10-Q 1 tm1922664d1_10q.htm FORM 10-Q

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-Q

 

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

 

FOR THE QUARTERLY PERIOD ENDED September 30, 2019

 

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

 

COMMISSION FILE NUMBER: 814-01180

 

Runway Growth Credit Fund Inc.

(Exact name of registrant as specified in its charter)

 

Maryland   47-5049745
(State of incorporation)   (I.R.S. Employer Identification No.)

 

205 N. Michigan Ave., Suite 4200    
Chicago, IL   60601
(Address of principal executive offices)   (Zip Code)

 

(312) 281-6270

(Registrant’s telephone number, including area code)

 

Securities Registered Pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
None   N/A   N/A

 

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 x No ¨

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ¨ No ¨

 

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

 

Large accelerated filer ¨ Accelerated filer ¨
Non-accelerated filer x Smaller reporting company ¨
   
Emerging growth company x  

 

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 x

 

The issuer had 21,990,715 shares of common stock, $0.01 par value per share, outstanding as of November 13, 2019.

 

 

 

 

 

 

RUNWAY GROWTH CREDIT FUND INC.

 

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2019

 

Table of Contents

 

    INDEX   PAGE
NO.
       
PART I.   FINANCIAL INFORMATION    
       
Item 1.   Financial Statements   1
       
    Statements of Assets and Liabilities as of September 30, 2019 (unaudited) and December 31, 2018   1
       
    Statements of Operations for the three and nine months ended September 30, 2019 and 2018 (unaudited)   2
       
    Statements of Changes in Net Assets for the three and nine months ended September 30, 2019 and 2018 (unaudited)   3
         
    Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 (unaudited)   4
         
    Schedule of Investments as of September 30, 2019 (unaudited)   5
         
    Schedule of Investments as of December 31, 2018   12
       
    Notes to Financial Statements (unaudited)   19
       
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   41
       
Item 3.   Quantitative and Qualitative Disclosures About Market Risk   60
       
Item 4.   Controls and Procedures   61
       
PART II.   OTHER INFORMATION   62
       
Item 1.   Legal Proceedings   62
       
Item 1A.   Risk Factors   62
       
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   62
       
Item 3.   Defaults Upon Senior Securities   62
       
Item 4.   Mine Safety Disclosures   62
       
Item 5.   Other Information   63
       
Item 6.   Exhibits   63
     
SIGNATURES    64

 

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements 

 

RUNWAY GROWTH CREDIT FUND INC.

 

Statements of Assets and Liabilities

 

   September 30,
2019
   December 31,
2018
 
   (Unaudited)     
Assets          
Investments at fair value:          
Non-control/non-affiliate investments at fair value (cost of $365,612,439 and $223,851,892, respectively)  $357,738,881   $224,248,389 
Investment in U.S. Treasury Bills at fair value (cost of $59,970,914 and $79,959,928, respectively)   59,970,914    79,959,928 
Total investments at fair value (cost of $425,583,353 and $303,811,820, respectively)   417,709,795    304,208,317 
Cash and cash equivalents   2,668,355    2,527,474 
Deferred offering costs   409,735    102,865 
Subscriptions receivable   649,123    - 
Accrued interest receivable   1,609,587    1,221,494 
Other accounts receivable   482,636    41,160 
Prepaid expenses   123,944    120,064 
Total assets   423,653,175    308,221,374 
           
Liabilities          
Debt:          
Credit facilities   65,000,000    59,500,000 
Deferred credit facility fees (net of accumulated amortization of $73,880 and $18,470, respectively)   (1,034,317)   (129,759)
Total debt, less unamortized deferred financing costs   63,965,683    59,370,241 
Payable for securities purchased   -    80,699 
Deferred revenue   -    100,000 
Reverse repurchase agreement   59,671,060    79,560,129 
Accrued incentive fees   2,639,490    1,071,566 
Dividends payable   811,203    - 
Due to affiliate   111,685    116,697 
Interest payable   394,060    163,981 
Accrued expenses and other liabilities   989,443    388,666 
Total liabilities   128,582,624    140,851,979 
           
Commitments and contingencies (Note 3)          
           
Net assets          
Common stock, $0.01 par value; 100,000,000 shares authorized; 20,324,150 and 11,056,595 shares issued and outstanding, respectively   203,241    110,566 
Additional paid-in capital   302,860,650    162,568,188 
Distributable (losses) earnings   (7,993,340)   4,690,641 
Total net assets  $295,070,551   $167,369,395 
           
Net asset value per share  $14.52   $15.14 

 

See notes to financial statements.

 

 1 

 

 

RUNWAY GROWTH CREDIT FUND INC.

 

Statements of Operations

(Unaudited)

 

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2019   2018   2019   2018 
Investment income                    
From non-control/non-affiliate:                    
Interest income  $11,082,660   $5,446,310   $38,667,854   $12,013,769 
Payment in-kind interest income   543,581    -    1,105,928    - 
Other income   146,668    26,500    394,397    939,397 
Interest income from U.S. Treasury Bills   8,674    7,125    106,374    67,269 
Other income from non-investment sources   52,902    36,144    106,250    275,257 
Total investment income   11,834,485    5,516,079    40,380,803    13,295,692 
                     
Operating expenses                    
Management fees   1,238,835    1,203,125    3,645,085    3,609,375 
Incentive fees   1,669,053    479,538    6,285,048    479,538 
Professional fees   217,741    164,948    702,244    509,034 
Interest expense   413,066    188,986    661,548    255,106 
Overhead allocation expense   185,016    105,055    602,677    315,122 
Administration fee   97,995    49,054    382,860    147,357 
Directors’ fees   52,000    57,000    155,000    156,000 
General and administrative expenses   3,397    24,311    15,129    86,472 
Insurance expense   25,260    23,970    75,403    71,910 
Consulting fees   12,830    12,000    60,025    37,000 
Other expenses   414,549    103,158    847,006    195,892 
Total operating expenses   4,329,742    2,411,145    13,432,025    5,862,806 
Net investment income   7,504,743    3,104,934    26,948,778    7,432,886 
                     
Realized and unrealized gain (loss) on investments                    
Realized gain on non-control/non-affiliate investments   -    -    493,308    59,792 
Realized (loss) on U.S. Treasury Bills   (966)   -    (966)   - 
Net change in unrealized appreciation (depreciation) on non-control/non-affiliate investments   (2,782,423)   493,209    (8,270,054)   (302,017)
Net change in unrealized appreciation (depreciation) on U.S. Treasury Bills   -    439    -    439 
Net realized and unrealized gain (loss) on investments   (2,783,389)   493,648    (7,777,712)   (241,786)
                     
Net increase in net assets resulting from operations  $4,721,354   $3,598,582   $19,171,066   $7,191,100 
                     
Net increase in net assets resulting from operations per common share  $0.24   $0.41   $1.09   $0.82 
Net investment income per common share  $0.38   $0.35   $1.54   $0.85 
Weighted-average shares outstanding   19,990,416    8,865,358    17,520,157    8,742,743 

 

See notes to financial statements.

 

 2 

 

 

RUNWAY GROWTH CREDIT FUND INC.

 

Statements of Changes in Net Assets

(Unaudited)

 

   Three Months Ended
September 30, 2019
   Three Months Ended
September 30, 2018
 
Net increase (decrease) in net assets from operations          
Net investment income  $7,504,743   $3,104,934 
Realized (loss) on investments and U.S. Treasury Bills   (966)   - 
Net change in unrealized appreciation (depreciation) on investments and U.S. Treasury Bills   (2,782,423)   493,648 
Net increase in net assets resulting from operations   4,721,354    3,598,582 
           
Distributions to shareholders from:          
Dividends paid to shareholders   (9,722,745)   (2,184,724)
Total distributions to shareholders   (9,722,745)   (2,184,724)
           
Capital share transactions          
Issuance of common stock   -    30,000,000 
Issuance of common stock under dividend reinvestment plan   7,735,702    1,754,244 
Net increase in net assets resulting from capital share transactions   7,735,702    31,754,244 
           
Total increase in net assets   2,734,311    33,168,102 
           
Net assets at beginning of period   292,336,240    130,378,215 
           
Net assets at end of period  $295,070,551   $163,546,317 

 

   Nine Months Ended
September 30, 2019
   Nine Months Ended
September 30, 2018
 
Net increase (decrease) in net assets from operations          
Net investment income  $26,948,778   $7,432,886 
Realized gain on investments   492,342    59,792 
Net change in unrealized appreciation (depreciation) on investments and U.S. Treasury Bills   (8,270,054)   (301,578)
Net increase in net assets resulting from operations   19,171,066    7,191,100 
           
Distributions to shareholders from:          
Dividends paid to shareholders   (31,855,047)   (3,484,974)
Total distributions to shareholders   (31,855,047)   (3,484,974)
           
Capital share transactions          
Issuance of common stock   115,000,000    30,000,000 
Issuance of common stock under dividend reinvestment plan   25,385,137    2,799,814 
Net increase in net assets resulting from capital share transactions   140,385,137    32,799,814 
           
Total increase in net assets   127,701,156    36,505,940 
           
Net assets at beginning of period   167,369,395    127,040,377 
           
Net assets at end of period  $295,070,551   $163,546,317 
           
Capital share activity          
Shares issued   9,267,555    2,185,482 
Shares outstanding at beginning of period   11,056,595    8,668,334 
Shares outstanding at end of period   20,324,150    10,853,816 

 

See notes to financial statements.

 3 

 

 

RUNWAY GROWTH CREDIT FUND INC.

 

Statements of Cash Flows

(Unaudited)

 

   Nine Months Ended
September 30, 2019
   Nine Months Ended
September 30, 2018
 
Cash flows from operating activities          
Net increase in net assets resulting from operations  $19,171,066   $7,191,100 
Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by (used in) operating activities:          
Purchase of investments   (225,533,774)   (83,214,914)
Purchase of U.S. Treasury Bills   (215,871,217)   (190,456,264)
Payment in-kind interest   (1,105,928)   - 
Sale or maturity of investments   94,103,017    11,468,353 
Sale or maturity of U.S. Treasury Bills   235,966,606    211,503,227 
Realized gain on non-control/non-affiliate investments, including U.S. Treasury Bills   (492,342)   (59,792)
Net change in unrealized (appreciation) depreciation on non-control/non-affiliate investments   8,270,054    302,017 
Net change in unrealized (appreciation) depreciation on U.S. Treasury Bills   -    (439)
Amortization of fixed income premiums or discounts   (8,837,895)   (3,170,957)
Amortization of deferred credit facility fees   181,571    44,833 
Changes in operating assets and liabilities:          
Accrued interest receivable   (388,093)   (422,864)
Other accounts receivable   (441,476)   (433,893)
Prepaid expenses   (3,880)   62,616 
Payable for securities purchased   (80,699)   (18,995,710)
Deferred revenue   (100,000)   - 
Accrued incentive fees   1,567,924    479,538 
Due to portfolio company   -    (3,000,000)
Due to affiliate   (5,012)   25,265 
Interest payable   230,079    7,288 
Accrued expenses and other liabilities   600,777    252,786 
Net cash used in operating activities   (92,769,222)   (68,417,810)
           
Cash flows from financing activities          
Deferred offering costs   (306,870)   - 
Deferred credit facility fees   (1,086,129)   (190,340)
Borrowings under credit facilities   82,750,000    15,000,000 
Repayments under credit facilities   (77,250,000)   (15,000,000)
Proceeds from reverse purchase agreements   214,791,620    44,775,000 
Repayment of reverse purchase agreements   (234,680,689)   - 
Dividends paid to shareholders   (6,307,829)   (685,160)
Net cash received from common stock issued   115,000,000    29,765,456 
Net cash provided by financing activities   92,910,103    73,664,956 
           
Net increase (decrease) in cash   (140,881)   5,247,146 
Cash and cash equivalents at beginning of period   2,527,474    8,141,670 
Cash and cash equivalents at end of period  $2,668,355   $13,388,816 
           
Supplemental and non-cash financing cash flow information:          
Taxes paid  $1,400   $4,872 
Interest paid   182,986    247,818 
Non-cash dividend reinvestments   25,385,137    2,799,814 

 

See notes to financial statements.

 4 

 

 

RUNWAY GROWTH CREDIT FUND INC.

 

Schedule of Investments (Unaudited)

 

September 30, 2019

 

Portfolio Companies  Sub-Industry  Investment Description
(1),(2),(5),(6),(11)
 

Acquisition

Date

  Principal   Cost   Fair
Value (2)
   % of Net
Assets
 
Non-control/non-affiliate investments                       
                              
Senior Secured Term Loans                          
                              
Aginity, Inc.  Application Software  Tranche I: LIBOR+10.5% PIK, 12.50% floor, 5% ETP, due 11/30/2019 (4),(8),(13)  5/25/2018  $7,386,026   $7,232,349   $2,902,501    0.98%
                              
      Tranche II:  LIBOR+10.5% PIK, 12.50% floor, Extension line, due 11/30/2019 (4),(8)(13)  7/25/2019   1,625,000    1,625,000    1,478,623    0.50 
                              
Aria Systems, Inc.  Application Software  LIBOR+9.00%, 11.35% floor, 4.5% ETP, due 12/15/2021  6/29/2018   25,000,000    24,828,225    24,473,907    8.30 
                              
Brilliant Earth, LLC  Internet Retail  LIBOR+8.25%, 10.40% floor, 4.5% ETP, due 4/15/2023  9/30/2019   35,000,000    33,579,317    33,579,317    11.38 
                              
CareCloud Corporation  Health Care Technology  Prime+7.00%, 11.75% floor, 3.5% ETP, due 6/15/2022 (14)  6/19/2018   25,000,000    24,883,287    24,325,745    8.25 
                              
Circadence Corporation  Application Software  LIBOR+9.5%, 12.00% floor, 5% ETP, due 6/15/2022 (18)  12/20/2018   18,000,000    15,478,017    15,478,017    5.25 
                              
Cloud Passage, Inc.  Data Processing & Outsourced Services  LIBOR+7.50%, 1% PIK, 11.75% floor, 2.75% ETP, due 6/13/2023(4)  6/13/2019   7,519,600    7,219,297    7,219,297    2.45 
                              
Dejero Labs Inc.  Data Processing & Outsourced Services  LIBOR+9.25%, 11.75% floor, 4.5% ETP, due 5/31/2023 (3),(7)  5/31/2019   11,000,000    10,736,560    10,736,560    3.64 
                              
Dtex Systems, Inc.  Application Software  LIBOR+9.15%, 11.50% floor, 11.5% cash cap, 4% ETP, due 11/15/2021 (15)  6/1/2018   8,363,015    8,432,015    8,432,015    2.86 
                              
Echo 360 Holdings, Inc.  Education Services  Tranche I: LIBOR+9.25%, 12.05% floor, 4.0% ETP, due 5/3/2023  5/3/2019   14,000,000    13,701,682    13,701,682    4.64 
      Tranche II: LIBOR+9.25%, 12.05% floor, 4.0% ETP, due 5/3/2023  5/3/2019   2,500,000    2,460,649    2,460,649    0.83 
                              
eSilicon Corporation  Semi-conductors  Tranche I: LIBOR+10.50%, 13% floor, 5% ETP, due 7/15/2020  7/31/2017   4,166,667    4,505,958    4,505,958    1.53 
      Tranche II: LIBOR+10.50%, 13% floor, 5% ETP, due 1/15/2021  2/8/2018   3,333,333    3,486,637    3,486,637    1.18 
      Tranche III: LIBOR+10.50%, 13% floor, 5% ETP, due 6/15/2020  6/21/2019   10,000,000    9,887,786    9,887,786    3.35 
      Tranche IV: Prime+2.75%, Revolving line, due 6/15/2020  6/21/2019   11,000,000    11,000,000    11,000,000    3.73 
                              
INRIX Inc.  Internet Software and Services  Tranche I: LIBOR+8.0%, 10.5% floor, 2.5% ETP, due 7/15/2023  7/26/2019   20,000,000    19,531,477    19,531,477    6.62 
      Tranche II: LIBOR+8.0%, 10.5% floor, ROSE loan, 2.5% ETP, due 7/15/2023  7/26/2019   5,000,000    4,680,091    4,680,091    1.59 

 

See notes to financial statements.

 

 5 

 

 

RUNWAY GROWTH CREDIT FUND INC.

 

Schedule of Investments (Unaudited) – (continued)

 

September 30, 2019

 

Portfolio Companies  Sub-Industry 

Investment Description

(1),(2),(5),(6),(11)

  Acquisition
Date
  Principal   Cost   Fair
Value (2)
   % of Net
Assets
 
Non-control/non-affiliate investments (continued)                       
                              
Senior Secured Term Loans (continued)                       
                              
Massdrop, Inc.  Computer & Electronics Retail  LIBOR+8.25%, 10.65% floor, 4% ETP, due 1/15/2023  7/22/2019  $17,500,000   $17,127,095   $17,127,095    5.80%
                              
MingleHealth Care Solutions, Inc.  Healthcare Technology  LIBOR+9.5%, 11.75% floor, 4% ETP, due 8/15/2022  8/15/2018   6,000,000    5,711,487    5,400,923    1.83 
                              
Mobius Imaging, LLC  Healthcare Technology  LIBOR+9.25%, 11.50% floor, 4% ETP, due 10/15/2022  11/23/2018   15,500,000    14,087,355    15,611,977    5.29 
                              
Mojix, Inc.  Application Software  Tranche I: LIBOR+10.50%, 11.00% floor, 12% cash cap, 5% ETP, due 5/15/2021 (17)  5/16/2017   6,226,376    6,030,939    5,174,153    1.75 
      Tranche II: LIBOR+10.50%, 11.00% floor, 12% cash cap, 5% ETP, due 5/15/2021 (17)  8/3/2017   2,075,459    2,014,576    1,724,719    0.58 
      Tranche III: LIBOR+10.50%, 11.00% floor, 12% cash cap, 5% ETP, due 5/15/2021 (17)  7/6/2018   518,340    505,960    430,744    0.15 
      Tranche IV: LIBOR+10.50%, 11.00% floor, 12% cash cap, 5% ETP, due 5/15/2021 (17)  9/5/2018   517,617    503,956    430,143    0.15 
      Tranche V: LIBOR+10.50%, 11.00% floor, 12% cash cap, 5% ETP, due 5/15/2021 (17)  1/28/2019   1,030,808    992,920    856,608    0.29 
                              
3DNA Corp.(dba NationBuilder)  Application Software  Tranche I: LIBOR+9.00%, 11.50% floor, 5% ETP, due 4/28/2022  12/28/2018   7,000,000    6,966,329    6,966,329    2.36 
      Tranche II: LIBOR+9.00%, 11.50% floor, 5% ETP, due 4/28/2022  6/12/2019   500,000    498,960    498,960    0.17 
                              
Ouster, Inc.  Technology Hardware, Storage & Peripherals  LIBOR+8.50%, 10.75% floor, 3.50% ETP, due 5/15/2021 (16)  11/27/2018   10,000,000    9,950,532    9,950,532    3.37 
                              
Pivot3, Inc.  Data Processing & Outsourced Services  LIBOR+8.50%, 11.00% floor, 4% ETP, due 11/15/2022  5/13/2019   20,000,000    19,749,753    19,576,957    6.63 
                              
RealWear, Inc.  Technology Hardware, Storage & Peripherals  LIBOR+8%, 10.35% floor, 5% ETP, due 6/28/2023 (12)  6/28/2018   25,000,000    24,517,223    24, 517,223    8.31 
                              
Scale Computing, Inc.  System Software  LIBOR+9.25%, 11.75% floor, 4.5% ETP, due 9/15/2022  3/29/2019   15,000,000    14,696,808    14,577,700    4.94 
                              
ShareThis, Inc.  Data Processing & Outsourced Services  Tranche I: LIBOR+9.25%, 11.60% floor, 5% ETP, due 6/15/2022  12/3/2018   19,250,000    17,834,429    17,834,429    6.04 
      Tranche II: LIBOR+9.25%, 11.60% floor, 5% ETP, due 6/15/2022  1/17/2019   750,000    687,112    687,112    0.23 
      Tranche III: LIBOR+9.25%, 11.60% floor, 5% ETP, due 6/15/2022  7/24/2019   1,000,000    899,187    899,187    0.31 
                              
Total Senior Secured Term Loans          $346,042,968   $340,145,053    115.28%

 

See notes to financial statements.

 

 6 

 

 

RUNWAY GROWTH CREDIT FUND INC.

 

Schedule of Investments (Unaudited) – (continued)

 

September 30, 2019

 

Portfolio Companies  Sub-Industry  Investment Description
(1),(2),(5),(6),(11)
  Acquisition
Date
  Principal/
Shares
   Cost   Fair
Value (2)
   % of Net
Assets
 
Preferred Stock (8)                          
                              
Aria Systems, Inc.  Application Software  Series G Preferred Stock  7/10/2018  289,419   $250,000   $461,826    0.16%
                              
Warrants (8)                             
                              
Aginity, Inc.  Application Software  Warrant for Series A Preferred Stock, exercise price $1.949/share, expires 5/25/2028  5/25/2018   359,159   167,727    -    0.00 
                              
      Warrant for Series A-1 Preferred Stock, exercise price $0.01/share, expires 2/25/2029  2/25/2019   205,234    151,873    -    0.00 
                              
AllClear ID, Inc.  Specialized Consumer Services  Warrant for Common Stock, exercise price $0.01/share, expires 9/1/2027  9/1/2017   870,514    1,749,733    906,205    0.31 
                              
Aria Systems, Inc.  Application Software  Warrant for Series G Preferred Stock, exercise price $0.8638/share, expires 6/29/2028  6/29/2018   2,170,641    770,578    1,786,438    0.60 
                              
Aspen Group Inc.  Education Services  Warrant for Common Stock, exercise price $6.87/share, expires 7/25/2022  7/25/2017   224,174    583,301    -    0.00 
                              
Brilliant Earth, LLC  Internet Retail  Warrant for Class P Units, exercise price $9.29/share, expires 9/1/2029  9/30/2019   333,333    973,000    973,000    0.33 
                              
CareCloud Corporation  Healthcare Technology  Warrant for Series A-1 Preferred Stock, exercise price $0.8287/share, expires 6/16/2025 (14)  4/17/2019   2,262,579    394,163    640,310    0.22 
                              
Circadence Corporation  Application Software  Warrant for Series A-5 Preferred Stock, exercise price $1.08/share, expires 12/20/2028 (18)  12/20/2018   1,666,667    3,630,000    3,385,000    1.14 
                              
CloudPassage, Inc.  Data Processing & Outsourced Services  Warrant for Series D-1 Preferred Stock, exercise price $1.60/share, expires 6/13/2029  6/13/2019   210,938    273,798    268,102    0.09 
                              
Dejero Labs Inc.  Data Processing & Outsourced Services  Warrant for Common Stock, exercise price $0.6000/share, expires 6/1/2025(3) (7)  5/31/2019   333,621    192,499    195,650    0.07 
                              
Dtex Systems, Inc.  Application Software  Warrant for Series C-Prime Preferred Stock, exercise price $0.6000/share, expires 6/1/2025(15)  6/1/2018   500,000    59,000    57,500    0.02 
      Warrant for Series C-Prime Preferred Stock, exercise price $0.6000/share, expires 7/22/2029(15)  7/22/2019   833,333    114,719    115,833    0.04 
                              
Echo 360 Holdings, Inc.  Education Services  Warrant for Series E Preferred Stock, exercise price $1.5963/share, expires 5/3/2029  5/3/2019   1,066,767    299,762    293,361    0.10 
                              
eSilicon Corporation  Semiconductors  Warrant for Series H Preferred Stock, exercise price $1.01/share, expires 7/31/2027  7/31/2017   1,485,149    543,564    972,772    0.33 
      Warrant for Series H Preferred Stock, exercise price $1.01/share, expires 6/11/2029   6/21/2019   990,099    312,871    455,446    0.15 

 

See notes to financial statements.

 

 7 

 

 

RUNWAY GROWTH CREDIT FUND INC.

 

Schedule of Investments (Unaudited) – (continued)

 

September 30, 2019

 

Portfolio Companies  Sub-Industry  Investment Description
(1),(2),(5),(6),(11)
  Acquisition
Date
  Principal/
Shares
   Cost   Fair
Value (2)
   % of Net
Assets
 
Non-control/non-affiliate investments (continued)                       
                              
Warrants (8) (continued)                          
                              
INRIX Inc.  Internet Software and Services  Warrant for Common Stock, exercise price $9.29/share, expires 7/26/2029  7/26/2019   150,804   $522,083   $510,924    0.17%
                              
Massdrop Inc.  Computer & Electronics Retail  Warrant for Series B Preferred Stock, exercise price $1.1/share, expires 7/22/2029  7/22/2019   848,093    183,188    189,125    0.06 
                              
Mingle HealthCare Solutions, Inc.  Healthcare Technology  Warrant for Series AA Preferred Stock, exercise price $0.24/share, expires 8/15/2028  8/15/2018   1,625,000    492,375    -    0.00 
                              
Mobius Imaging, LLC  Healthcare Technology  Warrant for next round securities, exercise price $136/share, expires 11/23/2028  11/23/2018   7,123    1,820,000    1,937,500    0.65 
                              
Mojix, Inc.  Application Software  Warrant for Common Stock exercise price $10.64/share, expires 5/16/2027 (17)  5/16/2017   164,427    417,645    -    0.00 
      Warrant for Series 1 Preferred Stock exercise price $0.28/share, expires 12/20/2028 (17)  12/20/2018   7,176,973    806,991    -    0.00 
      Warrant for Series 1 Preferred Stock exercise price $0.28/share, expires 5/30/2029 (17)  5/30/2019   358,849    21,531    -    0.00 
                              
3DNA Corp. (dba NationBuilder)  Application Software  Warrant for Series C-1 Preferred Stock exercise price $1.4643/share, expires 12/28/2028  12/28/2018   273,164    104,138    98,066    0.03 
                              
Ouster, Inc.  Technology Hardware, Storage & Peripherals  Warrant for Series A Preferred Stock, exercise price $11.3158/share, expires 11/27/2028 (16)  11/27/2018   53,023    103,010    139,906    0.05 
                              
Pivot3, Inc.  Data Processing &Outsourced Services  Warrant for Series D Preferred Stock, exercise price $0.59/share, expires 5/13/2029  5/13/2019   2,033,898    216,610    164,746    0.06 
                              
Realwear, Inc.  Technology Hardware, Storage & Peripherals  Warrant for Series A Preferred Stock, exercise price $4.4464/share, expires 10/5/2028 (12)  10/5/2018   112,451    135,841    400,434    0.14 
      Warrant for Series A Preferred Stock, exercise price $4.4464/share, expires 12/28/2028 (12)  12/28/2018   22,491    25,248    74,427    0.02 
      Warrant Series A Preferred Stock, exercise price $6.78/share, expires 6/27/2029 (12)   6/27/2019   123,894    380,850    340,709    0.12 
                              
Scale Computing, Inc.  System Software  Warrant for Series F-1 Preferred Stock exercise price $0.8031/share, expires 3/29/2029  3/29/2019   2,147,926    345,816    317,893    0.11 
                              
SendtoNews Video, Inc.  Advertising  Warrant for Class B Non-Voting Stock, exercise price $0.67/share, expires 6/30/2027 (3) (7)  6/30/2017   191,500    246,461    57,000    0.02 
                              
ShareThis, Inc.  Data Processing & Outsourced Services  Warrant for Series D-3 Preferred Stock, exercise price $2.4320/share, expires 12/3/2028  12/3/2018   647,615    2,162,000    2,162,000    0.73 
                              
zSpace, Inc.   Technology Hardware, Storage & Peripherals  Warrant for Series E Preferred Stock, exercise price $0.90/share, expires 12/29/2027  12/29/2017   1,896,966    707,568    436,046    0.15 
      Warrant for Series E Preferred Stock, exercise price $0.90/share, expires 2/11/2029  2/11/2019   2,806,830    411,528    253,609    0.09 
Total Warrants                 19,319,471    17,132,002    5.80%
                              
Total non-control/non-affiliate investments           365,612,439    357,738,881    121.24%

 

See notes to financial statements.   

 

 8 

 

 

RUNWAY GROWTH CREDIT FUND INC.

 

Schedule of Investments (Unaudited) – (continued)

 

September 30, 2019

 

Portfolio Companies   Sub-Industry   Investment Description (5), (6)  

Acquisition

Date

   

Principal/

Shares

    Cost     Fair
Value (2)
    % of Net
Assets
 
U.S. Treasury            U.S. Treasury Bill, 1.59%, due 10/8/2019(10)         -     $ 59,970,914     $ 59,970,914       20.32 %
                                               
Total Investments         $ 425,583,353     $ 417,709,795       141.56 %

 

  (1) Disclosures of interest rates on notes include cash interest rates and payment-in-kind (“PIK”) interest rates, as applicable. Unless otherwise indicated, all of the Company’s variable rate debt investments bear interest at a rate that is determined by reference to the 3-Month London Interbank Offered Rate (“LIBOR”) or the U.S. Prime Rate. At September 30, 2019, the 3-Month LIBOR was 2.09% and the U.S. Prime Rate was 5.00%.

 

  (2) All investments in portfolio companies, which as of September 30, 2019 represented 121.24% of the Company’s net assets, are restricted as to resale and were valued at fair value as determined in good faith by the Company’s Board of Directors.

 

  (3) Investment is not a qualifying investment as defined under Section 55(a) of the Investment Company Act of 1940, as amended. Non-qualifying assets represent 3.72% of total investments at fair value as of September 30, 2019. Qualifying assets must represent at least 70% of the Company’s total assets at the time of acquisition of any additional non-qualifying assets. If at any time qualifying assets do not represent at least 70% of the Company's total assets, the Company will be precluded from acquiring any additional non-qualifying assets until such time as it complies with the requirements of Section 55(a).

 

  (4) Represents a PIK security. PIK interest will be accrued and paid at maturity.

 

  (5) All investments are valued using unobservable inputs, except the U.S. Treasury Bills which are valued using observable inputs.

 

  (6) All investments are domiciled in the United States, unless otherwise noted.

 

  (7) Investment is domiciled in Canada.

 

  (8) Investments are non-income producing.

 

See notes to financial statements.

 

 9 

 

 

RUNWAY GROWTH CREDIT FUND INC.

 

Schedule of Investments (Unaudited) – (continued)

 

September 30, 2019 

 

  (9) Investments are held at Fair Value net of the Fair Value of Unfunded Commitments. See Note 3 for additional detail.

 

  (10) Treasury bills with $60,000,000 in aggregate of par value were purchased pursuant to a 5.00% reverse repurchase agreement with Goldman Sachs, dated September 27, 2019, due October 4, 2019, with a repurchase price of $60,000,000 and collateralized by a 1.59% U.S. Treasury Bill due October 8, 2019 with a par value of $60,000,000 and fair value of $59,970,914.

 

  (11) Disclosures of end-of-term-payments (“ETP”) are one-time payments stated as a percentage of original principal amount.

 

  (12) As of June 28, 2019, pursuant to the Company’s Amended and Restated Loan and Security Agreement, RealWear, Inc. paid down the $3,000,000 revolving note. The Company funded an additional $16,000,000 senior secured term loan to RealWear, Inc. and purchased a warrant to purchase 123,894 shares of Series A Preferred Stock for a total cost of $24,840,000.

 

  (13) As of July 23, 2019, the Aginity, Inc. loan and security agreement was amended to: (a) extend a loan amount maximum of $2,000,000, which shall not exceed a maximum of $500,000 per month; and, (b) modify the maturity date to be the earlier of the closing date of the sale of Aginity, Inc. or November 30, 2019. Effective July 1, 2019, the Company has placed Aginity, Inc. at non-accrual status.

 

  (14)

As of April 17, 2019, the CareCloud Corporation warrant to purchase preferred stock was amended to change the warrant entitlement of the Company from Series C Preferred Stock to Series A-1 Preferred Stock at 2,262,579 shares at an exercise price of $0.8287 per share.

 

  (15) As of July 11, 2019, the Dtex Systems, Inc. (“Dtex”) loan and security agreement was amended to: (a) extend the amortization date to October 15, 2019; (b) PIK all interest through September 15, 2019; and, (c) increase the applicable interest rate by 1.50% through September 15, 2019. Pursuant to the amendment, on July 11, 2019 the Company received an additional warrant to purchase 833,333 shares of Series C-Prime Preferred Stock at an exercise price of $0.60. As of October 29, 2019, the loan and security agreement was further amended to extend the amortization date to November 15, 2019.

 

  (16) As of August 5, 2019, in exchange for modification to certain financial covenants in the Loan and Security Agreement, the Ouster, Inc. warrant was modified to increase the Company's warrant coverage from 4% of the Loan Amount to 6% of the Loan Amount. The warrant price per share remains $11.3158, subject to adjustment as provided for under terms of the warrant agreement.

 

  (17) As of October 22, 2019, the Mojix, Inc. loan and security agreement was amended to extend the amortization date to June 30, 2020.

 

  (18) As of October 31, 2019, the Circadence Corporation loan and security agreement was amended to: (a) extend the amortization date to July 15, 2020; (b) increase the ETP to 6% of the original principal amount; and, (c) modify the maturity date to December 15, 2022. Pursuant to the amendment, on October 31, 2019 the Company received an additional warrant to purchase 416,667 shares of Series A-5 Preferred Stock at an exercise price of $1.08.

 

See notes to financial statements.

 

 10 

 

 

RUNWAY GROWTH CREDIT FUND INC.

 

Schedule of Investments (Unaudited) – (continued)

 

September 30, 2019

 

The following tables show the fair value of our portfolio of investments (excluding any U.S. Treasury Bills held) by geographic region and industry as of September 30, 2019:

 

   September 30, 2019 
Geographic Region  Investments at
Fair Value
   Percentage of
Net Assets
 
Western United States  $197,798,537    67.03%
Pacific Northwestern United States   50,055,284    16.96 
Northeastern United States   34,005,169    11.53 
Southeastern United States   24,966,055    8.46 
South Central United States   20,647,908    7.00 
Midwestern United States   19,276,718    6.53 
Canada   10,989,210    3.73 
Total  $357,738,881    121.24%

 

   September 30, 2019 
Industry  Investments at
Fair Value
   Percentage of
Net Assets
 
Application Software  $74,751,383    25.33%
Data Processing & Outsourced Services   59,744,040    20.25 
Healthcare Technology   47,916,455    16.24 
Technology Hardware, Storage & Peripherals   36,112,886    12.24 
Internet Retail   34,552,317    11.71 
Semiconductors   30,308,599    10.27 
Internet Software and Services   24,722,491    8.38 
Computer & Electronics Retail   17,316,220    5.87 
Education Services   16,455,692    5.58 
System Software   14,895,593    5.05 
Specialized Consumer Services   906,205    0.30 
Advertising   57,000    0.02 
Total  $357,738,881    121.24%

 

See notes to financial statements.

 

 11 

 

 

RUNWAY GROWTH CREDIT FUND INC.

 

Schedule of Investments

 

December 31, 2018

 

Portfolio Companies  Sub-Industry  Investment Description (1),(5),(6)  Acquisition
Date
  Principal   Cost   Fair
Value (2)
   % of Net
Assets
 
Non-control/non-affiliate investments                   
                          
Senior Secured Term Loans                          
                              
Aginity, Inc.  Application Software  LIBOR+9.5%, 11.5% floor, 5% ETP, due 5/25/2022  5/25/2018  $7,000,000   $6,795,581   $6,675,922    3.99%
                              
AllClear ID, Inc.  Specialized Consumer Services  Tranche I: LIBOR+10.75%, 12.25% floor, 5% ETP, due 8/15/2021  9/1/2017   10,000,000    9,545,594    9,841,798    5.88 
      Tranche II: LIBOR+8.50%, 10% floor, 5% ETP, due 8/15/2021  10/17/2018   5,000,000    4,342,367    4,920,899    2.94 
                              
Aria Systems, Inc.  Application Software  LIBOR+9.00%, 11.35% floor, 4% ETP, due 12/15/2021  6/29/2018   25,000,000    24,305,208    24,212,998    14.46 
                              
CareCloud Corporation  Healthcare Technology  Prime+7.00%, 11.75% floor, 3.5% ETP, due 6/15/2022  6/29/2018   25,000,000    24,570,129    24,123,158    14.41 
                              
Circadence Corporation  Application Software  LIBOR+9.5%, 12% floor, 5% ETP, due 6/20/2022  12/20/2018   18,000,000    14,239,085    14,239,085    8.51 
                              
Drawbridge, Inc.  Data Processing & Outsourced Services  LIBOR+9%, 11.25% floor, 4% ETP, due 10/22/2022  10/22/2018   15,000,000    14,467,708    14,467,708    8.64 
                              
Dtex Systems, Inc.  Application Software  LIBOR+9.5%, 11.5% floor, 11.5% cash cap, 4% ETP, due 11/15/2021  6/1/2018   8,000,000    7,938,983    7,887,407    4.71 
                              
eSilicon Corporation  Semiconductors  Tranche I: LIBOR+10.5%, 11.5% floor, 5% ETP, due 7/15/2020  7/31/2017   7,916,667    7,976,198    8,227,697    4.92 
      Tranche II: LIBOR+10.5%, 11.5% floor, 5% ETP, due 7/15/2020  2/8/2018   5,000,000    5,063,065    5,196,440    3.10 
                              
Jibe, Inc.  Application Software  LIBOR+10%, 12.25% floor, 5% ETP, due 6/7/2022  6/7/2018   7,000,000    6,951,535    6,951,535    4.15 
                              
MingleHealth Care Solutions, Inc.  Healthcare Technology  LIBOR+9.5%, 11.75% floor, 4% ETP, due 8/15/2022  8/15/2018   6,000,000    5,532,093    5,532,093    3.31 

 

See notes to financial statements.

 

 12 

 

 

RUNWAY GROWTH CREDIT FUND INC.

 

Schedule of Investments - (continued)

 

December 31, 2018

 

Portfolio Companies  Sub-Industry  Investment Description (5), (6)  Acquisition
Date
  Principal/
Shares
   Cost   Fair
Value (2)
   % of Net
Assets
 
Non-control/non-affiliate investments (continued)                       
                              
Senior Secured Term Loans (continued)                       
                              
Mobius Imaging, LLC  Healthcare Technology  LIBOR+9.25%, 11.00% floor, 4% ETP, due 10/15/2022  11/23/2018  $15,500,000   $13,551,386   $13,551,386    8.10%
                              
Mojix, Inc.  Application Software  Tranche I: LIBOR+10.50%, 11.00% floor, 12.0% cash cap, 5% ETP, due 5/15/2021 (4), (9)  5/16/2017   6,034,383    5,514,492    5,200,452    3.11 
      Tranche II: LIBOR+10.50%, 11.00% floor, 12.0% cash cap, 5% ETP, due 5/15/2021 (4), (9)  8/3/2017   2,011,462    1,845,251    1,733,484    1.04 
      Tranche III: LIBOR+10.50%, 11.00% floor, 12.0% cash cap, 5% ETP, due 5/15/2021 (4), (9)  7/6/2018   502,357    465,516    432,933    0.26 
      Tranche IV: LIBOR+10.50%, 11.00% floor, 12.0% cash cap, 5% ETP, due 5/15/2021 (4), (9)  9/5/2018   501,656    462,652    432,329    0.26 
                              
3DNA Corp.(dba NationBuilder)  Application Software  LIBOR+9.00%, 11.50% floor, 5% ETP, due 4/28/2022  12/28/2018   7,000,000    6,827,787    6,827,787    4.08 
                              
Ouster, Inc.  Technology Hardware, Storage & Peripherals  LIBOR+8.50%, 10.75% floor, 5.25% ETP, due 5/15/2012(14)  11/27/2018   10,000,000    -    -    - 
                              
RealWear, Inc.  Technology Hardware, Storage & Peripherals  Tranche I: LIBOR+9.50%, 10.85% floor, 5% ETP, due 10/5/2021  10/5/2018   5,000,000    4,854,551    4,832,563    2.89 
      Tranche II; LIBOR+9.50%, 10.85% floor, 5% ETP, due 10/5/2021  12/28/2018   1,000,000    965,139    966,513    0.58 
                              
RedSeal, Inc.  Application Software  LIBOR+9.50%, 11.00% floor, 5.25% ETP, due 12/15/2020  12/15/2017   15,000,000    15,123,353    15,123,353    9.04 
                              
ShareThis, Inc.  Data Processing & Outsourced Services  LIBOR+9.25%, 11.65% floor, 4% ETP, due 5/15/2022  12/3/2018   19,250,000    17,568,105    17,567,923    10.50 
                              
zSpace, Inc.  Technology Hardware, Storage & Peripherals  LIBOR+10.50%, 12.00% floor, 5% ETP, due 12/29/2020  12/29/2017   10,000,000    9,682,603    9,593,890    5.73 
                              
Total Senior Secured Term Loans             $208,588,381   $208,539,353    124.61%

 

See notes to financial statements.

 

 13 

 

 

RUNWAY GROWTH CREDIT FUND INC.

 

Schedule of Investments - (continued)

 

December 31, 2018

 

Portfolio Companies   Sub-Industry   Investment Description (5), (6)   Acquisition
Date
  Principal/
Shares
    Cost     Fair
Value (2)
    % of Net
Assets
 
Non-control/non-affiliate investments (continued)                                    
                                             
Preferred Stock                                      
                                             
Aria Systems, Inc.   Application Software   Series G Preferred Stock   7/10/2018     289,419     $ 250,000     $ 461,826       0.28 %
                                             
Warrants (8)                                            
                                             
Aginity, Inc.   Application Software   Warrant for Series A Preferred Stock, exercise price $1.949/share, expires 5/25/2028   5/25/2018     359,158       167,727       154,346       0.09  
                                             
AllClear ID, Inc.   Education Services   Warrant for Common Stock, exercise price $0.01/share, expires 9/1/2027   9/1/2017     870,514       1,749,733       1,176,700       0.70  
                                             
Aria Systems, Inc.   Application Software   Warrant for Series G-Preferred Stock, exercise price $0.8638/share, expires 6/29/2028   6/29/2018     2,170,641       770,578       1,827,680       1.09  
                                             
Aspen Group Inc.   Education Services   Warrant for Common Stock, exercise price $6.87/share, expires 7/25/2022   7/25/2017     224,174       583,301       593,000       0.35  
                                             
CareCloud Corporation   Healthcare Technology   Warrant for Series C Preferred Stock, exercise price $1.2035/share, expires 6/19/2025   6/19/2018     1,557,956       394,163       364,562       0.22  
                                             
Circadence Corp.   Application Software   Warrant for Series A-5 Preferred Stock, exercise price $1.08/share, expires 12/20/2028   12/20/2018     1,666,667       3,630,000       3,630,000       2.18  
                                             
Drawbridge, Inc.   Data Processing & Outsourced Services   Warrant for Series C Preferred Stock, exercise price $2.2595/share, expires 10/22/2028   10/22/2018     663,864       406,285       429,520       0.26  
                                             
Dtex Systems, Inc.   Application Software   Warrant for Series C Preferred Stock, exercise price $0.600/share, expires 6/1/2025   6/1/2018     500,000       59,000       56,000       0.03  
                                             
eSilicon Corporation   Semiconductors   Warrant for Series H Preferred Stock, exercise price $1.01/share, expires 7/31/2027   7/31/2017     1,485,149       543,564       1,005,446       0.60  
                                             
Jibe, Inc.   Application Software   Warrant for Series C Preferred Stock, exercise price $2.265/share, expires 6/7/2028   6/7/2018     247,242       40,795       35,603       0.02  

 

See notes to financial statements.

 

 14 

 

 

RUNWAY GROWTH CREDIT FUND INC.

 

Schedule of Investments - (continued)

 

December 31, 2018

 

Portfolio Companies   Sub-Industry   Investment Description (5), (6)   Acquisition
Date
  Principal/
Shares
    Cost     Fair
Value (2)
    % of Net
Assets
 
Non-control/non-affiliate investments (continued)                                    
                                             
Warrants (8) (continued)                                      
                                             
MingleHealth Care Solutions, Inc.   Healthcare Technology   Warrant for Series AA Preferred Stock, exercise price $0.24/share, expires 8/15/2028   8/15/2018     1,625,000     $ 492,375     $ 471,913       0.28 %
                                             
Mobius Imaging, LLC   Healthcare Technology   Warrant for next round security exercise price $136/share, expires 11/23/2028   11/23/2018     7,123       1,820,000       1,820,000       1.09  
                                             
Mojix, Inc.   Application Software   Warrant for Common Stock exercise price $10.64/share, expires 5/16/2027(9),(10)   5/16/2017     164,427       417,645       -       0.00  
        Warrant for Series 1 Preferred Stock exercise price $0.28/share, expires 12/20/2028(9),(10)   12/20/2018     7,176,973       806,991       798,389       0.48  
                                             
3DNA Corp. (dba NationBuilder)   Application Software   Warrant for Series C-1 Preferred Stock exercise price $1.4643/share, expires 12/28/2028   12/28/2018     273,164       104,138       104,138       0.06  
                                             
Ouster, Inc.   Technology Hardware, Storage & Peripherals   Warrant for Series A Preferred Stock, exercise price $11.3158/share, expires 11/27/2028(14)                                    
                                             
Realwear, Inc.   Technology Hardware, Storage & Peripherals   Warrant for Series A Preferred Stock, exercise price $4.4464/share, expires 10/5/2028   10/5/2018     112,451       135,841       141,435       0.08  
        Warrant for Series A Preferred Stock, exercise price $4.4464/share, expires 12/28/2028   12/28/2018     22,491       25,248       28,288       0.02  
                                             
RedSeal, Inc.   Application Software   Warrant for Series C-Prime Preferred Stock, exercise price $0.27318/share, expires 12/15/2027   12/15/2017     3,569,075       364,046       292,664       0.17  
                                             
SendtoNews Video, Inc.   Advertising   Warrant for Class B Non-Voting Stock, exercise price $0.67/share, expires 6/30/2027 (3) (7)   6/30/2017     191,500       246,461       66,000       0.04  

 

See notes to financial statements.

 

 15 

 

 

RUNWAY GROWTH CREDIT FUND INC.

 

Schedule of Investments - (continued)

 

December 31, 2018

 

Portfolio Companies   Sub-Industry   Investment Description (5), (6)   Acquisition
Date
  Principal/
Shares
    Cost     Fair
Value (2)
    % of Net
Assets
 
Non-control/non-affiliate investments (continued)                                    
                                             
Warrants (8) (continued)                                        
                                             
ShareThis, Inc.   Data Processing & Outsourced Services   Warrant for Series D-3 Preferred Stock, exercise price $2.4320/share, expires 12/3/2028   12/3/2018     371,030     $ 1,548,052     $ 1,580,000       0.94 %
                                             
zSpace, Inc.   Technology Hardware, Storage & Peripherals   Warrant for Series E Preferred Stock, exercise price $0.90/share, expires 12/29/2027   12/29/2017     1,896,966       707,568       671,526       0.40  
Total Warrants                         15,013,511       15,247,210       9,10  
                                             
Total non-control/non-affiliate investments         223,851,892       224,248,389       133.99  
                                             
U.S. Treasury       U.S. Treasury Bill, 2.254%, due 1/3/2019(12)       $ 80,000,000       79,959,928       79,959,928       47.77  
                                             
Total Investments                       $ 303,811,820     $ 304,208,317       181.76 %

 

  (1) Disclosures of interest rates on notes include cash interest rates and payment-in-kind (“PIK”) interest rates, as applicable. Unless otherwise indicated, all of the Company’s variable rate debt investments bear interest at a rate that is determined by reference to the 3-Month London Interbank Offered Rate (“LIBOR”) or the U.S. Prime Rate. At December 31, 2018, the 3-Month LIBOR was 2.80% and the U.S. Prime Rate was 5.50%.

 

  (2) All investments in portfolio companies, which as of December 31, 2018 represented 133.99% of the Company’s net assets, are restricted as to resale and were valued at fair value as determined in good faith by the Company’s Board of Directors.

 

  (3) Investment is not a qualifying investment as defined under Section 55(a) of the Investment Company Act of 1940, as amended. Non-qualifying assets represent 0.04% of total investments at fair value as of December 31, 2018. Qualifying assets must represent at least 70% of total assets at the time of acquisition of any additional non-qualifying assets. If at any time qualifying assets do not represent at least 70% of the Company's total assets, the Company will be precluded from acquiring any additional non-qualifying assets until such time as it complies with the requirements of Section 55(a).

 

  (4) Represents a PIK security. If the interest rate goes above the cap of 12.00%, PIK interest will be accrued on the excess amount and paid at maturity.

 

  (5) All investments are valued using unobservable inputs, except the U.S. Treasury Bill which is valued using observable inputs.

 

  (6) All investments are domiciled in the United States, unless otherwise noted.

 

  (7) Investment is domiciled in Canada.

 

See notes to financial statements.

 

 16 

 

 

RUNWAY GROWTH CREDIT FUND INC.

 

Schedule of Investments – (continued)

 

December 31, 2018

 

  (8) Investments are non-income producing.

 

  (9) As of September 29, 2018, the Mojix, Inc. (“Mojix”) loan and security agreement was amended to: (a) increase the LIBOR spread from 10.0% to 10.5%; (b) require existing shareholders to invest additional amounts of equity in Mojix; and, (c) make certain adjustments to the length and timing of interest-only periods based on the accomplishment of performance milestones. In exchange, the Company has agreed to provide forbearance on certain covenant defaults and make available, upon certain additional equity investment by the shareholders, the remaining $2,000,000 under the original loan commitment. As of December 31, 2018, the Company has funded $1,000,000 in a third and fourth tranche in the amount of $500,000 each.

 

  (10) In connection with the Amended and Restated Certificate of Incorporation dated September 4, 2018, each one warrant share of Series E Preferred Stock converted into one one-hundredth of a warrant share of Common Stock. The Company previously held 16,442,732 in warrants for Series E Preferred Stock which converted into 164,427 warrants for common stock.

 

  (11) Investments are held at Fair Value net of the Fair Value of Unfunded Commitments. See Note 3 for additional detail.

 

  (12) A treasury bill with $80,000,000 of par value was purchased pursuant to a 4.90% reverse repurchase agreement with Goldman Sachs, dated December 26, 2018, due January 2, 2019, with a repurchase price of $80,000,000 and collateralized by a 2.254% U.S. Treasury Bill due January 3, 2019 with a par value of $80,000,000 and fair value of $79,959,928.

 

  (13) Disclosures of end-of-term-payments (“ETP”) are one-time payments stated as a percentage of original principal amount.

 

  (14) On November 27, 2018, the Company entered into a Loan & Security Agreement whereby, upon attainment of certain financial milestones Ouster may borrow up to $10,000,000 under the facility. As of December 31, 2018, Ouster had not met the conditions required to borrow any amount under the loan facility. Upon borrowing under the loan facility the Company will receive a Warrant to purchase up to $400,000, or 353,348 shares of Series A preferred stock of Ouster at an exercise price of $11.3158 per share, with the number of shares calculated based on the amount of borrowings under the facility. In the event Ouster fails to meet required financial milestone for borrowing by March 31, 2019, the facility will terminate.

  

See notes to financial statements.

 

 17 

 

 

RUNWAY GROWTH CREDIT FUND INC.

 

Schedule of Investments – (continued)

 

December 31, 2018

 

The following tables show the fair value of our portfolio of investments (excluding any U.S. Treasury Bills held) by geographic region and industry as of December 31, 2018:

 

   December 31, 2018 
Geographic Region  Investments at
Fair Value
   Percentage of
Net Assets
 
Western United States  $154,566,480    92.36%
Southeastern United States   24,487,720    14.63 
Northeastern United States   22,358,524    13.36 
South Central United States   15,939,397    9.52 
Midwestern United States   6,830,268    4.08 
Canada   66,000    0.04 
Total  $224,248,389    133.99%

 

   December 31, 2018 
Industry  Investments at
Fair Value
   Percentage of
Net Assets
 
Application Software  $97,077,931    58.01%
Healthcare Technology   45,863,112    27.41 
Data Processing & Outsourced Services   34,045,151    20.34 
Technology Hardware, Storage & Peripherals   16,234,215    9.70 
Specialized Consumer Services   15,939,397    9.52 
Semiconductors   14,429,583    8.62 
Education Services   593,000    0.35 
Advertising   66,000    0.04 
Total  $224,248,389    133.99%

 

See notes to financial statements.

 

 18 

 

  

RUNWAY GROWTH CREDIT FUND INC.

 

Notes to Financial Statements

 

Note 1 – Organization

 

Runway Growth Credit Fund Inc. (the “Company”) is a Maryland corporation that was formed on August 31, 2015. The Company is an externally managed, non-diversified, closed-end 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”). In addition, the Company has elected to be treated, and intends to qualify annually, as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).

 

The Company was formed primarily to lend to, and selectively invest in, small, fast-growing companies in the United States. The Company’s investment objective is to maximize its total return to its stockholders primarily through current income on its loan portfolio, and secondarily through capital appreciation on its warrants and other equity positions. The Company’s investment activities are managed by its external investment adviser, Runway Growth Capital LLC (“RGC”). Runway Administrator Services LLC (the “Administrator”) is a wholly owned subsidiary of RGC and provides administrative services necessary for the Company to operate.

 

In October 2015, in connection with the Company’s formation, the Company issued and sold 1,667 shares of common stock to R. David Spreng, the President and Chief Executive Officer of the Company and Chairman of the Company’s Board of Directors, for an aggregate purchase price of $25,000. The sale of shares of common stock was approved by the unanimous consent of the Company’s sole director at the time. In December 2016, the Company completed the initial closing of capital commitments in its first private offering of shares of common stock to investors (the “Initial Private Offering”) in reliance on exemptions from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), and other applicable securities laws. The final closing of the Initial Private Offering occurred on December 1, 2017. As of September 30, 2019, in connection with the Initial Private Offering, the Company had no remaining outstanding capital commitments and had issued 18,241,157 shares of its common stock for a total purchase price of $275,000,000. The Company has issued an additional 2,081,327 shares of its common stock as part of the Company’s dividend reinvestment plan since inception. Refer to Note 6 for further detail.

 

As of September 30, 2019, the Company had completed multiple closings under its second private offering (the “Second Private Offering”). As of September 30, 2019, the Company had accepted capital commitments of $170,573,500. Subsequent to September 30, 2019, the Company has completed additional closings under the Second Private Offering totaling $2,000,000 and had issued 1,666,667 shares of its common stock for a total purchase price of $25,000,000 in connection with the Second Private Offering.

 

Note 2 – Summary of Significant Accounting Policies  

 

Basis of Presentation

 

The interim unaudited financial statements of the Company are prepared on the accrual basis of accounting in conformity with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) and pursuant to the requirements for reporting on Form 10-Q and Regulation S-X under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company is an investment company following the specialized accounting and reporting guidance specified in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 946, Financial Services — Investment Companies.

 

In the opinion of management, all adjustments, all of which were of a normal recurring nature, considered necessary for the fair presentation of financial statements for the interim period have been included. The results of operations for the current interim period are not necessarily indicative of results that ultimately may be achieved for any other interim period or for the year ending December 31, 2019. The interim unaudited financial statements and notes hereto should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s annual report on Form 10-K for the year ended December 31, 2018 filed with the SEC on March 29, 2019.

 

Use of Estimates

 

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

 

 19 

 

 

Cash and cash equivalents

 

Cash represents deposits held at financial institutions, while cash equivalents are highly liquid investments held at financial institutions with an original maturity of three months or less at the date of acquisition. At times, the Company’s cash and cash equivalents exceed federally insured limits, subjecting the Company to risks related to the uninsured balance. Cash and cash equivalents are held at large, established, high credit-quality financial institutions, and management believes that risk of loss associated with any uninsured balance is remote.

 

Subscriptions receivable

 

Subscriptions receivable represents amounts due from investors when capital is called under subscription agreements and not yet received; and, dividend amounts to be paid in stock under the Company’s dividend reinvestment plan. As of September 30, 2019, $649,123 represented shares to be issued under the dividend reinvestment plan relating to the special dividend declared on September 27, 2019 to shareholders of record as of September 30, 2019 and paid on November 12, 2019. As of November 13, 2019, there were no subscriptions receivable outstanding. 

 

Deferred Credit Facility Fees

 

The fees and expenses associated with opening the KeyBank loan facilities or Credit Agreement (as defined below) are being deferred and amortized as part of interest expense using the effective interest method over the term of the Credit Agreement in accordance with ASC 470, Debt. Debt issuance costs associated with the Credit Agreement are classified as a direct reduction of the carrying amount of borrowings with the Credit Agreement, unless there are no outstanding borrowings, in which case the debt issuance costs are presented as an asset.

 

The fees and expenses associated with opening the CIBC USA Credit Facilities (as defined below) are being deferred and amortized as part of interest expense using the effective interest method over the term of the Credit Facilities in accordance with ASC 470, Debt. Debt issuance costs associated with the Credit Agreement are classified as a direct reduction of the carrying amount of borrowings with the Credit Agreement, unless there are no outstanding borrowings, in which case the debt issuance costs are presented as an asset.

 

Reverse Repurchase agreement

 

The Company may enter into reverse repurchase agreements, under the terms of a Master Repurchase Agreement, with selected commercial banks and broker-dealers, under which the Company acquires securities as collateral (debt obligation) subject to an obligation of the counterparty to repurchase and the Company to resell the securities (obligation) at an agreed upon time and price. The Company, through the custodian or a sub-custodian, receives delivery of the underlying securities collateralizing repurchase agreements. The Company requires the custodian to take possession, to have legally segregated in the Federal Reserve Book Entry System, or to have segregated within the custodian’s vault, all securities held as collateral for repurchase agreements. The Company and the counterparties are permitted to sell, re-pledge, or use the collateral associated with the transaction. It is the Company’s policy that the market value of the collateral be at least equal to 100 percent of the repurchase price in the case of a repurchase agreement of one-day duration and 102 percent of the repurchase price in the case of all other repurchase agreements. Upon an event of default under the terms of the Master Repurchase Agreement, both parties have the right to set-off. If the seller defaults or enters an insolvency proceeding, realization of the collateral by the Company may be delayed, limited or wholly denied.

 

Pursuant to a reverse repurchase agreement with Goldman Sachs, which expired on October 4, 2019, the Company purchased a U.S. Treasury Bill, due October 8, 2019. The value of the related collateral that the Company received for this agreement was $59,970,914 at September 30, 2019. Pursuant to a reverse repurchase agreement with Goldman Sachs which expired on January 2, 2019, the Company purchased a U.S. Treasury Bill, due January 3, 2019. The value of the related collateral that the Company received for this agreement was $79,959,928 at December 31, 2018. At September 30, 2019 and December 31, 2018, the repurchase liability is $59,671,060 and $79,560,129, respectively, which is reflected as Reverse Repurchase Agreement on the Statement of Assets and Liabilities.

 

Investment Transactions and Related Investment Income

 

Security transactions, if any, are recorded on a trade-date basis. Realized gains or losses from the repayment or sale of investments are measured using the specific identification method. The amortized cost basis of investments represents the original cost adjusted for the accretion/amortization of discounts and premiums and upfront loan origination fees. The Company reports changes from the prior period in fair value of investments that are measured at fair value as a component of net change in unrealized appreciation (depreciation) on investments in the statement of operations.

 

 20 

 

 

Dividends are recorded on the ex-dividend date. Interest income, if any, adjusted for amortization of market premium and accretion of market discount, is recorded on an accrual basis to the extent that the Company expects to collect such amounts. Original issue discount, principally representing the estimated fair value of detachable equity or warrants obtained in conjunction with the Company’s debt investments, loan origination fees, end of term payments, and market discount or premium are capitalized and accreted or amortized into interest income over the life of the respective security using the effective interest method. Loan origination fees received in connection with the closing of investments are reported as unearned income, which is included as amortized cost of the investment; the unearned income from such fees is accreted into interest income over the contractual life of the loan based on the effective interest method. Upon prepayment of a loan or debt security, any prepayment penalties, unamortized loan origination fees, end-of-term payments, and unamortized market discounts are recorded as interest income.

 

The Company currently holds, and expects to hold in the future, some investments in its portfolio that contain payment-in-kind (“PIK”) interest provisions. PIK interest is computed at the contractual rate specified in each loan agreement and is added to the principal balance of the loan, rather than being paid to the Company in cash, and is recorded as interest income. Thus, the actual collection of PIK interest may be deferred until the time of debt principal repayment. PIK interest, which is a non-cash source of income, is included in the Company’s taxable income and therefore affects the amount the Company is required to distribute to stockholders to maintain its qualification as a RIC for U.S. federal income tax purposes, even though the Company has not yet collected the cash. Generally, when current cash interest and/or principal payments on a loan become past due, or if the Company otherwise does not expect the borrower to be able to service its debt and other obligations, the Company will place the investment on non-accrual status and will generally cease recognizing PIK interest and dividend income on that loan for financial reporting purposes until all principal and interest have been brought current through payment or due to a restructuring such that the interest and dividend income is deemed to be collectible. As of September 30, 2019, and December 31, 2018, the Company has not written off any accrued and uncollected PIK interest and dividends. As of September 30, 2019, the Company had one loan on non-accrual status with total interest of $563,961 that would have been accrued into income. Had the loan not been on non-accrual status, $271,847 would be payable, and $292,113 would be original issue discount. For the three and nine months ended September 30, 2019, approximately 4.6% and 2.7%, respectively, of the Company’s total investment income was attributable to non-cash PIK interest and dividend income. The Company did not have non-cash PIK interest and dividend income for the three and nine months ended September 30, 2018.

 

 21 

 

 

Valuation of Investments

 

The Company measures the value of its investments at fair value in accordance with ASC Topic 820, Fair Value Measurements and Disclosure (“ASC Topic 820”), issued by the FASB. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

 

The audit committee of the Company’s Board of Directors (the “Audit Committee”) is responsible for assisting the Board of Directors in valuing investments that are not publicly traded or for which current market values are not readily available. Investments for which market quotations are readily available are valued using market quotations, which are generally obtained from independent pricing services, broker-dealers or market makers. With respect to portfolio investments for which market quotations are not readily available, the Company’s Board of Directors, with the assistance of the Audit Committee, RGC and its senior investment team and independent valuation agents, is responsible for determining, in good faith, the fair value in accordance with the valuation policy approved by the Board of Directors. If more than one valuation method is used to measure fair value, the results are evaluated and weighted, as appropriate, considering the reasonableness of the range indicated by those results. The Company considers a range of fair values based upon the valuation techniques utilized and selects the value within that range that was most representative of fair value based on current market conditions as well as other factors RGC’s senior investment team considers relevant.

 

 The Company’s Board of Directors makes this fair value determination on a quarterly basis and any other time when a decision regarding the fair value of the portfolio investments is required. A determination of fair value involves subjective judgments and estimates and depends on the facts and circumstances. Due to the inherent uncertainty of determining the fair value of portfolio investments that do not have a readily available market value, the fair value of the investments may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material.

 

ASC Topic 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. ASC Topic 820 also provides guidance regarding a fair value hierarchy, which prioritizes information used to measure fair value and the effect of fair value measurements on earnings and provides for enhanced disclosures determined by the level within the hierarchy of information used in the valuation. In accordance with ASC Topic 820, these inputs are summarized in the three levels listed below:

 

  · Level 1—Valuations are based on quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date.

 

  · Level 2—Valuations are based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly and model-based valuation techniques for which all significant inputs are observable.

 

  · Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models incorporating significant unobservable inputs, such as discounted cash flow models and other similar valuations techniques. The valuation of Level 3 assets and liabilities generally requires significant management judgment due to the inability to observe inputs to valuation. 

 

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of observable input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment.

 

Under ASC Topic 820, the fair value measurement also assumes that the transaction to sell an asset occurs in the principal market for the asset or, in the absence of a principal market, the most advantageous market for the asset, which may be a hypothetical market, and excludes transaction costs. The principal market for any asset is the market with the greatest volume and level of activity for such asset in which the reporting entity would or could sell or transfer the asset. In determining the principal market for an asset or liability under ASC Topic 820, it is assumed that the reporting entity has access to such market as of the measurement date. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent, knowledgeable and willing and able to transact.

 

 22 

 

 

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

  

  · The quarterly valuation process begins with each portfolio company investment being initially valued by RGC’s investment professionals that are responsible for the portfolio investment; 

 

  · Preliminary valuation conclusions are then documented and discussed with RGC’s senior investment team;

 

  · At least once annually, the valuation for each portfolio investment is reviewed by one or more independent valuation firms. Certain investments, however, may not be evaluated by the applicable independent valuation firm if the net asset value and other aspects of such investments in the aggregate do not exceed certain thresholds;

 

  · The Audit Committee then reviews these preliminary valuations from RGC and the applicable independent valuation firm, if any, and makes a recommendation to our Board of Directors regarding such valuations; and

 

  · The Company’s Board of Directors reviews the recommended preliminary valuations and determines the fair value of each investment in the Company’s portfolio, in good faith, based on the input of RGC, the applicable independent valuation firm and the Audit Committee.

 

The Company’s investments are primarily loans made to and equity and warrants of small, fast-growing companies focused in technology, life sciences, health care information and services, business services and other high-growth industries. These investments are considered Level 3 assets under ASC Topic 820 because there is no known or accessible market or market indices for these types of debt instruments and, thus, RGC’s senior investment team must estimate the fair value of these investment securities based on models utilizing unobservable inputs.

 

Investment Valuation Techniques

 

 Debt Investments: To determine the fair value of the Company’s debt investments, the Company compares the cost basis of the debt investment, which includes original issue discount, to the resulting fair value determined using a discounted cash flow model, unless another model is more appropriate based on the circumstances at the measurement date. The discounted cash flow approach entails analyzing the interest rate spreads for recently completed financing transactions which are similar in nature to the Company’s investments, in order to determine a comparable range of effective market interest rates for its investments. The range of interest rate spreads utilized is based on borrowers with similar credit profiles. All remaining expected cash flows of the investment are discounted using this range of interest rates to determine a range of fair values for the debt investment.

 

This valuation process includes, among other things, evaluating the underlying investment performance, the portfolio company’s current financial condition and ability to raise additional capital, as well as macro-economic events that may impact valuations. These events include, but are not limited to, current market yields and interest rate spreads of similar securities as of the measurement date. Significant increases or decreases in these unobservable inputs could result in a significantly higher or lower fair value measurement; however, a significantly higher or lower fair value measurement of any of the Company’s portfolio investments may occur regardless of whether there is a significant increase or decrease in these unobservable inputs.

 

Under certain circumstances, the Company may use an alternative technique to value the debt investments to be acquired by the Company that better reflects the fair value of the investment, such as the price paid or realized in a recently completed transaction or a binding offer received in an arms-length transaction, the use of multiple probability-weighted cash flow models when the expected future cash flows contain elements of variability or estimates of proceeds that would be received in a liquidation scenario.

 

Warrants: Fair value of warrants is primarily determined using a Black Scholes option-pricing model. Privately held warrants and equity-related securities are valued based on an analysis of various factors including, but not limited to, the following:

 

 23 

 

 

  · Underlying enterprise value of the issuer is estimated based on information available, including any information regarding the most recent rounds of issuer funding. Valuation techniques to determine enterprise value include market multiple approaches, income approaches or approaches that utilize recent rounds of financing and the portfolio company’s capital structure to determine enterprise value. Valuation techniques are also utilized to allocate the enterprise fair value of a portfolio company to the specific class of common or preferred stock exercisable in the warrant. Such techniques take into account the rights and preferences of the portfolio company’s securities, expected exit scenarios, and volatility associated with such outcomes to allocate the fair value to the specific class of stock held in the portfolio. Such techniques include Option Pricing Models, or “OPM,” including back-solve techniques, Probability Weighted Expected Return Models, or “PWERM,” and other techniques as determined to be appropriate.

 

  · Volatility, or the amount of uncertainty or risk about the size of the changes in the warrant price, is based on comparable publicly traded companies within indices similar in nature to the underlying company issuing the warrant. Significant increases (decreases) in this unobservable input could result in a significantly lower (higher) fair value, but a significantly higher or lower fair value measurement of any of the Company’s portfolio investments may occur regardless of whether there is a significant increase or decrease in this unobservable input.

 

  · The risk-free interest rates are derived from the U.S. Treasury yield curve. The risk-free interest rates are calculated based on a weighted average of the risk-free interest rates that correspond closest to the expected remaining life of the warrant. Significant increases (decreases) in this unobservable input could result in a significantly higher (lower) fair value, but a significantly higher or lower fair value measurement of any of the Company’s portfolio investments may occur regardless of whether there is a significant increase or decrease in this unobservable input.

 

  · Other adjustments, including a marketability discount on private company warrants, are estimated based on judgment about the general industry environment. Significant increases (decreases) in this unobservable input could result in a significantly lower (higher) fair value, but a significantly higher or lower fair value measurement of any of the Company’s portfolio investments may occur regardless of whether there is a significant increase or decrease in this unobservable input.

 

  · Historical portfolio experience on cancellations and exercises of warrants are utilized as the basis for determining the estimated life of the warrants in each financial reporting period. Warrants may be exercised in the event of acquisitions, mergers or initial public offerings, and cancelled due to events such as bankruptcies, restructuring activities or additional financings. These events cause the expected remaining life assumption to be shorter than the contractual term of the warrants. Significant increases (decreases) in this unobservable input could result in a significantly higher (lower) fair value, but a significantly higher or lower fair value measurement of any of the Company’s portfolio investments may occur regardless of whether there is a significant increase or decrease in this unobservable input.

 

Under certain circumstances, the Company may use an alternative technique to value warrants that better reflects the warrants’ fair values, such as an expected settlement of a warrant in the near term, a model that incorporates a put feature associated with the warrant, or the price paid or realized in a recently completed transaction or binding offer received in an arms-length transaction. The fair value may be determined based on the expected proceeds to be received from such settlement or based on the net present value of the expected proceeds from the put option.

 

These valuation methodologies involve a significant degree of judgment. There is no single standard for determining the fair value of investments that do not have an active public market. Valuations of privately held investments are inherently uncertain, as they are based on estimates, and their values may fluctuate over time. The determination of fair value may differ materially from the values that would have been used if an active market for these investments existed. In some cases, the fair value of such investments is best expressed as a range of values derived utilizing different methodologies from which a fair value may then be determined.

 

 24 

 

 

Equity Investments. The fair value of an equity investment in a privately held company is initially the face value of the amount invested. The Company adjusts the fair value of equity investments in private companies upon the completion of a new third-party round of equity financing subsequent to the Company’s investment. The Company may make adjustments to fair value, absent a new equity financing event, based upon positive or negative changes in a portfolio company’s financial or operational performance. The Company may also reference comparable transactions and/or secondary market transactions in connection with its determination of fair value. The fair value of an equity investment in a publicly traded company is based upon the closing public share price on the date of measurement. These assets are recorded at fair value on a recurring basis. These valuation methodologies involve a significant degree of judgment. There is no single standard for determining the fair value of investments that do not have an active public market. Valuations of privately held investments are inherently uncertain, as they are based on estimates, and their values may fluctuate over time. The determination of fair value may differ materially from the values that would have been used if an active market for these investments existed. In some cases, the fair value of such investments is best expressed as a range of values derived utilizing different methodologies from which a fair value may then be determined.

 

Fair Value of Financial Instruments

 

The carrying amounts of the Company’s financial instruments, including cash and accrued liabilities, approximate fair value due to their short-term nature.

 

Investment Classification

 

The Company is a non-diversified company within the meaning of the 1940 Act. The Company classifies its investments by level of control. As defined in the 1940 Act, control investments are those where there is the ability or power to exercise a controlling influence over the management or policies of a company. Control is generally deemed to exist when a company or individual possesses, or has the right to acquire within 60 days or less, beneficial ownership of more than 25.0% of the voting securities of a company. Affiliated investments and affiliated companies are defined by a lesser degree of influence and are deemed to exist through the possession outright, or via the right to acquire within 60 days or less, beneficial ownership of 5.0% or more of the outstanding voting securities of a company.

 

Investments are recognized when the Company assumes an obligation to acquire a financial instrument and assumes the risks for gains or losses related to that instrument. Investments are derecognized when the Company assumes an obligation to sell a financial instrument and foregoes the risks for gains or losses related to that instrument. Specifically, the Company records all security transactions on a trade date basis. Investments in other, non-security financial instruments, such as limited partnerships or private companies, are recorded on the basis of subscription date or redemption date, as applicable. Amounts for investments recognized or derecognized but not yet settled will be reported as receivables for investments sold and payables for investments acquired, respectively, in the Statements of Assets and Liabilities.

 

Income Taxes

 

The Company elected to be treated as a RIC under Subchapter M of the Code starting with its taxable year ended December 31, 2016, has qualified, currently qualifies, and intends to qualify annually for the tax treatment applicable to RICs. Generally, a RIC is not subject to U.S. federal income taxes on distributed income and gains so long as it meets certain source-of-income and asset diversification requirements and it distributes at least 90% of its net ordinary income and net short-term capital gains in excess of its net long-term capital losses, if any, to its stockholders. So long as the Company obtains and maintains its status as a RIC, it generally will not pay corporate-level U.S. federal income taxes on any ordinary income or capital gains that it distributes at least annually to its stockholders as dividends. Rather, any U.S. federal income tax liability related to income earned by the Company represents obligations of the Company’s investors and will not be reflected in the financial statements of the Company. The Company intends to make sufficient distributions to maintain its RIC tax treatment each year and it does not anticipate paying any material U.S. federal income taxes in the future.

 

 25 

 

 

If the Company does not distribute (or is not deemed to have distributed) each calendar year the sum of (1) 98% of its net ordinary income for each calendar year, (2) 98.2% of its capital gain net income for the one-year period ending October 31 in that calendar year and (3) any income recognized, but not distributed, in preceding years (the “Minimum Distribution Amount”), the Company will generally be required to pay a U.S. federal excise tax equal to 4% of the amount by which the Minimum Distribution Amount exceeds the distributions for the year. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions from such taxable income, the Company accrues excise taxes, if any, on estimated excess taxable income as taxable income is earned using an annual effective excise tax rate. The annual effective U.S. federal excise tax rate is determined by dividing the estimated annual excise tax by the estimated annual taxable income.

 

If the Company does not qualify to be treated as a RIC for any taxable year, the Company will be taxed as a regular corporation (a “C corporation”) under subchapter C of the Code for such taxable year. If the Company has previously qualified to be treated as a RIC but is subsequently unable to qualify for treatment as a RIC, and certain amelioration provisions are not applicable, the Company would be subject to U.S. federal income tax on all of its taxable income (including its net capital gains) at regular corporate rates. The Company would not be able to deduct distributions to stockholders, nor would it be required to make distributions. In order to requalify as a RIC, in addition to the other requirements discussed above, the Company would be required to distribute all of its previously undistributed earnings attributable to the period it failed to qualify as a RIC by the end of the first year that it intends to requalify as a RIC. If the Company fails to requalify as a RIC for a period greater than two taxable years, it may be subject to regular corporate-level U.S. federal income tax on any net built-in gains with respect to certain of its assets (i.e., the excess of the aggregate gains, including items of income, over aggregate losses that would have been realized with respect to such assets if the Company had been liquidated) that it elects to recognize on requalification or when recognized over the next five years. 

 

Per Share Information

 

Basic and diluted earnings per common share is calculated using the weighted-average number of common shares outstanding for the period presented. For the three and nine months ended September 30, 2019 and 2018, basic and diluted earnings per share of common stock were the same because there were no potentially dilutive securities outstanding. Per share data is based on the weighted-average shares outstanding.

 

Distributions

 

The Company generally intends to distribute, out of assets legally available for distribution, substantially all of its available earnings, on a quarterly basis, subject to the discretion of the Board of Directors. For the three and nine months ended September 30, 2019, the Company declared dividends in the amount of $9,722,744 and $31,855,046, respectively, of which $1,987,041 and $6,469,908, respectively, was cash and the remainder shares of common stock to stockholders pursuant to the Company’s dividend reinvestment plan. Of these distributions for the three and nine months ended September 30, 2019, $8,911,541 and $31,043,843 was paid as of September 30, 2019, respectively, of which $1,824,961 and $6,307,828, respectively, was cash distributed and the remainder distributed in shares to stockholders pursuant to the Company’s dividend reinvestment plan. The remainder of dividends declared during the three months ended September 30, 2019 was paid on November 12, 2019 in the amount of $162,080 in cash and $649,123 in common stock. For the three months ended September 30, 2018, the Company declared and paid dividends in the amount of $2,184,724 of which $430,480 was distributed in cash and the remainder distributed in shares to stockholders pursuant to the Company’s dividend reinvestment plan. For the nine months ended September 30, 2018, the Company declared and paid dividends in the amount of $3,484,974 of which $685,160 was distributed in cash and the remainder distributed in shares to stockholders pursuant to the Company’s dividend reinvestment plan.

 

Organization and Offering Costs

 

Organization costs include, among other things, the cost of organizing as a Maryland corporation, including the cost of legal services and other fees pertaining to our organization, all of which are expensed as incurred. Offering costs include, among other things, legal fees and other costs pertaining to the preparation of the Company’s private placement memorandum and other offering documents, including travel-related expenses related to the Initial Private Offering. Pursuant to the investment advisory agreement between the Company and RGC, as subsequently amended and restated (the “Amended Advisory Agreement”), the Company and RGC agreed that organization and offering costs incurred in connection with the Initial Private Offering would be borne by the Company up to a maximum amount of $1,000,000, provided that the amount of such costs in excess of $1,000,000 would be paid by RGC. As of December 31, 2016, the Company had already incurred the maximum amount of $1,000,000 in organization and offering costs incurred in connection with the Initial Private Offering. As a result, for year ended December 31, 2018, the Company did not incur any organization or offering expenses.

 

 26 

 

 

Offering costs related to new or follow on offerings will be accumulated and charged to additional paid in capital at the time of closing. These offering costs are subject to a cap of $600,000, excluding placement agent fees which have no cap, of which the Company will bear the cost. As of September 30, 2019 and December 31, 2018, respectively, the Company had accumulated and recorded $409,735 and $102,865 of deferred offering costs. As of September 30, 2019, $98,602 in placement agent fees had been incurred and included within deferred offering costs. As of December 31, 2018, no placement agent fees had been incurred. Under the terms of the Second Private Offering, offering costs in excess of $600,000, excluding placement agent fees, will be reimbursed by RGC.

 

Recent Accounting Pronouncements

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which changes the fair value measurement disclosure requirements of ASC 820. The key provisions include new, eliminated and modified disclosure requirements. The new guidance is effective for fiscal years beginning after December 15, 2019, including interim periods therein. Early application is permitted. The Company is currently evaluating the impact the adoption of this new accounting standard will have on its financial statements, however the impact of the adoption is not expected to be material.

 

In March 2019, the SEC issued Final Rule Release No. 33-10618, FAST Act Modernization and Simplification of Regulation S-K, which amends certain SEC disclosure requirements. The amendments are intended to simplify certain disclosure requirements, improve readability and navigability of disclosure documents, and discourage repetition and disclosure of immaterial information. The amendments are effective for all filings submitted on or after May 2, 2019. The Company adopted the requisite amendments effective May 9, 2019. As it pertains to the Company for this Quarterly Report on Form 10-Q, there were no significant changes to the Company’s financial position or disclosures. The Company is still evaluating the impact this amendment will have on its future periodic filings.

 

Note 3 – Commitments and Contingencies

 

In the normal course of business, the Company may enter into investment agreements under which it commits to make an investment in a portfolio company at some future date or over a specified period of time.

 

At September 30, 2019, the Company had $35,875,000 in unfunded loan commitments to provide debt financing to its portfolio companies. The balance of unfunded commitments to extend financing as of September 30, 2019 was as follows:

 

Portfolio Company  Investment Type  September 30, 2019 
Aginity, Inc.  Extension Loan  $375,000 
Aria Systems, Inc.  Senior Secured Term Loan   2,500,000 
Brilliant Earth, LLC  Senior Secured Term Loan   5,000,000 
CloudPassage, Inc.  Senior Secured Term Loan   2,500,000 
Dejero Labs, Inc.  Senior Secured Term Loan   4,000,000 
Dtex Systems, Inc.  Senior Secured Term Loan   7,000,000 
Echo Holdings, Inc.  Senior Secured Term Loan   500,000 
eSilicon Corporation  Revolving Line   1,000,000 
INRIX Inc.  ROSE Loan   8,000,000 
Massdrop Inc.  Senior Secured Term Loan   5,000,000 
Total unused commitments to extend financing     $35,875,000 

 

At December 31, 2018, the Company had $41,250,000 in unfunded loan commitments.

 

The Company’s management believes that its available cash balances, availability under the Credit Agreement and/or ability to drawdown capital from investors provides sufficient funds to cover its unfunded commitments as of September 30, 2019. The Company has evaluated the expected net future cash flows related to unfunded commitments and determined the fair value to be zero as of September 30, 2019 and December 31, 2018.

 

The Company is currently not subject to any material legal proceedings, nor, to its knowledge, is any material proceeding threatened against the Company. From time to time, the Company may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of its rights under contracts with its portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, the Company does not expect that these proceedings will have a material effect upon its business, financial condition or results of operations.

 

 27 

 

 

Note 4 – Concentration of Credit Risk

 

In the normal course of business, the Company maintains its cash balances in financial institutions, which at times may exceed federally insured limits. The Company is subject to credit risk to the extent that any financial institution with which it conducts business is unable to fulfill contractual obligations on its behalf. Management monitors the financial condition of those financial institutions and does not currently anticipate any losses from these counterparties.

 

Note 5 – Net Increase in Net Assets Resulting from Operations per Common Share

 

The following information sets forth the computation of basic income/losses per common share for the three and nine months ended September 30, 2019 and 2018:

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2019   2018   2019   2018 
Net increase in net assets resulting from operations  $4,721,354   $3,598,582   $19,171,066   $7,191,100 
Per Share Data (1):                    
Weighted-average shares outstanding for period                    
Basic   19,990,416    8,865,358    17,520,157    8,742,743 
Diluted   19,990,416    8,865,358    17,520,157    8,742,743 
Basic and diluted income per common share                    
Basic  $0.24   $0.41   $1.09   $0.82 
Diluted  $0.24   $0.41   $1.09   $0.82 

 

  (1) Per share data is based on average weighted shares outstanding.

 

Note 6 – Net Assets

 

The Company has the authority to issue 100,000,000 shares of common stock, $0.01 par value per share. The common shares issued, the price per share and the proceeds raised, since inception, are detailed in the following table:

 

Issuance Date  Shares Issued   Price Per Share   Gross Proceeds 
October 8, 2015   1,667   $15.00   $25,000 
December 22, 2016   333,333    15.00    5,000,000 
April 19, 2017   1,000,000    15.00    15,000,000 
June 26, 2017   1,666,667    15.00    25,000,000 
September 12, 2017   2,666,667    15.00    40,000,000 
December 22, 2017   3,000,000    15.00    45,000,000 
May 31, 2018 (1)   70,563    14.82    1,045,570 
August 31, 2018 (1)   117,582    14.92    1,754,244 
September 27, 2018   1,997,337    15.02    30,000,000 
November 15, 2018(1)   202,779    15.07    3,055,498 
January 14, 2019   4,344,964    15.19    66,000,000 
March 26, 2019 (1)   326,431    15.14    4,942,168 
May 21, 2019 (1)   374,783    15.13    5,670,467 
May 24, 2019   3,232,189    15.16    49,000,000 
July 16, 2019 (1)   465,090    15.13    7,036,800 
August 26, 2019 (1)   480,121    14.76    7,086,580 
November 12, 2019 (1)(2)   43,979    14.76    649,123 
Total   20,324,152        $306,265,450 

 

  (1) Shares were issued as part of the dividend reinvestment plan.
  (2) Dividend reinvestment plan shares pending issue as of September 30, 2019.

 

At September 30, 2019 and December 31, 2018, the Company had total remaining commitments of $0 and $275,000,000 under the Company’s Initial Private Offering, respectively. As of September 30, 2019, all capital commitments under the Initial Private Offering had been drawn. As of December 31, 2018, $115,000,000 was undrawn. Between June 14, 2019 and September 30, 2019, the Company accepted $170,573,500 in capital commitments under its Second Private Offering. No capital commitments under the Second Private Offering had been drawn as of September 30, 2019. On October 1, 2019, the Company called $25,000,000 of capital under the Second Private Offering.

 

 28 

 

  

Capital commitments may be drawn down by the Company on a pro rata basis, as needed, upon not less than ten (10) days’ prior written notice for the purposes of funding the Company’s investments (including follow-on investments), paying the Company’s expenses, including fees under the Amended Advisory Agreement, by and between the Company and RGC, and/or maintaining a reserve account for the payment of future expenses or liabilities.

 

Note 7 – Related Party Agreements and Transactions

 

Amended and Restated Advisory Agreement

 

On November 29, 2016, the Company’s Board of Directors approved an investment advisory agreement between RGC and the Company, under which RGC, subject to the overall supervision of the Board of Directors, manages the day-to-day operations of and provides investment advisory services to the Company. On August 3, 2017, the Board of Directors approved the Amended Advisory Agreement and recommended that the Company’s stockholders approve the Amended Advisory Agreement. The Amended Advisory Agreement became effective on September 12, 2017 after approval by the stockholders at a special meeting of stockholders of the Company. Under the terms of the Amended Advisory Agreement, RGC:

 

  · determines the composition of the Company’s portfolio, the nature and timing of the changes to the portfolio and the manner of implementing such changes;

 

  · identifies, evaluates and negotiates the structure of the investments the Company makes;

 

  · executes, closes and monitors the investments the Company makes;

 

  · determines the securities and other assets that the Company will purchase, retain or sell;

 

  · performs due diligence on prospective investments; and

 

  · provides the Company with other such investment advisory, research and related services as the Company may, from time to time, reasonably require for the investment of its funds.

 

Pursuant to the Amended Advisory Agreement, the Company pays RGC a fee for its investment advisory and management services consisting of two components – a base management fee and an incentive fee. The cost of both the base management fee and incentive fee are ultimately borne by the Company’s stockholders.

 

Base Management Fee

 

The base management fee is payable on the first day of each calendar quarter, is subject to an annual cap based on RGC’s actual operating expenses and is calculated based on the Capital Commitments (as defined below) and assets purchased with borrowed funds or other forms of leverage (collectively, the “Pre-Spin-Off Gross Assets”) during the preceding calendar quarter. For purposes of the Amended Advisory Agreement, “Capital Commitments” is defined as the aggregate amount of capital committed to the Company by investors as of the end of the most recently completed calendar quarter. On September 12, 2017, without changing the base management fee percentage, the Advisory Agreement was amended to provide clarification as to the calculation of the base management fee. Prior to amendment, the base management fee was collected on the first day of each quarter based on an estimate of actual operating expenses, not to exceed 1.75% per annum, for the following quarter with an implied, though not defined “true-up” mechanism effected once all actual costs were known. The Amended Advisory Agreement defines the process and timing of the true-up and base management fee. The base management fee is now collected at the maximum annualized rate of 1.75% per annum with a comparison of actual expenses for the immediately preceding calendar year to occur on or before March 31 of the subsequent calendar year, with any excess management fee collected when compared to actual operating expenses credited against the base management fee payable for subsequent quarters.

  

 29 

 

 

Until the earlier of (1) the consummation of an initial public offering (“IPO”) of the Public Fund (defined below) in connection with a Spin-Off transaction (defined below) and (2) the earliest date at which (a) all Capital Commitments have been called for investments and/or expenses and (b) the Company holds no more than 10.0% of its total assets in cash, the base management fee will be an amount equal to 0.4375% (1.75% annualized) of the Pre-Spin-Off Gross Assets at the end of the most recently completed calendar quarter, provided, however, that the base management fee payable in a calendar year will not exceed the actual operating expenses incurred by RGC during such calendar year (the “Management Fee Cap”). No later than March 31 of each calendar year, RGC will provide the Company a reconciliation of the actual operating expenses incurred by RGC for the prior calendar year and the base management fee paid to RGC for such prior calendar year. To the extent the base management fee paid to RGC for such prior calendar year exceeds the Management Fee Cap (the “Excess Fee”) for such prior calendar year, the base management fee payable to RGC for the second calendar quarter and each subsequent quarter immediately following such calendar year will be reduced by the Excess Fee until such time as the Excess Fee for the prior calendar year has been reduced to zero. For the avoidance of doubt, actual operating expenses of RGC for a particular year will not include any reduction in base management fees as a result of Excess Fees paid by the Company.

 

For purposes of the Amended Advisory Agreement, a “Spin-Off transaction” includes a transaction whereby the Company offers its stockholders the option to elect to either (i) retain their ownership of shares of the Company’s common stock; (ii) exchange their shares of the Company’s common stock for shares of common stock in a newly formed entity (the “Public Fund”) that will elect to be regulated as a BDC under the 1940 Act and treated as a RIC under Subchapter M of the Code, and will use its commercially reasonable best efforts to complete an IPO of shares of its common stock not later than three years after the Company’s final closing of the Initial Private Offering, which occurred on December 1, 2017; or (iii) exchange their shares of the Company’s common stock for interests of one or more newly formed entities (each, a “Liquidating Fund”) that will each be organized as a limited liability company, and which will, among other things, seek to complete an orderly wind down and/or liquidation of any such Liquidating Fund.

  

Following the earlier of (1) the consummation of an IPO of the Public Fund in connection with a Spin-Off transaction and (2) the earliest date at which (a) all Capital Commitments have been called for investments and/or expenses and (b) the Company holds no more than 10.0% of its total assets in cash, the base management fee will be an amount equal to 0.4375% (1.75% annualized) of the Company’s average daily Gross Assets (defined below) during the most recently completed calendar quarter for so long as the aggregate amount of Gross Assets of the Company as of the end of the most recently completed calendar quarter is less than $500,000,000. For purposes of the Amended Advisory Agreement, “Gross Assets” is defined as the Company’s gross assets, including assets purchased with borrowed funds or other forms of leverage, as well as any paid-in-kind interest, as of the end of the most recently completed fiscal quarter. If the aggregate amount of the Company’s Gross Assets as of the end of the most recently completed calendar quarter is equal to or greater than $500,000,000, but less than $1,000,000,000, the base management fee will be an amount equal to 0.40% (1.60% annualized) of the Company’s average daily Gross Assets during the most recently completed calendar quarter. If the aggregate amount of the Company’s Gross Assets as of the end of the most recently completed calendar quarter is equal to or greater than $1,000,000,000, the base management fee will be an amount equal to 0.375% (1.50% annualized) of the Company’s average daily Gross Assets during the most recently completed calendar quarter.

 

As of June 13, 2019, the Company had called all Capital Commitments and held less than 10% of its total assets in cash. As such, pursuant to the Amended Advisory Agreement, the base management fee payable to the Company is now calculated as an amount equal to 0.4375% (1.75% annualized) of the Company’s average daily Gross Assets during the most recently completed calendar quarter for so long as the aggregate amount of Gross Assets of the Company as of the end of the most recently completed calendar quarter is less than $500,000,000.

 

RGC earned base management fees of $1,238,835 and $1,203,125 respectively, for the three months ended September 30, 2019 and 2018 respectively; and earned base management fees of $3,645,085 and $3,609,375 respectively, for the nine months ended September 30, 2019 and 2018 respectively.

  

Incentive Fee

 

The incentive fee, which provides RGC with a share of the income that RGC generates for the Company, consists of an investment-income component and a capital-gains component, which are largely independent of each other, with the result that one component may be payable even if the other is not.

 

 30 

 

 

Under the investment-income component (the “Income Incentive Fee”), the Company will pay RGC each quarter an incentive fee with respect to the Company’s Pre-Incentive Fee net investment income. The Income Incentive Fee is calculated and payable quarterly in arrears based on the Pre-Incentive Fee net investment income for the immediately preceding fiscal quarter. Payments based on Pre-Incentive Fee net investment income will be based on the Pre-Incentive Fee net investment income earned for the quarter. For this purpose, “Pre-Incentive Fee net investment income” means interest income, dividend income and any other income (including any other fees, such as commitment, origination, structuring, diligence, managerial and consulting fees or other fees that the Company receives from portfolio companies) that the Company accrues during the fiscal quarter, minus the Company’s operating expenses for the quarter (including the base management fee, expenses payable under the administration agreement with the Administrator (the “Administration Agreement”), and any dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee); provided however, that Pre-Incentive Fee net investment income will be reduced by multiplying the Pre-Incentive Fee net investment income earned for the quarter by a fraction, the numerator of which is the Company’s average daily Gross Assets during the immediately preceding fiscal quarter minus average daily borrowings during the immediately preceding fiscal quarter, and the denominator of which is the Company’s average daily Gross Assets during the immediately preceding fiscal quarter. 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 pay in kind interest and zero coupon securities), accrued income the Company has not yet received in cash; provided, however, that the portion of the Income Incentive Fee attributable to deferred interest features will be paid, only if and to the extent received in cash, and any accrual thereof will be reversed if and to the extent such interest is reversed in connection with any write off or similar treatment of the investment giving rise to any deferred interest accrual, applied in each case in the order such interest was accrued. Such subsequent payments in respect of previously accrued income will not reduce the amounts payable for any quarter pursuant to the calculation of the Income Incentive Fee described above. Pre-Incentive Fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation.

 

Pre-Incentive Fee net investment income, expressed as a rate of return on the value of the Company’s net assets (defined as total assets less liabilities) at the end of the immediately preceding fiscal quarter, will be compared to a “hurdle rate” of 2.0% per quarter (8.0% annualized). The Company will pay RGC an Income Incentive Fee with respect to the Company’s Pre-Incentive Fee net investment income in each calendar quarter as follows: (1) no Income Incentive Fee in any calendar quarter in which the Company’s Pre-Incentive Fee net investment income does not exceed the hurdle rate of 2.0%; (2) 80% of the Company’s Pre-Incentive Fee net investment income with respect to that portion of such Pre-Incentive Fee net investment income, if any, that exceeds the hurdle rate but is less than 2.667% in any calendar quarter (10.668% annualized) (the portion of the Company’s Pre-Incentive Fee net investment income that exceeds the hurdle but is less than 2.667% is referred to as the “catch-up”; the “catch-up” is meant to provide RGC with 20.0% of the Company’s Pre-Incentive Fee net investment income as if a hurdle did not apply if the Company’s Pre-Incentive Fee net investment income exceeds 2.667% in any calendar quarter (10.668% annualized)); and (3) 20.0% of the amount of the Company’s Pre-Incentive Fee net investment income, if any, that exceeds 2.667% in any calendar quarter (10.668% annualized) payable to RGC (once the hurdle is reached and the catch-up is achieved, 20.0% of all Pre-Incentive Fee net investment income thereafter is allocated to RGC).

 

Until the consummation of an IPO of the Public Fund in connection with a Spin-Off transaction, in the event that (a) the sum of the Company’s cumulative net realized losses since the date of the Company’s election to be regulated as a BDC exceeds 2.0% of the total non-control/non-affiliate investments made by the Company since the date of the Company’s election to be regulated as a BDC through the end of the quarter and (b) the Pre-Incentive Fee net investment income adjusted to include any realized capital gains and losses (“Adjusted Pre-Incentive Fee net investment income”), expressed as an annualized rate of return on the value of the Company’s average daily net assets (defined as total assets less liabilities), since the Company’s election to be regulated as a BDC through the end of the quarter is less than 10.0%, no Income Incentive Fee will be payable for such quarter until the first subsequent quarter in which either (x) the sum of the Company’s cumulative net realized losses since the date of the Company’s election to be regulated as a BDC is equal to or less than 2.0% of the total non-control/non-affiliate investments made by the Company since the date of the Company’s election to be regulated as a BDC through the end of such subsequent quarter or (y) the Adjusted Pre-Incentive Fee net investment income, expressed as an annualized rate of return on the value of the Company’s average daily net assets (defined as total assets less liabilities), since the Company’s election to be regulated as a BDC through the of the end of the quarter equals or exceeds 10.0%; provided, however, that in no event will any Income Incentive Fee be payable for any prior quarter after the three-year anniversary of the end of such quarter.

 

 31 

 

 

After the consummation of an IPO of the Public Fund in connection with a Spin-Off transaction, in the event that (a) the sum of the Company’s cumulative net realized losses for the previous four fiscal quarters or, if fewer than four fiscal quarters have passed since such IPO, that number of fiscal quarters since such IPO (the “Look-Back Period”), exceeds 2.0% of the total non-control/non-affiliate investments (i) made by the Company during the Look-Back Period or (ii) transferred to the Public Fund in connection with a Spin-Off transaction during the Look-Back Period and (b) the Adjusted Pre-Incentive Fee net investment income, expressed as an annualized rate of return on the value of the Company’s average daily net assets (defined as total assets less liabilities), during the Look-Back Period is less than 10.0% no Income Incentive Fee will be payable for such quarter until the first subsequent quarter in which (x) the sum of the Company’s cumulative net realized losses for the Look-Back Period is equal to or less than 2.0% of the total non-control/non-affiliate investments (i) made by the Company during the Look-Back Period or (ii) transferred to the Public Fund in connection with a Spin-Off transaction during the Look-Back Period or (y) the Adjusted Pre-Incentive Fee net investment income, expressed as an annualized rate of return on the value of the Company’s average daily net assets (defined as total assets less liabilities), during the Look-Back Period equals or exceeds 10.0%; provided, however, that in no event will any Income Incentive Fee be paid for any prior quarter after the three-year anniversary of the end of such quarter.

 

Under the capital-gains component of the incentive fee (the “Capital Gains Fee”), the Company will pay RGC, as of the end of each calendar year, 20.0% of the Company’s aggregate cumulative realized capital gains, if any, from the date of the Company’s election to be regulated as a BDC through the end of that calendar year, computed net of the Company’s aggregate cumulative realized capital losses and aggregate cumulative unrealized capital depreciation through the end of such year, less the aggregate amount of any previously paid Capital Gains Fee; provided, however, that the Company will not pay the Capital Gains Fee to RGC for any calendar year in which the sum of the Company’s (1) Pre-Incentive Fee net investment income and (2) realized gains less realized losses and unrealized capital depreciation from the date of the Company’s election to be regulated as a BDC through the end of such calendar year, expressed as a rate of return on the value of the Company’s net assets (defined as total assets less liabilities) at the end of such calendar year is less than 8.0% until the first subsequent calendar quarter in which the sum of the Company’s (1) Pre-Incentive Fee net investment income and (2) realized gains less realized losses and unrealized capital depreciation from the date of the Company’s election to be regulated as a BDC through, and including, the end of such subsequent calendar quarter, expressed as a rate of return on the value of the Company’s net assets (defined as total assets less liabilities) at the end of such calendar quarter is equal to or exceeds 8.0%; provided, further, that in no event will any Capital Gains Fee be paid for any prior year after the three-year anniversary of the end of such year. For the foregoing purpose, the Company’s “aggregate cumulative realized capital gains” will not include any unrealized appreciation. If such amount is negative, then no Capital Gains Fee will be payable for such year.

 

RGC earned incentive fees of $1,669,053 and $6,285,048 for the three and nine months ended September 30, 2019. RGC earned incentive fees of $479,538 for the three and nine months ended September 30, 2018. $1,120,903 and $5,126,159, respectively, of the incentive fees for the three and nine months ended September 30, 2019 were earned, payable in cash, and $548,150 and $1,158,889, respectively of the incentive fees for the three and nine months ended September 30, 2019 were accrued and generated from deferred interest (i.e., PIK interest and certain discount accretion) and are not payable pending receipt of cash by the Company. $339,758 of the incentive fees for the three and nine months ended September 30, 2018 were earned, payable in cash, and $139,780 of the incentive fees for the three and nine months ended September 30, 2018 were accrued and generated from deferred interest (i.e., PIK interest and certain discount accretion) and are not payable pending receipt of cash by the Company. Both currently payable in cash and deferred incentive fees are included in accrued incentive fees in the statement of assets and liabilities as of September 30, 2019.

 

The capital gains incentive fee consists of fees related to realized gains, realized capital losses and unrealized capital depreciation. With respect to the incentive fee expense accrual related to the capital gains incentive fee, U.S. GAAP requires that the capital gains invective fee accrual consider the cumulative aggregate unrealized appreciation in the calculation, as a capital gains incentive fee would be payable if such unrealized appreciation were realized even though such unrealized appreciation is not permitted to be considered in calculating the fee actually payable under the Amended Advisory Agreement. As of each of September 30, 2019 and December 31, 2018, there was no capital gains incentive fee accrued, earned or payable to RGC under the Amended Advisory Agreement.

 

 32 

 

 

Spin-Off Incentive Fee

 

The Income Incentive Fee will be payable in connection with a Spin-Off transaction. The Income Incentive Fee will be calculated as of the date of the completion of each Spin-Off transaction and will equal the amount of Income Incentive Fee that would be payable to RGC if (1) all of the Company’s investments were liquidated for their current value and any unamortized deferred portfolio investment-related fees would be deemed accelerated, (2) the proceeds from such liquidation were used to pay all of the Company’s outstanding liabilities, and (3) the remainder were distributed to the Company’s stockholders and paid as incentive fee in accordance with the Income Incentive Fee described in clauses (1) and (2) above for determining the amount of the Income Incentive Fee; provided, however, that in no event will the Income Incentive Fee paid in connection with the completion of a Spin-Off transaction (x) include the portion of the Income Incentive Fee attributable to deferred interest features of a particular investment that is not transferred pursuant to a Spin-Off transaction until such time as the deferred interest is received in cash, or (y) exceed 20.0% of the Company’s Pre-Incentive Fee net investment income accrued by the Company for the fiscal quarter as of the date of the completion of the Spin-Off transaction. The Company will make the payment of the Income Incentive Fee paid in connection with the completion of a Spin-Off transaction in cash on or immediately following the date of the completion of a Spin-Off transaction. After a Spin-Off transaction, all calculations relating to the incentive fee payable will be made beginning on the day immediately following the completion of the Spin-Off transaction without taking into account the exchanged shares of the Company’s common stock (or contributions, distributions or proceeds relating thereto).

  

The Capital Gains Fee will be payable in respect of the exchanged shares of the Company’s common stock in connection with a Spin-Off transaction and will be calculated as of the date of the completion of a Spin-Off transaction as if such date were a calendar year-end for purposes of calculating and paying the Capital Gains Fee.

 

No Income Incentive Fee or Capital Gains Fee will be payable in connection with a Spin-Off transaction unless, on the date of the completion of a Spin-Off transaction, the sum of the Company’s (i) Pre-Incentive Fee net investment income and (ii) realized capital gains less realized capital losses and unrealized capital depreciation from the date of the Company’s election to be regulated as a BDC through, and including, the date of the completion of such Spin-Off transaction, is greater than 8.0% of the cumulative net investments made by the Company since the Company’s election to be regulated as a BDC.

 

Administration Agreement

 

The Company reimburses the Administrator for the allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations under the Administration Agreement, including furnishing the Company with office facilities, equipment and clerical, bookkeeping and recordkeeping services at such facilities, as well as providing other administrative services. In addition, the Company reimburses the Administrator for the fees and expenses associated with performing compliance functions, and the Company’s allocable portion of the compensation of certain of its officers, including the Company’s Chief Financial Officer, Chief Compliance Officer and any administrative support staff. Pursuant to the terms of the Administration Agreement, the amounts payable to the Administrator by the Company in any fiscal year will not exceed the greater of (i) 0.75% of the aggregate capital commitments as of the end of the most recently completed fiscal year and (ii) $1.0 million.

 

The Company reimbursed the Administrator $281,849 and $846,296 for the three and nine months ended September 30, 2019, respectively, and $171,520 and $447,581 for the three and nine months ended September 30, 2018, respectively. As of September 30, 2019, the Company had accrued a payable to the Administrator of $111,685. Of the total amount reimbursed and accrued during the three and nine months ended September 30, 2019, $207,345 and $567,121, respectively, was related to overhead allocation expense. Of the total amount reimbursed and accrued during the three and nine months ended September 30, 2018, $60,388 and $178,502, respectively, was related to overhead allocation expense. The Company reimbursed the Administrator $614,405 during the year ended December 31, 2018 and accrued a payable of $116,697 due to the Administrator as of December 31, 2018. Administration fees were $97,995 and $382,860 for the three and nine months ended September 30, 2019, respectively. Administration fees were $49,054 and $147,357 for the three and nine months ended September 30, 2018, respectively.

 

 33 

 

 

License Agreement

 

The Company has entered into a license agreement with RGC (the “License Agreement”) pursuant to which RGC has granted the Company a personal, non-exclusive, royalty-free right and license to use the name “Runway Growth Credit Fund”. Under the License Agreement, the Company has the right to use the “Runway Growth Credit Fund” name for so long as RGC or one of its affiliates remains the Company’s investment adviser. Other than with respect to this limited license, the Company has no legal right to the “Runway Growth Credit Fund” name.

 

Oaktree Strategic Relationship

 

In December 2016, RGC entered into a strategic relationship with Oaktree Capital Management, L.P. (“Oaktree”). In connection with the strategic relationship, OCM Growth Holdings, LLC, a Delaware limited liability company (“OCM”) managed by Oaktree, made an initial $125.0 million capital commitment to the Company, which was subsequently increased to $139.0 million (the “Initial OCM Commitment”). On June 14, 2019, the Company accepted a capital commitment from OCM in the amount of $112.5 million (the “Subsequent OCM Commitment and, together with the Initial OCM Commitment, the “OCM Commitment”). OCM has granted a proxy to the Company pursuant to which the shares held by OCM will be voted in the same proportion as the Company’s other stockholders vote their shares.

 

In connection with the OCM Commitment, the Company entered into a stockholder agreement, dated December 15, 2016, with OCM, pursuant to which OCM has a right to nominate a member of the Company’s Board of Directors for election. Brian Laibow was appointed to the Company’s Board of Directors as OCM’s representative. OCM also holds an interest in RGC and has the right to appoint a member of RGC’s board of managers and a member of RGC’s investment committee. Brian Laibow is OCM’s initial appointee to RGC’s board of managers and investment committee. In connection with the Subsequent OCM Commitment, the Company expects OCM to purchase additional equity in RGC.

 

Note 8 – Fair Value Measurements

 

The Company’s assets recorded at fair value have been categorized based upon a fair value hierarchy in accordance with ASC Topic 820. See Note 2 for discussion of the Company’s policies.

 

The following tables present information about the Company’s assets measured at fair value as of September 30, 2019 and December 31, 2018, respectively:

 

   As of September 30, 2019 (Unaudited) 
   Level 1   Level 2   Level 3   Total 
Portfolio Investments                    
Senior Secured Term Loans  $-   $-   $340,145,055   $340,145,055 
Preferred Stock   -    -    461,826    461,826 
Warrants   -    -    17,132,000    17,132,000 
Total Portfolio Investments   -    -    357,738,881    357,738,881 
U.S. Treasury Bill   59,970,914    -    -    59,970,914 
Total Investments  $59,970,914   $-   $357,738,881   $417,709,795 

 

   As of December 31, 2018 
   Level 1   Level 2   Level 3   Total 
Portfolio Investments                    
Senior Secured Term Loans  $-   $-   $208,539,353   $208,539,353 
Preferred Stock   -    -    461,826    461,826 
Warrants   -    -    15,247,210    15,247,210 
Total Portfolio Investments   -    -    224,248,389    224,248,389 
U.S. Treasury Bill   79,959,928    -    -    79,959,928 
Total Investments  $79,959,928   $-   $224,348,389   $304,208,317 

 

 34 

 

 

The Company recognizes transfers into and out of the levels indicated above at the end of the reporting period. There were no transfers into or out of the levels during the period ended September 30, 2019 and the year ended December 31, 2018.

 

The following table presents a rollforward of Level 3 assets measured at fair value as of September 30, 2019:

 

   Preferred Stock   Senior Secured
Term Loans
   Warrants   Total 
Fair value at December 31, 2018  $461,826   $208,539,353   $15,247,210   $224,248,389 
Amortization of fixed income premiums or discounts   -    8,730,554    -    8,730,554 
Purchases of investments (1)   -    222,753,543    3,886,158    226,639,701 
Sales of investments   -    (94,029,510)   (73,507)   (94,103,017)
Reorganizations   -    -    -    - 
Realized gain   -    -    493,308    493,308 
Change in unrealized gain (loss)   -    (5,848,887)   (2,421,167)   (8,270,054)
Fair value at September 30, 2019  $461,826   $340,145,053   $17,132,002   $357,738,881 
Change in unrealized gain (loss) on Level 3 investments still held as of September 30, 2019  $-   $(5,410,607)  $(1,733,408)  $(7,144,015)

 

  (1) Includes PIK interest, reorganization and restructuring of investments.

 

The following table presents a rollforward of Level 3 assets measured at fair value as of September 30, 2018:

 

    Preferred Stock     Senior Secured
Term Loans
    Warrants     Total  
Fair value at December 31, 2017   $ -     $ 63,977,756     $ 4,239,103     $ 68,216,859  
Amortization of fixed income premiums or discounts     -       3,137,837       -       3,137,837  
Purchases of investments     250,000       81,040,276       1,924,638       83,214,914  
Sales of investments     -       (11,375,629 )     (92,724 )     (11,468,353 )
Reorganizations     -       (114,629 )     114,629       -  
Realized gain     -       -       59,792       59,792  
Change in unrealized gain (loss)     -       (53,242 )     (248,775 )     (302,017 )
Fair value at September 30, 2018   $ 250,000     $ 136,612,3699     $ 5,996,663     $ 142,859,032  
Change in unrealized gain (loss) on Level 3 investments still held as of September 30, 2018   $ -     $ (53,242 )   $ (250,307 )   $ (302,017 )

 

The following table provides quantitative information regarding Level 3 fair value measurements as of September 30, 2019:

 

Description   Fair Value     Valuation  Technique   Unobservable
Inputs
  Range (Weighted Average)
Preferred Stock   $ 461,826     Recent private market and merger and acquisition transaction prices   N/A   N/A
                     
Senior Secured Term Loans (1)     328,626,186     Discounted Cash Flow analysis   Discount rate   13.3%-30.1% (16.9%)
            Market approach   Origination yield   12.3%-26.0% (14.9%)
      11,518,869     PWERM   Discount rate   22.3%-29.1% (25.2%)
                     
Warrants (2)     14,970,000     Black-Scholes model