from independent third parties are valued at their mid quotations obtained from unaffiliated market makers, other financial institutions that trade in similar investments or based on prices provided by independent third party pricing services. For investments where there are no available bid quotations, fair value is derived using proprietary models that consider the analyses of independent valuation agents as well as credit risk, liquidity, market credit spreads, and other applicable factors for similar transactions.

Due to the nature of our strategy once fully ramped, our portfolio will include relatively illiquid investments that are privately held. Valuations of privately held investments are inherently uncertain, may fluctuate over short periods of time and may be based on estimates. The determination of fair value may differ materially from the values that would have been used if a ready market for these investments existed. Our net asset value could be materially affected if the determinations regarding the fair value of our investments were materially higher or lower than the values that we ultimately realize upon the disposal of such investments.

The Board is ultimately and solely responsible for determining the fair value of the portfolio investments that are not publicly traded, whose market prices are not readily available on a quarterly basis in good faith or any other situation where portfolio investments require a fair value determination.

The valuation process is conducted at the end of each fiscal quarter, with a portion of our valuations of portfolio companies without market quotations subject to review by the independent valuation firms each quarter. When an external event with respect to one of our portfolio companies, such as a purchase transaction, public offering or subsequent equity sale occurs, we expect to use the pricing indicated by such external event to corroborate our valuation.

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

•

Our quarterly valuation process begins with each portfolio company or investment being initially valued by investment professionals of our investment adviser responsible for credit monitoring.

•

Preliminary valuation conclusions are then documented and discussed with our senior management and our investment adviser.

•

The audit committee of the Board reviews these preliminary valuations.

•

The Board discusses valuations and determines the fair value of each investment in our portfolio in good faith.

As of March 31, 2017, the Company held the following investments for which a sufficient level of current, reliable market quotations were not available:


Instrument	Type	Market Value
Gemphire Therapeutics, Inc.	Warrant	$	647,782
PAMCO CLO 1997-1A B	Asset-Backed		293,086
SCYNEXIS, Inc.	Warrant		287,385
CareDx, Inc.	Warrant		183,974
Kadmon Holdings, Inc.	Warrant		98,918
Galena Biopharma, Inc.	Warrant		2,250

As of December 31, 2016, the Company held the following investments for which a sufficient level of current, reliable market quotations were not available:


Instrument	Type	Market Value
CareDx, Inc.	Warrant	$	395,318
SCYNEXIS, Inc.	Warrant		259,771
PAMCO CLO 1997-1A B	Asset-Backed		275,625
Galena Biopharma, Inc.	Warrant		23,851

Organization Costs

Organization costs include the cost of incorporation, such as the cost of legal services and other fees pertaining to our organization and are paid by the Adviser, are expensed as we raise proceeds and become payable to the Adviser. Organization costs, together with offering costs, are limited to 1% of total gross proceeds raised in this offering and are not due and payable to the Adviser to the extent they exceed that amount. For the three months ended March 31, 2017 and March 31, 2016, the Adviser incurred and paid $0 of organization costs on our behalf. For the period from our inception to March 31, 2017, the Adviser incurred and paid organization costs of $33,392 on our behalf.

Offering Costs

Our offering costs include legal fees, promotional costs and other costs pertaining to the public offering of our shares of common stock, and are capitalized and amortized to expense over one year. For the three months ended March 31, 2017 and March 31, 2016, the Adviser incurred offering costs of $296,961 and $231,772, respectively, on our behalf. For the three months ended March 31, 2017 and March 31, 2016, the Company capitalized $91,816 and $61,157 of offering costs, respectively. Of the capitalized offering costs, $109,729 and $5,834 were amortized to expense during the three months ended March 31, 2017 and March 31, 2016, respectively, and $210,642 and $55,323 remain on the Statement of Assets and Liabilities as of March 31, 2017 and March 31, 2016, respectively.

Investment Transactions and Related Investment Income and Expense

We record our investment transactions on a trade date basis, which is the date when we have determined that all material terms have been defined for the transactions. These transactions could possibly settle on a subsequent date depending on the transaction type. All related revenue and expenses attributable to these transactions are reflected on the Statements of Operations commencing on the trade date unless otherwise specified by the transaction documents. Realized gains and losses on investment transactions are recorded on the specific identification method. We accrue interest income if we expect that ultimately we will be able to collect it. Generally, when an interest payment default occurs on a loan in our portfolio, or if our management otherwise believes that the issuer of the loan will not be able to service the loan and other obligations, we place the loan on non-accrual status and will cease recognizing interest income on that loan until all principal and interest is current through payment or until a restructuring occurs, such that the interest income is deemed to be collectible. However, we remain contractually entitled to this interest. We may make exceptions to this policy if the loan has sufficient collateral value and is in the process of collection. Accrued interest is written off when it becomes probable that such interest will not be collected and the amount of uncollectible

interest can be reasonably estimated. We also accrue for delayed compensation, which is a pricing adjustment payable by the parties to a secondary loan trade that closes late, intended to assure that neither party derives an economic advantage from the delay. Delayed compensation begins calculating at the loan’s specific coupon rate if a trade hasn’t settled within 7 business days of trading. Original issue discounts, market discounts or premiums are accreted or amortized using the effective interest method as interest income, and will be accreted or amortized over the maturity period of the investments. We will record prepayment premiums on loans and debt securities as interest income. Dividend income, if any, will be recognized on an accrual basis to the extent that we expect to collect such amount.

We may have investments in our portfolio that contain a PIK interest provision. Any PIK interest will be added to the principal balance of such investments and is recorded as income, if the portfolio company valuation indicates that such PIK interest is collectible. In order to qualify for the special tax treatment accorded RICs and their shareholders, substantially all of our income (including PIK interest) must be distributed to stockholders in the form of dividends, even if we have not collected any cash.

Interest expense is recorded on an accrual basis. Certain expenses related to legal and tax consultation, due diligence, rating fees, valuation expenses and independent collateral appraisals may arise when we make certain investments.

Loan Origination, Facility, Commitment and Amendment Fees

We may receive fees in addition to interest income from loans during the life of the investment. We may receive origination fees upon the origination of an investment. These origination fees are initially deferred and deducted from the cost basis of the investment and subsequently accreted into income over the term of the loan. We may receive facility, commitment and amendment fees, which are paid to us on an ongoing basis. Facility fees, sometimes referred to as asset management fees, are accrued as a percentage periodic fee on the base amount (either the funded facility amount or the committed principal amount). Commitment fees are based upon the undrawn portion committed by us and are recorded on an accrual basis. Amendment fees are paid in connection with loan amendments and waivers and are accounted for upon completion of the amendments or waivers, generally when such fees are receivable. Any such fees are included in other income on the Statements of Operations.

Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation

We measure net realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized upfront fees and prepayment penalties. Net change in unrealized appreciation or depreciation will reflect the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized.

U.S. Federal Income Taxes

We have elected to be treated as a RIC under Subchapter M of the Code and intend each year to qualify and be eligible to be treated as such. As a RIC, we generally will not have to pay corporate-level federal income taxes on any investment company taxable income or net capital gains that we distribute as dividends to our stockholders. In order to qualify for the special tax treatment accorded RICs and their shareholders, we must meet certain gross income, diversification, and distribution requirements.

Recent Accounting Pronouncements

The Company generally intends to take advantage of the extended transition period available to emerging growth companies to comply with new or revised accounting standards until those standards are applicable to private companies.

In March 2016, the FASB issued Accounting Standards Update 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. The amendments in this update clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. For public entities this update will be effective for interim periods and fiscal years beginning after December 15, 2016. For all other entities, this update will be effective for fiscal years beginning after December 31, 2017, and for interim periods within fiscal years beginning after December 15, 2018. The Company is currently evaluating the impact of this new guidance on the Company’s financial statements.

In August, 2016, the FASB issued Accounting Standards Update 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Receipts and Cash Payments. The amendments in this update address eight specific issues, where there has been diversity in practice in how certain cash receipts and cash payments are presented and classified in the Statement of Cash Flows under Topic 230. For public entities this update will be effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. For all other entities, this update is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The Company is currently evaluating the impact of this new guidance on the Company’s financial statements.

In October 2016, the U.S. Securities and Exchange Commission adopted new rules and amended existing rules (together, “final rules”) intended to modernize the reporting and disclosure of information by registered investment companies. In part, the final rules amend Regulation S-X and require standardized, enhanced disclosure about derivatives in investment company financial statements, as well as other amendments. The compliance date for the amendments to Regulation S-X is August 1, 2017. The Company is currently evaluating the impact that the adoption of the amendments to Regulation S-X will have on the Company’s financial statements and related disclosures.

In November, 2016, the FASB issued Accounting Standards Update 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The amendments in this update require the Statement of Cash Flows explain the change during the period in the total of cash, cash equivalents. Amounts generally described as restricted cash or restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the Statement of Cash Flows. For public entities this update will be effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. For all other entities, this update is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The Company is currently evaluating the impact of this new guidance on the Company’s financial statements.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

We are subject to financial market risks, most significantly changes in interest rates. As of March 31, 2017, 44% (based on fair value) of the investments in our portfolio had floating interest rates. These investments are usually based on a floating LIBOR and typically have interest rate reset provisions that adjust applicable interest rates under such loans to current market rates on a quarterly basis.

A rise in the general level of interest rates can be expected to lead to higher interest rates applicable to our debt investments, especially to the extent that we predominantly hold variable-rate investments, and to declines in the value of any fixed- rate investments we hold. To the extent that a majority of our investments may be in variable-rate investments, an increase in interest rates could make it easier for us to meet or exceed the hurdle rate for the income incentive fee payable to the Adviser and may result in a substantial increase in our net investment income, and also to the amount of incentive fees payable to our investment adviser with respect to our increasing pre-incentive fee net investment income.

Assuming that the Statements of Assets and Liabilities as of March 31, 2017 were to remain constant and that we took no actions to alter our existing interest rate sensitivity, the following table shows the annualized impact of hypothetical base rate changes in interest rates.


Change in interest rates	Increase (decrease) in interest income			(Increase) decrease in interest expense		Increase (decrease) in net investment income
Down 25 basis points	$	(16,527	)	$	—	$	(16,527	)
Up 50 basis points		145,933			—		145,933
Up 100 basis points		298,048			—		298,048
Up 200 basis points		602,278			—		602,278
Up 300 basis points		906,508			—		906,508

Although we believe that this analysis is indicative of our existing sensitivity to interest rate changes, it does not adjust for changes in the credit market, credit quality, the size and composition of the assets in our portfolio and other business developments, including borrowing under future credit facilities or other borrowing. Accordingly, we can offer no assurances that actual results would not differ materially from the analysis above.

We may in the future hedge against interest rate fluctuations by using standard hedging instruments such as interest rate swaps, futures, options and forward contracts to the limited extent permitted under the 1940 Act and applicable commodities laws. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to the investments in our portfolio with fixed interest rates.

Item 4.

Controls and Procedures

As of the period covered by this report, we, including our president and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on our evaluation, our management, including our president and chief financial officer, concluded that our disclosure controls and procedures were effective in timely alerting management, including our president and chief financial officer, of material information about us required to be included in our periodic SEC filings. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, are based upon certain assumptions about the likelihood of future events and can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. There has not been any change in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

Part II – Other Information

Item 1:

Legal Proceedings.

Although we may, from time to time, be involved in litigation arising out of our operations in the normal course of business or otherwise, we are currently not a party to any pending material legal proceedings.

Item 1A:

Risk Factors.

None.

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3:

Defaults Upon Senior Securities.

None.

Item 4:

Mine Safety Disclosures.

None.

Item 5:

Other Information.

None.

Item 6:

Exhibits


Number		Description

3.1		Amended and Restated Certificate of Incorporation (Incorporated by reference to Exhibit (a)(3) to Post-Effective Amendment No. 1 to the Company’s Registration Statement on Form N-2 (File No. 333-196096) filed on December 12, 2014)

3.2		Amended and Restated Bylaws (Incorporated by reference to Exhibit (b)(3) to Post-Effective Amendment No. 1 to the Company’s Registration Statement on Form N-2 (File No. 333-196096) filed on December 12, 2014)

4.1		Form of Subscription Agreement (Incorporated by reference to Appendix A filed with Supplement No. 1 to the Company’s Prospectus dated October 14, 2014 (File No. 333-196096) filed on November 4, 2014)

4.2		Form of Subscription Agreement (Incorporated by reference to Appendix A, Appendix B and Appendix C filed with Pre-effective Amendment No. 1 to the Company’s Form N-2 dated October 14, 2014 (File No. 333-216277) filed on April 24, 2017)

4.3		Distribution Reinvestment Plan (Incorporated by reference to Exhibit (e) to Post-Effective Amendment No. 1 to the Company’s Registration Statement on Form N-2 (File No. 333-196096) filed on December 12, 2014)

4.4		Form of Subscription Agreement (Incorporated by reference to Supplement No. 14 to the Company’s Prospectus dated September 23, 2016 (File No. 333-196096) filed on September 23, 2016)

10.1		Form of Investment Advisory Agreement (Incorporated by reference to Exhibit (g) to Pre-Effective Amendment No. 1 to the Company’s Registration Statement on Form N-2 (File No. 333-196096) filed on July 2, 2014)

10.2		Form of Investment Advisory Agreement (Incorporated by reference to Exhibit (h)(1) to Post-Effective Amendment No. 4 to the Company’s Registration Statement on Form N-2 (File No. 333-196096) filed on March 2, 2016)

31.1*		Certifications by President pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

31.2*		Certifications by Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

32.1*		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

*	Filed herewith

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.


	NEXPOINT CAPITAL, INC.

Date: May 15, 2017

	By:	/s/ James Dondero
	Name:	James Dondero
	Title:	President and Principal Executive Officer

Date: May 15, 2017	By:	/s/ Brian Mitts
	Name:	Brian Mitts
	Title:	Principal Financial Officer and Principal Accounting Officer