PRINCETON CAPITAL CORPORATION References herein to "we", "us" or "our" refer toPrinceton Capital Corporation (the "Company" or "Princeton Capital "), unless the context specifically requires otherwise. Forward-Looking Statements Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements, which relate to future events or our future performance or financial condition. Such forward-looking statements may include statements preceded by, followed by or that otherwise include the words "may," "might," "will," "intend," "should," "could," "can," "would," "expect," "believe," "estimate," "anticipate," "predict," "potential," "plan" or similar words. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties, including statements as to:
? our future operating results;
? our business prospects and the prospects of our portfolio companies;
? the effect of investments that we expect to make;
? our contractual arrangements and relationships with third parties;
? actual and potential conflicts of interest with our investment advisor;
? the dependence of our future success on the general economy and its effect on
the industries in which we invest;
? the ability of our portfolio companies to achieve their objectives;
? the use of borrowed money to finance a portion of our investments;
? the adequacy of our financing sources and working capital;
? the timing of cash flows, if any, from the operations of our portfolio
companies;
? the ability of our investment advisor to locate suitable investments for us
and to monitor and administer our investments;
? the ability of our investment advisor to attract and retain highly talented
professionals;
? our ability to qualify and maintain our qualification as a regulated
investment company and as a business development company; and
? the effect of future changes in laws or regulations (including theinterpretation of these laws and regulations by regulatory authorities) and
conditions in our operating areas, particularly with respect to business
development companies or regulated investment companies; and
? the effect of the COVID-19 pandemic including the uncertainty surrounding its
duration and global economic impact, as well as measures taken by governmental
agencies, businesses and other third parties in response to counteract any
negative effects.
We have based the forward-looking statements included in this quarterly report
on Form 10-Q on information available to us on the date of this quarterly report
on Form 10-Q, and we assume no obligation to update any such forward-looking
statements. Actual results could differ materially from those anticipated in our
forward-looking statements, and future results could differ materially from
historical performance. We undertake no obligation to revise or update any
forward-looking statements, whether as a result of new information, future
events or otherwise, unless required by law or Securities and Exchange
Commission ("SEC") rule or regulation. You are advised to consult any additional
disclosures that we may make directly to you or through reports that we in the
future may file with the SEC , including annual reports on Form 10-K, quarterly
reports on Form 10-Q and current reports on Form 8-K.
Overview
We are an externally managed, non-diversified, closed-end investment company
that has elected to be treated as a business development company ("BDC") under
the Investment Company Act of 1940 (the "1940 Act" or "Investment Company Act").
While we have sought to invest primarily in private small and lower
middle-market companies in various industries, we are now (with a strategic
alternatives process underway and limited resources) investing only in current
investments and otherwise conserving cash. Our investment objective is to
maximize the total return to our stockholders in the form of current income and
capital appreciation through debt and related equity investments in private
small and lower middle-market companies. Since January 1, 2018 , we have been
managed by House Hanover, LLC ("House Hanover").
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As a BDC, we must not acquire any assets other than "qualifying assets"
specified in the 1940 Act unless, at the time the acquisition is made, at least
70% of our total assets are qualifying assets (with certain limited exceptions).
Qualifying assets include investments in "eligible portfolio companies." Under
the relevant SEC rules, the term "eligible portfolio company" includes all
private companies, companies whose securities are not listed on a national
securities exchange, and certain public companies that have listed their
securities on a national securities exchange and have a market capitalization of
less than $250 million , in each case organized in the United States .
On November 15, 2019 , our Board announced that the Company has initiated a
strategic review process to identify, examine, and consider a range of strategic
alternatives available to the Company, including but not limited to, (i) selling
the Company's assets to a business development company or other potential buyer,
(ii) merging with another business development company, (iii) liquidating the
Company's assets in accordance with a plan of liquidation, (iv) raising
additional funds for the Company, or (v) otherwise entering into another
business combination, with the objective of maximizing stockholder value. As of
September 30, 2021 and through the date of filing this Quarterly Report, the
Company has not entered into any agreements regarding any strategic
alternative.`
Corporate History
In order to expedite the ramp-up of our investment activities and further our
ability to meet our investment objectives on March 13, 2015 , we (i) acquired
approximately $11.2 million in cash, $43.5 million in equity and debt
investments, and $1.9 million in restricted cash escrow deposits of Capital
Point Partners, L.P. ("CPP") and Capital Point Partners II, L.P. ("CPPII")
(together, the "Partnerships"), and (ii) issued approximately 115.5 million
shares of our common stock based on a pre-valuation presumed fair value of $60.9
million and on a price of approximately $0.53 per share. While we have sought to
invest primarily in private small and lower middle-market companies in various
industries, we are now (with a strategic alternatives process underway and
limited resources) investing only in current investments and otherwise
conserving cash.
On an annual basis and in general, BDCs intend to elect to be treated for tax
purposes as a regulated investment company ("RIC") under Subchapter M of the
Internal Revenue Code of 1986 (the "Code"). To qualify as a RIC, a BDC must,
among other things, meet certain source-of-income and asset diversification
requirements. As a RIC, BDCs generally will not have to pay corporate-level
taxes on any income they distribute to their stockholders. We did not meet the
qualifications of a RIC for the 2020 tax year and will be taxed as a corporation
under Subchapter C of the Code. Further, we do not expect to meet the
qualifications of a RIC until such time as certain strategic alternatives are
achieved.
Portfolio Composition and Investment Activity
Portfolio Composition
We originate and invest primarily in private small and lower middle-market companies through first lien loans, second lien loans, unsecured loans, unitranche and mezzanine debt financing, and corresponding equity investments. United States Treasury securities may be purchased and temporarily held in connection with complying with RIC diversification requirements under Subchapter M of the Code. AtSeptember 30, 2021 , the Company had investments in 7 portfolio companies. The total cost and fair value of the total investments were approximately$46.0 million and$32.3 million , respectively. The composition of our investments by asset class as ofSeptember 30, 2021 is as follows: Percentage of Investments Cost Fair Value Total Portfolio Portfolio Investments First Lien Loans$ 15,404,530 $ 18,808,031 58.15 % Second Lien Loans 12,766,144 8,649,696 26.75 Unsecured Loans 1,381,586 - 0.00 Equity 16,483,889 4,881,694 15.10 Total Portfolio Investments$ 46,036,149 $ 32,339,421 100.00 % - 33 -
AtDecember 31, 2020 , the Company had investments in 7 portfolio companies. The total cost and fair value of the total investments were approximately$46.2 million and$21.6 million , respectively. The composition of our investments by asset class as ofDecember 31, 2020 is as follows: Percentage of Investments Cost Fair Value Total Portfolio Portfolio Investments First Lien Loans$ 15,537,699 $ 14,671,435 68.0 % Second Lien Loans 12,766,144 5,235,708 24.3 Unsecured Loans 1,381,586 - - Equity 16,483,889 1,659,880 7.7 Total Portfolio Investments 46,169,318 21,567,023 100.0 Total Investments$ 46,169,318 $ 21,567,023 100.0 % AtSeptember 30, 2021 , our weighted average yield of our portfolio investments, based upon cost and excluding non-yielding assets, was approximately 10.05% of which approximately 7.36% is current cash interest, all bearing a fixed rate of interest except for one debt investment bearing interest at a variable rate. AtDecember 31, 2020 , our weighted average yield based upon cost of our portfolio investments was approximately 7.39% of which approximately 7.39% is current
cash interest. AtSeptember 30, 2021 andDecember 31, 2020 , we held no United States Treasury securities. United States Treasury securities may be purchased and temporarily held in connection with complying with RIC diversification requirements under Subchapter M of the Code. Investment Activity Our level of investment activity can vary substantially from period to period depending on many factors, including the amount of debt and equity capital to middle market companies, the level of merger and acquisition activity, the general economic environment and the competitive environment for the types
of investments we make.
The primary portfolio investment activities for the nine months ended
? On
Judgment on its breach of contract claim against
and World Class Capital Group, LLC , awarding damages to the Company in the
amount of $9,910,601 . On March 9, 2021 , the Harris County District Court granted the Company's Motion to Sever Remaining Claims. These remaining
claims are pending in the
the GVS Defendants filed a Notice of Appeal and has a deadline to file its
appeal brief by August 9, 2021 . On June 30, 2021 , the Company filed a
Motion for Post-Judgment Receivership to appoint a receiver to the court
to collect the judgment on our behalf. On September 8, 2021 , the court
granted the appointment of a receiver. On
court granted a temporary stay of the receiver to allow the GVS defendants
to seek a supersedeas bond, a status of which is to be filed with the
(see Note 8).
? On
$462,736 consisting of$50,734 of current interest,$181,431 of cash interest owed from periods prior toDecember 31, 2017 , and$230,571 of PIK interest. Asset Quality In addition to various risk management and monitoring tools, our investment advisor used an investment rating system to characterize and monitor the quality of our debt investment portfolio. Equity securities and Treasury Bills are not graded. This debt investment rating system uses a five-level numeric scale. The following is a description of the conditions associated with each investment rating: Investment Rating Summary Description 1 Investments that are performing above expectations, and whose risks remain favorable compared to the expected risk at the time of the original investment. 2 Investments that are performing within expectations and whose risks remain neutral compared to the expected risk at the time of the original investment. All new loans will initially be rated 2. 3 Investments that are performing below expectations and that require closer monitoring, but where no loss of return or principal is expected. Portfolio companies with a rating of 3 may be out of compliance with financial covenants.
4 Investments that are performing substantially below expectations and
whose risks have increased substantially since the original investment.
These investments are often in work out. Investments with a rating of 4
will be those for which some loss of return but no loss of principal is
expected.
5 Investments that are performing substantially below expectations and
whose risks have increased substantially since the original investment.
These investments almost always in work out. Investments with a rating
of 5 are those for which some loss of return and principal is expected.
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The following table shows the investment ratings of our debt investments at fair
value as of
As of September 30, 2021 As of December 31, 2020
Number of Number of
% of Total Portfolio % of Total Portfolio
Investment Rating Fair Value Portfolio Companies Fair Value Portfolio Companies
1 $ - - % - $ - - % -
2 - - - - - -
3 14,233,324 44.01 1 - - -
4 9,090,028 28.11 2 17,679,643 81.97 3
5 4,134,375 12.78 2 2,227,500 10.33 2
$ 27,457,727 84.90 % 5 $ 19,907,143 92.30 % 5
We will not accrue interest on loans and debt securities if we have reason to doubt our ability to collect such interest. As ofSeptember 30, 2021 , we had 5 loans on non-accrual status and as ofDecember 31, 2020 , we had 5 loans on
non-accrual status. Results of Operations An important measure of our financial performance is net increase (decrease) in net assets resulting from operations, which includes net investment income (loss), net realized gain (loss) and net change in unrealized gain (loss). Net investment income (loss) is the difference between our income from interest, dividends, fees and other investment income and our operating expenses including interest on borrowed funds. Net realized gain (loss) on investments is the difference between the proceeds received from dispositions of portfolio investments and their amortized cost. Net change in unrealized gain (loss) on investments is the net change in the fair value of our investment portfolio. Revenues
We generate revenue in the form of interest income on debt investments and capital gains and distributions, if any, on investment securities that we may acquire in portfolio companies. Our debt investments typically have a term of five to seven years and bear interest at a fixed or floating rate. Interest on our debt securities is generally payable quarterly. Payments of principal on our debt investments may be amortized over the stated term of the investment, deferred for several years or due entirely at maturity. In some cases, our debt investments may pay interest in-kind, or PIK. Any outstanding principal amount of our debt securities and any accrued but unpaid interest will generally become due at the maturity date. The level of interest income we receive is directly related to the balance of interest-bearing investments multiplied by the weighted average yield of our investments. We expect that the dollar amount of interest and any dividend income that we earn to increase as the size of our investment portfolio increases. In addition, we may generate revenue in the form of prepayment fees, commitment, loan origination, structuring or due diligence fees, fees for providing managerial assistance and possibly consulting fees. These fees will be reorganized as they are earned. Expenses
Our primary operating expenses include the payment of fees to House Hanover and our allocable portion of overhead expenses under the investment advisory agreement and other operating costs described below. We bear all other out-of-pocket costs and expenses of our operations and transactions, which
may include:
? organizational and offering expenses;
? expenses incurred in valuing the Company's assets and computing its net asset
value per share (including the cost and expenses of any independent valuation
firm);
? subject to the guidelines approved by the Board of Directors, expenses
incurred by our investment advisor that are payable to third parties,including agents, consultants or other advisors, in monitoring financial and
legal affairs for the Company and in monitoring the Company's investments and
performing due diligence on the Company's prospective portfolio companies or
otherwise related to, or associated with, evaluating and making investments;
? interest payable on debt, if any, incurred to finance the Company's
investments and expenses related to unsuccessful portfolio acquisition
efforts;
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? offerings of the Company's common stock and other securities;
? administration fees;
? transfer agent and custody fees and expenses;
? U.S. federal and state registration fees of the Company (but not our
investment advisor);
? all costs of registration and listing the Company's shares on any securities
exchange;
? U.S. federal, state and local taxes;
? independent directors' fees and expenses;
? costs of preparing and filing reports or other documents required of the
Company (but not our investment advisor) by the
? costs of any reports, proxy statements or other notices to stockholders,
including printing costs;
? the costs associated with individual or group stockholders;
? the Company's allocable portion of the fidelity bond, directors' andofficers'/errors and omissions liability insurance, and any other insurance
premiums;
? direct costs and expenses of administration and operation of the Company,
including printing, mailing, long distance telephone, copying, secretarial and
other staff, independent auditors and outside legal costs; and
? all other non-investment advisory expenses incurred by the Company in
connection with administering the Company's business.
Comparison of the Three Months Ended September 30, 2021 and September 30, 2020
Three Months Ended Three Months Ended
September 30, 2021 September 30, 2020
(unaudited) (unaudited)
Per Per
Total Share (1) Total Share (1)
Investment income
Interest income $ 351,610 $ 0.003 $ 258,153 $ 0.002
Other income 6,085 0.000 7,629 0.000
Total investment income 357,695 0.003 265,782 0.002
Operating expenses
Management fees 74,347 0.001 58,382 0.001
Administration fees 101,643 0.001 99,577 0.001
Audit fees 21,115 0.000 21,115 0.000
Tax preparation fee - - 21,450 0.000
Legal fees 71,304 0.001 31,760 0.000
Valuation fees 33,000 0.000 37,500 0.000
Directors' fees 38,625 0.000 38,625 0.001
Insurance expense 41,201 0.000 36,053 0.000
Interest expense - - 1,267 0.000
Other general and administrative
expenses 20,003 0.000 20,207 0.000
Total net operating expenses 401,238 0.003 365,936 0.003
Net investment loss before tax (43,543 ) (0.000 ) (100,154 ) (0.001 ) Income tax expense - - 1,750 0.000 Net investment loss after tax$ (43,543 ) $ (0.000 ) $ (101,904 ) $ (0.001 ) Net change in unrealized gain (loss)$ (1,630,575 ) $ (0.014 ) $ 429,691 $ 0.004 Net increase (decrease) in net assets resulting from operations$ (1,674,118 ) $ (0.014 ) $ 327,787 $ 0.003
(1) The basic per share figures noted above are based on a weighted average of
120,486,061 shares outstanding for both the three months ended
2021 and
to be consistent with what is disclosed in the financial highlights of our
financial statements.
(2) Interest income includes PIK interest of
ended September 30, 2021 and 2020, respectively.
- 36 -
Operating Expenses
Total net operating expenses increased from $365,936 for the three months ended
September 30, 2020 to $401,238 for the three months ended September 30, 2021 .
The increase is primarily due to an increase in management fees and legal
expense, offset by decrease in tax preparation fee, for the three months ended
September 30, 2021 .
Total operating expenses per share remained unchanged from
Net Investment Loss After Tax
Net investment loss after tax decreased from a loss of$101,904 for the three months endedSeptember 30, 2020 to a loss of$43,543 for the three months endedSeptember 30, 2021 . Net investment loss decreased primarily due to the increase in investment income, partially offset by a decrease in operating expense noted above.
Net investment loss after tax per share remained consistent at
Net Realized Gain (Loss)
We measure realized losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, using the specific identification method, without regard to unrealized appreciation or depreciation previously recognized.
For the three months ended
Net Change in Unrealized Gain (Loss)
Net change in unrealized gain (loss) primarily reflects the change in portfolio investment values during the reporting period, including the reversal of previously recorded appreciation or depreciation when gains or losses are realized.
Net change in unrealized gain (loss) on investments totaled a loss of
Net change in unrealized gain (loss) on investments totaled a gain of$429,691 for the three months endedSeptember 30, 2020 primarily in connection with gains of$1,398,251 , and$544,180 onRockfish Seafood Grill, Inc. andAdvantis Certified Staffing Solutions, Inc. , which were partially offset by losses of$1,451,250 and$168,950 fromPerformance Alloys, Inc. andGreat Value Storage, LLC . - 37 - Comparison of the Nine Months EndedSeptember 30, 2021 andSeptember 30, 2020 Nine Months Ended Nine Months Ended September 30, September 30, 2021 2020 (unaudited) (unaudited) Per Per Total Share (1) Total Share (1)
Investment income Interest income (2)$ 494,792 $ 0.004 $ 706,516 $ 0.006 Other income 18,081 0.000 22,960 0.000
Total investment income 512,873 0.004
729,476 0.006
Operating expenses
Management fees 182,778 0.002 214,512 0.002
Administration fees 300,467 0.002 297,077 0.002
Audit fees 112,682 0.001 135,235 0.001
Tax preparation fee 19,487 0.000 21,920 0.000
Legal fees 136,914 0.001 98,321 0.001
Valuation fees 99,000 0.001 121,500 0.001Other professional fees - -
- 0.000
Directors' fees 114,375 0.001 118,875 0.001
Insurance expense 119,059 0.001 105,834 0.001
Interest expense 188 0.000 3,105 0.000
Other general and administrative
expenses 80,509 0.001 61,770 0.001
Total net operating expenses 1,165,459 0.010 1,178,149 0.010
Net investment loss before tax (652,586 ) (0.006 ) (448,673 ) (0.004 )
Income tax expense - - 7,007 0.000
Net investment loss after tax $ (652,586 ) $ (0.006 ) $ (455,680 ) $ (0.004 )
Net change in unrealized gain (loss) $ 10,905,567 $ 0.091 $ (11,423,143 ) $ (0.095 )
Net increase decrease in net assets
resulting from operations $ 10,252,981 $ 0.085 $ (11,878,823 ) $ (0.099 )
(1) The basic per share figures noted above are based on a weighted average of
120,486,061 shares outstanding for both the nine months ended
2021 and
be consistent with what is disclosed in the financial highlights of our
financial statements.
(2) Interest income includes PIK interest of
months ended September 30, 2021 and 2020, respectively.
Operating Expenses
Total net operating expenses decreased from $1,178,149 for the nine months ended
September 30, 2020 to $1,165,459 for the nine months ended September 30, 2021 .
The decrease is primarily due to a decrease in valuation fees, audit fees and
management expense for the nine months ended September 30, 2021 , which was
partially offset by an increase in legal fee and other general and
administrative expenses and insurance expense.
Total operating expenses per share remained consistent at $0.010 per share for
the nine months ended September 30, 2020 and for the nine months ended September
30, 2021 .
Net Investment Loss After Tax
Net investment loss after tax increased from a loss of$455,680 for the nine months endedSeptember 30, 2020 to a loss of$652,586 for the nine months endedSeptember 30, 2021 . This increase in a loss was primarily due to a decrease in investment income, which was minimally offset by a decrease in expenses as explained above.
Net investment loss after tax per share increased from
Net Realized Gain (Loss) We measure realized gains (losses) by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, using the specific identification method, without regard to unrealized appreciation or depreciation previously recognized.
For the nine months ended
- 38 -
Net Change in Unrealized Gain (Loss)
Net change in unrealized gain (loss) on investments totaled a gain of$10,905,567 for the nine months endedSeptember 30, 2021 primarily in connection with gains of$4,752,990 ,$3,119,373 , and$1,906,875 and$1,507,113 onRockfish Seafood Grill, Inc. ,Rockfish Holdings, LLC ,Performance Alloys, Inc. , andAdvantis Certified Staffing Solutions, Inc. Net change in unrealized gain (loss) primarily reflects the change in portfolio investment values during the reporting period, including the reversal of previously recorded appreciation or depreciation when gains or losses are realized. Net change in unrealized gain (loss) on investments totaled a loss of$11,423,143 for the nine months endedSeptember 30, 2020 primarily in connection with losses of$6,883,210 ,$2,077,386 ,$1,085,348 and$1,077,054 onLone Star Brewery Development Inc. ,Performance Alloys, Inc. ,Dominion Medical Management, Inc. andGreat Value Storage, LLC .
Financial Condition, Liquidity and Capital Resources
We intend to continue to generate cash from future offerings of securities and cash flows from operations, including earnings on investments in our portfolio and future investments, as well as interest earned from the temporary investment of cash inU.S. government securities and other high-quality debt investments that mature in one year or less. We may, if permitted by regulation, seek various forms of leverage and borrow funds to make investments. As ofSeptember 30, 2021 , we had$939,287 in cash and$40,574 in restricted cash, and our net assets totaled$32,732,521 . We believe that our anticipated cash flows from operations will be adequate to meet our cash needs for our daily operations for at least the next twelve months. Contractual Obligations
As of
We have entered into one contract under which we have material future commitments, the House Hanover Investment Advisory Agreement, pursuant to which House Hanover serves as our investment adviser. Payments under the House Hanover Investment Advisory Agreement in future periods will be equal to a percentage of the value of our net assets. The House Hanover Investment Advisory Agreement is terminable by either party without penalty upon written notice by the Company or 60 days' written notice by House Hanover. If this agreement is terminated, the costs we incur under a new agreement may increase. In addition, we will likely incur significant time and expense in locating alternative parties to provide the services we expect to receive under our investment advisory agreement. Any new investment advisory agreement would also be subject to approval by our stockholders. Distributions
For the nine months ended
In order to qualify as a RIC and to avoidU.S. federal corporate level income tax on the income we distribute to our stockholders, we are required to distribute at least 90% of our net ordinary income and our net short-term capital gains in excess of net long-term capital losses, if any, to our stockholders on an annual basis. Additionally, we must distribute an amount at least equal to the sum of 98% of our net ordinary income (during the calendar year) plus 98.2% of our net capital gain income (during each 12-month period ending onOctober 31 ) plus any net ordinary income and capital gain net income for preceding years that were not distributed during such years and on which we paid noU.S. federal income tax to avoid aU.S. federal excise tax. To the extent that we have income available, we intend to make quarterly distributions to our stockholders. Our stockholder distributions, if any, will be determined by our board of directors on a quarterly basis. Any distribution to our stockholders will be declared out of assets legally available for distribution. The Company did not meet the requirements to qualify as a RIC for the 2020 tax year and will be taxed as a corporation under Subchapter C of the Code. It may not be in the best interests of the Company's stockholders to elect to be taxed as a RIC at the present time due to the net operating losses and capital loss carryforwards the Company currently has. Management will make a determination that is in the best interests of the Company and its stockholders. While the Company does not expect to meet the qualifications of a RIC until such time as certain strategic alternatives are achieved, it can still declare a dividend even though it is not required to do so. - 39 -
We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of our distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage requirements applicable to us as a BDC under the 1940 Act. If we do not distribute a certain percentage of our income annually, we could suffer adverse tax consequences, including the possible failure to qualify as a RIC. We cannot assure stockholders that they will receive any distributions. To the extent our taxable earnings fall below the total amount of our distributions for that fiscal year, a portion of those distributions may be deemed a return of capital to our stockholders forU.S. federal income tax purposes. Thus, the source of a distribution to our stockholders may be the original capital invested by the stockholder rather than our income or gains. Stockholders should read any written disclosure accompanying any stockholder distribution carefully and should not assume that the source of any distribution is our ordinary income or capital gains. We have adopted an "opt out" dividend reinvestment plan for our common stockholders. As a result, if we declare a distribution, the stockholders' cash distributions will be automatically reinvested in additional shares of our common stock unless a stockholder specifically "opts out" of our dividend reinvestment plan. If a stockholder opts out, that stockholder will receive cash distributions. Although distributions paid in the form of additional shares of our common stock will generally be subject toU.S. federal, state and local taxes in the same manner as cash distributions, stockholders participating in our dividend reinvestment plan will not receive any corresponding cash distributions with which to pay any such applicable taxes.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. Related Party Transactions Management Fees Management fees earned by House Hanover for the three months endedSeptember 30, 2021 andSeptember 30, 2020 were$74,347 and$58,382 , respectively. Management fees earned by House Hanover for the nine months endedSeptember 30, 2021 andSeptember 30, 2020 were$182,778 and$214,512 , respectively. As ofSeptember 30, 2021 andDecember 31, 2020 , management fees of$449,762 and$552,121 , respectively, were payable to House Hanover. HouseHanover is allowing management fees to accrue and not be paid to allow the Company to build its cash balance and analyze the best use of its available funds. Incentive Fees The Company is not obligated to pay House Hanover an incentive fee. Incentive fees are a typical component of investment advisory agreements with business development companies.
Recent Accounting Pronouncements
See Note 2 of the financial statements for a description of recent accounting pronouncements, if any, including the expected dates of adoption and the anticipated impact on the financial statements.
Critical Accounting Policies The preparation of our financial statements and related disclosures in conformity withU.S. Generally Accepted Accounting Principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ. In addition to the discussion below, our significant accounting policies are further described in the notes to the financial statements. - 40 -
Valuation of Portfolio Investments
As a BDC, we generally invest in illiquid loans and securities including debt and equity securities of middle-market companies. Under procedures established by our board of directors, we value investments for which market quotations are readily available at such market quotations. We obtain these market values from an independent pricing service or at the mean between the bid and ask prices obtained from at least two brokers or dealers (if available, otherwise by a principal market maker or a primary market dealer). Debt and equity securities that are not publicly traded or whose market prices are not readily available are valued at fair value as determined in good faith by our board of directors. Such determination of fair values may involve subjective judgments and estimates, although we engage independent valuation providers to review the valuation of each portfolio investment that does not have a readily available market quotation quarterly. Investments purchased within 60 days of maturity are valued at cost plus accreted discount, or minus amortized premium, which approximate fair value. With respect to unquoted securities, our board of directors values each investment considering, among other measures, discounted cash flow models, comparisons of financial ratios of peer companies that are public and other factors, that are provided by a nationally recognized independent valuation firm. This valuation firm provides a range of values for selected investments, which is presented to the Valuation Committee to determine the value for each of the selected investments. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, our board of directors uses the pricing indicated by the external event to corroborate and/or assist us in our valuation. Because there is not a readily available market for substantially all of the investments in our portfolio, we value our portfolio investments at fair value as determined in good faith by our board of directors using a documented valuation policy and a consistently applied valuation process. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material.
With respect to investments for which market quotations are not readily available, our board of directors undertakes a multi-step valuation process each quarter, as described below:
? Our quarterly valuation process begins with each portfolio company or
investment being initially valued by an independent valuation firm, except for
those investments where market quotations are readily available;
? Preliminary valuation conclusions are then documented and discussed with our
senior management, our investment advisor, and our auditors;
? The valuation committee of our board of directors then reviews thesepreliminary valuations and approves them for recommendation to the board of
directors;
? The board of directors then discusses valuations and determines the fair value
of each investment in our portfolio in good faith, based on the input of our
investment advisor, the independent valuation firm and the valuation committee.
Revenue Recognition Realized gain (loss) on the sale of investments is the difference between the proceeds received from dispositions of portfolio investments and their stated costs. Realized gains or losses on the sale of investments are calculated using the specific identification method. Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis to the extent that we expect to collect such amounts. For loans and debt securities with contractual PIK interest, which represents contractual interest accrued and added to the loan balance that generally becomes due at maturity, we do not accrue PIK interest if the portfolio company valuation indicates that such PIK interest is not collectible. Generally, we will not accrue interest on loans and debt securities if we have reason to doubt our ability to collect such interest. Loan origination fees, original issue discount and market discount or premium are capitalized, and we then accrete or amortize such amounts using the effective interest method as interest income. Upon the prepayment of a loan or debt security, any unamortized loan origination is recorded as interest income. We record prepayment premiums on loans and debt securities as interest income.
Dividend income, if any, will be recognized on the ex-dividend date.
Generally, when a payment default occurs on a loan in the portfolio, or if the Company otherwise believes that the borrower will not be able to make contractual interest payments, the Company may place the loan on non-accrual status and cease recognizing interest income on the loan until all principal and interest is current through payment, or until a restructuring occurs, and the interest income is deemed to be collectible. The Company may make exceptions to this policy if a loan has sufficient collateral value, is in the process of collection or is viewed to be able to pay all amounts due if the loan were to be collected on through an investment in or sale of the business, the sale of the assets of the business, or some portion or combination thereof. Recent Developments
Subsequent to the quarter ending
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