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;
? the effect of future changes in laws or regulations (including the
interpretation 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 orSecurities 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 theSEC , 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. SinceJanuary 1, 2018 , we have been managed byHouse Hanover, LLC ("House Hanover"). - 34 - 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 relevantSEC 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 inthe United States . OnNovember 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 ofSeptember 30, 2022 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 onMarch 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 ofCapital Point Partners, L.P. ("CPP") andCapital 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 2021 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, 2022 , the Company had investments in 7 portfolio companies. The total cost and fair value of the total investments were approximately$46.0 million and$40.8 million , respectively. The composition of our investments by asset class as ofSeptember 30, 2022 is as follows: Percentage of Total Investments Cost Fair Value Portfolio Portfolio Investments First Lien Loans$ 16,920,674 $ 23,567,755 57.8 % Second Lien Loans 11,250,000 11,364,044 27.9 Unsecured Loans 1,381,586 - - Equity 16,483,889 5,840,260 14.3 Total Portfolio Investments$ 46,036,149 $ 40,772,059 100.0 % - 35 -
AtDecember 31, 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$34.3 million , respectively. The composition of our investments by asset class as ofDecember 31, 2021 is as follows: Percentage of Total Investments Cost Fair Value Portfolio Portfolio Investments First Lien Loans$ 15,404,530 $ 19,400,200 56.6 % Second Lien Loans 12,766,144 11,435,134 33.3 Unsecured Loans 1,381,586 - - Equity 16,483,889 3,471,758 10.1 Total Portfolio Investments 46,036,149 34,307,092 100.00 Total Investments$ 46,036,149 $ 34,307,092 100.00 % AtSeptember 30, 2022 , our weighted average yield of our portfolio investments, based upon cost and excluding non-yielding assets, was approximately 10.09% of which approximately 10.09% is current cash interest, all bearing a fixed rate of interest except for one debt investment bearing interest at a variable rate. AtDecember 31, 2021 , our weighted average yield based upon cost of our portfolio investments was approximately 9.08% of which approximately 9.08% is current
cash interest. AtSeptember 30, 2022 andDecember 31, 2021 , 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.
? In
that it had paid its senior lender in full. This resulted in the Company's
second lien loan to DMM becoming a first lien loan.
? On
Acceptance Agreement with
related parties. In exchange for a settlement payment of
indemnification secured by
claims in the bankruptcy proceeding, the Company agreed to sell, assign and
transfer its rights to the loans to Great Value and the Judgment against Great
onOctober 7, 2022 . 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.
- 36 -
The following table shows the investment ratings of our debt investments at fair
value as of
As of September 30, 2022 As of December 31, 2021
Number of Number of
% of Total Portfolio % of Total Portfolio
Investment Rating Fair Value Portfolio Companies Fair Value Portfolio Companies
1 $ - - % - $ - - % -
2 7,320,000 20.95 1 - - -
3 23,360,942 66.88 2 21,380,690 69.34 2
4 4,044,044 11.58 1 9,296,485 30.15 2
5 206,813 0.59 1 158,159 0.51 1
$ 34,931,799 100.00 % 5 $ 30,835,334 100.00 % 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, 2022 , we had 3 loans on non-accrual status and as ofDecember 31, 2021 , we had 4 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;
? offerings of the Company's common stock and other securities;
? administration fees;
? transfer agent and custody fees and expenses;
?
advisor);
- 37 -
? all costs of registration and listing the Company's shares on any securities
exchange;
?
? 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' and
officers'/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 EndedSeptember 30, 2022 andSeptember 30, 2021 Three Months Ended Three Months Ended September 30, 2022 September 30, 2021 (unaudited) (unaudited) Per Per Total Share (1) Total Share (1) Investment income Interest income$ 427,179 $ 0.004 $ 351,610 $ 0.003 Other income 6,081 0.000 6,085 0.000 Total investment income 433,260 0.004 357,695 0.003 Operating expenses Management fees 83,014 0.001 74,347 0.001 Administration fees 105,257 0.001 101,643 0.001 Audit fees 21,320 0.000 21,115 0.000 Tax preparation fee 1,570 0.000 - - Legal fees 342,598 0.003 71,304 0.001 Valuation fees 28,500 0.000 33,000 0.000 Directors' fees 38,625 0.000 38,625 0.000 Insurance expense 47,654 0.001 41,201 0.000 Interest expense 1,638 0.000 - - Other general and administrative expenses 35,740 0.000 20,003 0.000 Total net operating expenses 705,916 0.006 401,238 0.003
Net investment loss before tax (272,656 ) (0.002 ) (43,543 ) (0.000 ) Income tax expense - - - - Net investment loss after tax$ (272,656 ) $ (0.002 ) $ (43,543 ) $ (0.000 ) Net change in unrealized gain (loss)$ 7,255,747 $ 0.060 $ (1,630,575 ) $ (0.014 ) Net increase (decrease) in net assets resulting from operations$ 6,983,091 $ 0.058
$ (1,674,118 ) $ (0.014 )
(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
2022 and
be consistent with what is disclosed in the financial highlights of our
financial statements.
Operating Expenses
Total net operating expenses increased from $401,238 for the three months ended
September 30, 2021 to $705,916 for the three months ended September 30, 2022 .
The increase is primarily due to an increase in legal fees and other general and
administrative expenses for the three months ended September 30, 2022 .
Total operating expenses per share increased from
- 38 -
Net Investment Income (Loss) after tax
Net investment income (loss) (after tax) increased from a loss of$(43,543) for the three months endedSeptember 30, 2021 to a loss of$(272,656) for the three months endedSeptember 30, 2022 . This increase in a loss was primarily due to an increase in expenses as explained above, which was offset by an increase in investment income.
Net investment income (loss) (after tax) per share decreased from
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 gain of$7,255,747 for the three months endedSeptember 30, 2022 primarily in connection by gains of$997,665 and$6,298,007 onPerformance Alloys, LLC andGreat Value Storage, LLC ., respectively. Net change in unrealized gain (loss) on investments totaled a loss of ($1,630,575 ) for the three months endedSeptember 30, 2021 primarily in connection with losses of$(1,442,387) , and$(1,022,828) onGreat Value Storage, LLC ., andRockfish Holdings, LLC ., respectively, which was partially offset by a gain of$489,375 onPerformance Alloys, Inc. Comparison of the Nine Months EndedSeptember 30, 2022 andSeptember 30, 2021 Nine Months Ended Nine Months Ended September 30, 2022 September 30, 2021 (unaudited) (unaudited) Per Per Total Share (1) Total Share (1) Investment income Interest income (2)$ 1,082,290 $ 0.009 $ 494,792 $ 0.004 Other income 18,051 0.000 18,081 0.000 Total investment income 1,100,341 0.009
512,873 0.004
Operating expenses
Management fees 247,395 0.002 182,778 0.002
Administration fees 308,543 0.002 300,467 0.002
Audit fees 128,876 0.001 112,682 0.001
Tax preparation fee 13,120 0.000 19,487 0.000
Legal fees 712,909 0.006 136,914 0.001
Valuation fees 94,500 0.001 99,000 0.001
Directors' fees 115,875 0.001 114,375 0.001
Insurance expense 136,658 0.001 119,059 0.001
Interest expense 3,963 0.000 188 0.000
Other general and administrative
expenses 80,628 0.001 80,509 0.001
Total net operating expenses 1,842,467 0.015 1,165,459 0.010
Net investment loss before tax (742,126 ) (0.006 ) (652,586 ) (0.006 ) Income tax expense 456 0.000 - - Net investment loss after tax$ (742,582 ) $ (0.006 ) $ (652,586 ) $ (0.006 ) Net change in unrealized gain$ 6,464,967 $ 0.054 $ 10,905,567 $ 0.091 Net increase in net assets resulting from operations$ 5,722,385 $ 0.047 $ 10,252,981 $ 0.085
(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
2022 and
be consistent with what is disclosed in the financial highlights of our
financial statements.
(2) Interest income includes PIK interest of
ended September 30, 2022 and 2021, respectively.
- 39 -
Operating Expenses
Total net operating expenses increased from $1,165,459 for the nine months ended
September 30, 2021 to $1,842,467 for the nine months ended September 30, 2022 .
The increase is primarily due to an increase in management expense, legal fees
and audit fees for the nine months ended September 30, 2022 , which was partially
offset by a decrease in tax preparation fee and valuation fees.
Total operating expenses per share increased from $0.010 per share for the nine
months ended September 30, 2021 to $0.015 per share for the nine months ended
September 30, 2022 .
Net Investment Loss after tax
Net investment loss after tax increased from a loss of$652,856 for the nine months endedSeptember 30, 2021 to a loss of$742,582 for the nine months endedSeptember 30, 2022 . This increase in a loss was primarily due to an increase in expenses as explained above, which was offset by an increase in investment income.
Net investment loss after tax per share remained consistent at
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
Net Change in Unrealized Gain (Loss)
Net change in unrealized gain (loss) on investments totaled a gain of$6,464,967 for the nine months endedSeptember 30, 2022 primarily in connection with gains of$4,597,803 and$6,517,979 onPerformance Alloys, LLC andGreat Value Storage , respectively, which were partially offset by losses of$2,557,237 and$1,725,445 onRockfish Seafood Grill, Inc. andRockfish Holdings , respectively. 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.
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, 2022 , we had$187,979 in cash and cash equivalents and$40,624 in restricted cash, and our net assets totaled$40,195,377 . 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.
- 40 -
Distributions
For the nine months endedSeptember 30, 2022 and 2021, , no dividends have been declared or distributed to stockholders. As disclosed in the Company's Form 8-K that was filed onOctober 27, 2022 , the Board of Directors has authorized and declared a cash dividend of$0.075 per share of common stock payable onDecember 1, 2022 to stockholders of record as of the close of business onNovember 21, 2022 . 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 2021 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. 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. At the initial meeting of the Board of Directors (the "Board") held onMarch 13, 2015 , the Board 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. OnOctober 17, 2022 , the Board terminated the "opt out" dividend reinvestment plan, as disclosed in the Company's 8-K filed onOctober 19, 2022 . Written notice of such termination was mailed to the Company's stockholders onOctober 21, 2022 , with an effective date ofNovember 20, 2022 . As a result, any distributions declared for stockholders of record afterNovember 20, 2022 ,
will be paid in cash.
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, 2022 andSeptember 30, 2021 were$83,014 and$74,347 , respectively. Management fees earned by House Hanover for the nine months endedSeptember 30, 2022 andSeptember 30, 2021 were$247,395 and$182,778 , respectively. - 41 -
As ofSeptember 30, 2022 andDecember 31, 2021 , management fees of$512,735 and$262,324 , respectively, were payable to House Hanover. HouseHanover has allowed 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. OnApril 29, 2021 ,December 6, 2021 , andNovember 2, 2022 , the Company made payments to HouseHanover for management fees in the amount of$285,137 ,$266,984 , and$512,735 , respectively. The Company expects cash flows from operations plus cash reserves to be able to fund management fees going forward beginning in the fourth quarter of 2022. 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. Administration Fees HouseHanover is entitled to reimbursement of expenses under the House Hanover Investment Advisory Agreement for administrative services performed for the Company. Administration fees were$67,500 , and$67,500 for the three months endedSeptember 30, 2022 and 2021, respectively, as shown on the Statements of Operations under administration fees. Administration fees were$202,500 , and$202,500 for the nine months endedSeptember 30, 2022 and 2021, respectively, as shown on the Statements of Operations under administration fees. As ofSeptember 30, 2022 andDecember 31, 2021 there were$472,500 and$273,016 , respectively, of administration fees owed to House Hanover, as shown on the Statements of Assets and Liabilities under Due to affiliates. OnOctober 26, 2022 , the Board of Directors accepted a proposal from the Company's investment adviser,House Hanover, LLC , of an adjustment in the amount of$31,875 to reduce these outstanding administration fees payable for the allocation of Chief Compliance Officer administration fees. HouseHanover has allowed administration fees to accrue and not be paid until such time as the Company has sufficient capital to pay them. OnApril 29, 2021 ,December 6, 2021 , andNovember 2, 2022 , the Company made payments to House Hanover for administration fees in the amount of$202,500 ,$270,000 , and$440,625 , respectively. The Company expects cash flows from operations plus cash reserves to be able to fund administration fees going forward beginning in the fourth quarter of 2022. OnMay 1, 2022 ,Advantis Certified Staffing Solutions, Inc. ("Advantis") requested one of its directors,Gregory J. Cannella who also serves as our Chief Financial Officer, become the Executive Chair of Advantis to provide executive authority and leadership in the absence of their former president, who resigned inMarch 2022 .Mr. Cannella has agreed to take this position and in return will be compensated by Advantis in the amount of$5,000 per month. The title and benefits of this position can be removed at any time by the board of directors of Advantis.
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. - 42 -
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, which 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 these
preliminary 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.
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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 The Company evaluated subsequent events and transactions that occurred up to the date unaudited condensed financial statements were issued. Based upon this review, the Company did not identify any subsequent events, other than noted below, that would have required adjustment or disclosure in the unaudited condensed financial statements.
On
OnOctober 17, 2022 , the Board terminated the "opt out" dividend reinvestment plan, as disclosed in the Company's 8-K filed onOctober 19, 2022 . Written notice of such termination was mailed to the Company's stockholders onOctober 21, 2022 , with an effective date ofNovember 20, 2022 . OnOctober 26, 2022 , the Board of Directors accepted a proposal from the Company's investment adviser,House Hanover, LLC , of an adjustment in the amount of$31,875 to reduce the outstanding amounts under Due to affiliates on the Statements of Assets and Liabilities for the allocation of Chief Compliance Officer administration fees. Further, the Board of Directors accepted a proposal of Chief Compliance Officer administration fees beginningOctober 1, 2022 to be allocated 65% to the Company and 35% toHouse Hanover, LLC . As disclosed in the Company's Form 8-K that was filed onOctober 27, 2022 , the Board of Directors has authorized and declared a cash dividend of$0.075 per share of common stock payable onDecember 1, 2022 to stockholders of record as of the close of business onNovember 21, 2022 . - 44 -
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