UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Form
For the Quarterly Period Ended
or
For the transition period from to
Commission file number:
(Exact Name of Registrant as Specified in its Charter)
| (State or Other Jurisdiction of | (I.R.S. Employer | |
| Incorporation or Organization) | Identification No.) |
| (Address of Principal Executive Offices) | (Zip Code) |
(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 | ||
| The | ||||
| The |
Securities registered pursuant to Section 12(g) of the Act: None
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.
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).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 ☐ | | Smaller reporting company | Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ☐ No
The Registrant had
PHENIXFIN CORPORATION
TABLE OF CONTENTS
| i |
PHENIXFIN CORPORATION
Consolidated Statements of Assets and Liabilities
| June 30, 2023 (Unaudited) | September 30, 2022 | |||||||
| Assets: | ||||||||
| Investments at fair value | ||||||||
| Non-controlled, non-affiliated investments (amortized cost of $ | $ | $ | ||||||
| Affiliated investments (amortized cost of $ | ||||||||
| Controlled investments (amortized cost of $ | ||||||||
| Total Investments at fair value | ||||||||
| Cash and cash equivalents | ||||||||
| Receivables: | ||||||||
| Interest receivable | ||||||||
| Paydown receivable | ||||||||
| Dividends receivable | ||||||||
| Other receivable | ||||||||
| Prepaid share repurchase | ||||||||
| Deferred financing costs | ||||||||
| Due from Affiliate | ||||||||
| Other assets | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities: | ||||||||
| Credit facility and note payable (net of debt issuance costs of $ | $ | $ | ||||||
| Investments purchased payable | ||||||||
| Accounts payable and accrued expenses | ||||||||
| Interest and fees payable | ||||||||
| Other liabilities | ||||||||
| Deferred revenue | ||||||||
| Administrator expenses payable (see Note 6) | - | |||||||
| Due to broker | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (see Note 8) | ||||||||
| Net Assets: | ||||||||
| Common Shares, $ | ||||||||
| Capital in excess of par value | ||||||||
| Total distributable earnings (loss) | ( | ) | ( | ) | ||||
| Total Net Assets | ||||||||
| Total Liabilities and Net Assets | $ | $ | ||||||
| Net Asset Value Per Common Share | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 1 |
PHENIXFIN CORPORATION
Consolidated Statements of Operations
(Unaudited)
| For the Three Months Ended June 30, | For the Nine Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Interest Income: | ||||||||||||||||
| Interest from investments | ||||||||||||||||
| Non-controlled, non-affiliated investments: | ||||||||||||||||
| Cash | $ | $ | $ | $ | ||||||||||||
| Payment in-kind | ||||||||||||||||
| Affiliated investments: | ||||||||||||||||
| Cash | ( | ) | ||||||||||||||
| Payment in-kind | ||||||||||||||||
| Controlled investments: | ||||||||||||||||
| Cash | ||||||||||||||||
| Payment in-kind | ||||||||||||||||
| Total interest income | ||||||||||||||||
| Dividend income | ||||||||||||||||
| Interest from cash and cash equivalents | ||||||||||||||||
| Fee income (see Note 9) | ||||||||||||||||
| Other income | ||||||||||||||||
| Total Investment Income | ||||||||||||||||
| Expenses: | ||||||||||||||||
| Interest and financing expenses | ||||||||||||||||
| Salaries and benefits | ||||||||||||||||
| Professional fees, net | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Directors fees | ||||||||||||||||
| Insurance expenses | ||||||||||||||||
| Administrator expenses (see Note 6) | ||||||||||||||||
| Total expenses | ||||||||||||||||
| Net Investment Income | ||||||||||||||||
| Realized and unrealized gains (losses) on investments | ||||||||||||||||
| Net realized gains (losses): | ||||||||||||||||
| Non-controlled, non-affiliated investments | ( | ) | ( | ) | ( | ) | ||||||||||
| Affiliated investments | ||||||||||||||||
| Controlled investments | ||||||||||||||||
| Total net realized gains (losses) | ( | ) | ( | ) | ( | ) | ||||||||||
| Net change in unrealized gains (losses): | ||||||||||||||||
| Non-controlled, non-affiliated investments | ( | ) | ( | ) | ||||||||||||
| Affiliated investments | ( | ) | ||||||||||||||
| Controlled investments | ( | ) | ||||||||||||||
| Total net change in unrealized gains (losses) | ( | ) | ( | ) | ||||||||||||
| Loss on extinguishment of debt (see Note 5) | ( | ) | ||||||||||||||
| Total realized and unrealized gains (losses) | ( | ) | ( | ) | ||||||||||||
| Net Increase (Decrease) in Net Assets Resulting from Operations | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| $ | $ | ( | ) | $ | $ | ( | ) | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 2 |
PHENIXFIN CORPORATION
Consolidated Statements of Changes in Net Assets
(Unaudited)
| Common Stock | ||||||||||||||||||||
| Shares | Par Amount | Capital in Excess of Par Value | Total Distributable Earnings/(Loss) | Total Net Assets | ||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| OPERATIONS | ||||||||||||||||||||
| Net investment income (loss) | - | |||||||||||||||||||
| Net realized gains (losses) on investments | - | ( | ) | ( | ) | |||||||||||||||
| Net change in unrealized appreciation (depreciation) on investments | - | ( | ) | ( | ) | |||||||||||||||
| CAPITAL SHARE TRANSACTIONS | ||||||||||||||||||||
| Distributions to shareholders | - | ( | ) | ( | ) | |||||||||||||||
| Repurchase of common shares | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Total Increase (Decrease) in Net Assets | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||
| Balance at June 30, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| OPERATIONS | ||||||||||||||||||||
| Net investment income (loss) | - | |||||||||||||||||||
| Net realized gains (losses) on investments | - | ( | ) | ( | ) | |||||||||||||||
| Net change in unrealized appreciation (depreciation) on investments | - | |||||||||||||||||||
| Net loss on extinguishment of debt | - | |||||||||||||||||||
| CAPITAL SHARE TRANSACTIONS | ||||||||||||||||||||
| Repurchase of common shares | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Total Increase (Decrease) in Net Assets | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| OPERATIONS | ||||||||||||||||||||
| Net investment income (loss) | - | |||||||||||||||||||
| Net realized gains (losses) on investments | - | |||||||||||||||||||
| Net change in unrealized appreciation (depreciation) on investments | - | ( | ) | ( | ) | |||||||||||||||
| Net loss on extinguishment of debt | - | ( | ) | ( | ) | |||||||||||||||
| CAPITAL SHARE TRANSACTIONS | ||||||||||||||||||||
| Distributions declared | - | ( | ) | ( | ) | |||||||||||||||
| Repurchase of common shares | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Total Increase (Decrease) in Net Assets | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||
| Balance at June 30, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| OPERATIONS | ||||||||||||||||||||
| Net investment income (loss) | - | |||||||||||||||||||
| Net realized gains (losses) on investments | - | ( | ) | ( | ) | |||||||||||||||
| Net change in unrealized appreciation (depreciation) on investments | - | |||||||||||||||||||
| CAPITAL SHARE TRANSACTIONS | ||||||||||||||||||||
| Repurchase of common shares | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Total Increase (Decrease) in Net Assets | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 3 |
PHENIXFIN CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
| For the Nine Months Ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net increase (decrease) in net assets resulting from operations | $ | $ | ( | ) | ||||
| Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities: | ||||||||
| Investment increases due to payment-in-kind interest | ( | ) | ( | ) | ||||
| Net amortization of premium (discount) on investments | ( | ) | ( | ) | ||||
| Amortization of debt issuance cost | ||||||||
| Amortization of deferred financing cost | ||||||||
| Net realized (gains) losses from investments | ( | ) | ||||||
| Net unrealized (gains) losses on investments | ( | ) | ||||||
| Proceeds from sale and settlements of investments | ||||||||
| Purchases, originations and participations | ( | ) | ( | ) | ||||
| Loss on extinguishment of debt | ||||||||
| (Increase) decrease in operating assets: | ||||||||
| Fees receivable | ||||||||
| Interest receivable | ( | ) | ( | ) | ||||
| Due from affiliate | ( | ) | ( | ) | ||||
| Dividends receivable | ( | ) | ||||||
| Paydown receivable | ||||||||
| Other receivable | ||||||||
| Prepaid share repurchase | ||||||||
| Other assets | ||||||||
| Increase (decrease) in operating liabilities: | ||||||||
| Due to broker | ( | ) | ( | ) | ||||
| Accounts payable and accrued expenses | ( | ) | ( | ) | ||||
| Due to affiliates | ( | ) | ||||||
| Administrator expenses payable | ( | ) | ( | ) | ||||
| Interest and fees payable | ||||||||
| Deferred revenue | ( | ) | ||||||
| Investments purchased payable | ||||||||
| Other liabilities | ( | ) | ( | ) | ||||
| Net cash provided by (used in) operating activities | ( | ) | ( | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Debt issuance | ||||||||
| Paydowns on debt | ( | ) | ( | ) | ||||
| Debt issuance costs paid | ( | ) | ( | ) | ||||
| Deferred financing costs | ( | ) | ||||||
| Repurchase of common shares | ( | ) | ( | ) | ||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Net increase (decrease) in cash and cash equivalents | ( | ) | ( | ) | ||||
| Cash and cash equivalents, beginning of period | ||||||||
| Cash and cash equivalents, end of period | $ | $ | ||||||
| Supplemental information: | ||||||||
| Interest paid during the period | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 4 |
PHENIXFIN CORPORATION
Consolidated Schedule of Investments
As of June 30, 2023
(Unaudited)
| Company(1) | Industry | Type of Investment | Maturity | Par
Amount/ Shares/Units(2) | Amortized Cost(3) | Fair
Value(4) | %
of Net Assets(5) | ||||||||||||||||
| Non-Controlled/Non-Affiliated Investments: | |||||||||||||||||||||||
| Altisource S.A.R.L.(11) | Services: Business | Senior Secured First Lien Term Loan B (SOFR + | $ | $ | $ | % | |||||||||||||||||
| Warrants(21) | % | ||||||||||||||||||||||
| % | |||||||||||||||||||||||
| Arcline FM Holdings, LLC | Aerospace & Defense | First Lien Term Loans (SOFR + | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| Be Green Packaging, LLC | Containers, Packaging & Glass | Equity - | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| Boostability Seotowncenter, Inc. | Services: Business | Equity - | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| CB&L Associates Holdco I, LLC(11) | Banking, Finance, Insurance & Real Estate | First Lien Term Loan (SOFR + | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| Chimera Investment Corp.(11) | Banking, Finance, Insurance & Real Estate | Equity - | % | ||||||||||||||||||||
| Equity - | % | ||||||||||||||||||||||
| % | |||||||||||||||||||||||
| Copper Property CTL Pass Through Trust | Banking, Finance, Insurance & Real Estate | Equity Certificates(14) | % | ||||||||||||||||||||
| DataOnline Corp. | High Tech Industries | Senior Secured First Lien Term Loan (LIBOR + | % | ||||||||||||||||||||
| Revolving Credit Facility (LIBOR + | % | ||||||||||||||||||||||
| % | |||||||||||||||||||||||
| Deer Management Systems LLC | Consumer Discretionary | First Lien Term Loan (SOFR + | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| DirecTV Financing, LLC | Media: Broadcasting & Subscription | Senior Secured First Lien Term Loan (SOFR + | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| Dream Finders Homes, LLC | Construction & Building | Preferred Equity ( | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| First Brands Group, LLC | Automotive | Senior Secured First Lien Term Loan (SOFR + | % | ||||||||||||||||||||
| Senior Secured First Lien Term Loan (SOFR + | % | ||||||||||||||||||||||
| % | |||||||||||||||||||||||
| 5 |
PHENIXFIN CORPORATION
Consolidated Schedule of Investments
As of June 30, 2023
(Unaudited)
| Company(1) | Industry | Type of Investment | Maturity | Par
Amount/ Shares/Units(2) | Amortized Cost(3) | Fair
Value(4) | %
of Net Assets(5) | ||||||||||||||||
| Banking, Finance, Insurance & Real Estate | Equity - 392,745 Common Units(13) | % | |||||||||||||||||||||
| % | |||||||||||||||||||||||
| Global Accessories Group, LLC | Consumer goods: Non-durable | Equity - | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| Great AJAX Corp.(11) | Banking, Finance, Insurance & Real Estate | Equity - | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| Innovate Corp.(11) | Construction & Building | % | |||||||||||||||||||||
| % | |||||||||||||||||||||||
| Invesco Mortgage Capital, Inc.(11) | Banking, Finance, Insurance & Real Estate | Equity - | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| JFL-NGS-WCS Partners, LLC | Construction & Building | Senior Secured First Lien Term Loan B (SOFR + | % | ||||||||||||||||||||
| Equity - | % | ||||||||||||||||||||||
| % | |||||||||||||||||||||||
| Lighting Science Group Corporation | Containers, Packaging & Glass | Warrants - | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| Lucky Bucks, LLC(28) | Consumer Discretionary | Senior Secured First Lien Term Loan(LIBOR + | % | ||||||||||||||||||||
| Senior Secured First Lien Term Loan(SOFR + | % | ||||||||||||||||||||||
| Senior Secured First Lien Term Loan(SOFR + | % | ||||||||||||||||||||||
| % | |||||||||||||||||||||||
| McKissock Investment Holdings, LLC (dba Colibri) | Services: Consumer | Senior Secured First Lien Term Loan (SOFR + CSA + | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| 6 |
PHENIXFIN CORPORATION
Consolidated Schedule of Investments
As of June 30, 2023
(Unaudited)
| Company(1) | Industry | Type of Investment | Maturity | Par
Amount/ Shares/Units(2) | Amortized Cost(3) | Fair
Value(4) | %
of Net Assets(5) | ||||||||||||||||
| MFA Financial, Inc.(11) | Banking, Finance, Insurance & Real Estate | Equity - | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| New York Mortgage Trust, Inc.(11) | Banking, Finance, Insurance & Real Estate | Equity - | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| PennyMac Financial Services, Inc.(11) | Banking, Finance, Insurance & Real Estate | Equity - | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| Point.360 | Services: Business | Senior Secured First Lien Term Loan (LIBOR + | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| Power Stop LLC | Automotive | Senior Secured First Lien Term Loan (LIBOR + | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| Rithm Capital Corp.(11) | Banking, Finance, Insurance & Real Estate | Equity - | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| Secure Acquisition Inc. (dba Paragon Films) | Packaging | Senior Secured First Lien Term Loan (LIBOR + | % | ||||||||||||||||||||
| Senior Secured First Lien Delayed Draw Term Loan (LIBOR + | ( | ) | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| 7 |
PHENIXFIN CORPORATION
Consolidated Schedule of Investments
As of June 30, 2023
(Unaudited)
| Company(1) | Industry | Type of Investment | Maturity | Par
Amount/ Shares/Units(2) | Amortized Cost(3) | Fair
Value(4) | %
of Net Assets(5) | ||||||||||||||||
| Sendero Drilling Company, LLC | Energy: Oil & Gas | Unsecured Debt( | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| SS Acquisition, LLC (dba Soccer Shots Franchising) | Services: Consumer | Senior Secured First Lien Term Loan (SOFR + CSA + | % | ||||||||||||||||||||
| Senior Secured First Lien Delayed Draw Term Loan (SOFR + | % | ||||||||||||||||||||||
| % | |||||||||||||||||||||||
| SMART Financial Operations, LLC | Retail | Equity - | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| Services: Business | Equity - 338,736.11 Class A Units(21) | % | |||||||||||||||||||||
| % | |||||||||||||||||||||||
| Staples, Inc. | Services: Consumer | First Lien Term Loan (LIBOR + | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| Tamarix Capital Partners II, L.P.(11) | Banking, Finance, Insurance & Real Estate | Fund Investment(8)(21) | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| Thryv Holdings, Inc.(11) | Media: Broadcasting & Subscription | Senior Secured First Lien Term Loan (SOFR + | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| Velocity Pooling Vehicle, LLC | Automotive | Equity - | % | ||||||||||||||||||||
| Warrants - | % | ||||||||||||||||||||||
| % | |||||||||||||||||||||||
| Watermill-QMC Midco, Inc. | Automotive | Equity - | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| Wingman Holdings, Inc. | Aerospace & Defense | Equity - | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| Subtotal Non-Controlled/Non-Affiliated Investments | $ | $ | $ | % | |||||||||||||||||||
| 8 |
PHENIXFIN CORPORATION
Consolidated Schedule of Investments
As of June 30, 2023
(Unaudited)
| Company(1) | Industry | Type of Investment | Maturity | Par
Amount/ Shares/Units(2) | Amortized Cost(3) | Fair
Value(4) | %
of Net Assets(5) | ||||||||||||||||
| Affiliated Investments:(6) | |||||||||||||||||||||||
| 1888 Industrial Services, LLC | Energy: Oil & Gas | Senior Secured First Lien Term Loan A (LIBOR + | $ | $ | $ | % | |||||||||||||||||
| Senior Secured First Lien Term Loan C (LIBOR + (23) | % | ||||||||||||||||||||||
| Revolving Credit Facility (LIBOR + 5.00%, | % | ||||||||||||||||||||||
| Equity - | |||||||||||||||||||||||
| % | |||||||||||||||||||||||
| Black Angus Steakhouses, LLC | Hotel, Gaming & Leisure | Senior Secured First Lien Delayed Draw Term Loan (SOFR + | % | ||||||||||||||||||||
| Senior Secured First Lien Term Loan (SOFR + | % | ||||||||||||||||||||||
| Senior Secured First Lien Super Priority Delayed Draw Term Loan (SOFR + | % | ||||||||||||||||||||||
| Equity - | % | ||||||||||||||||||||||
| % | |||||||||||||||||||||||
| FST Holdings Parent, LLC | High Tech Industries | Equity - | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| Maritime Wireless Holdings LLC | Hotel, Gaming & Leisure | Senior Secured First Lien Term Loan A (SOFR + CSA + | % | ||||||||||||||||||||
| Senior Secured First Lien Term Loan B (SOFR + CSA + | % | ||||||||||||||||||||||
| Equity(21) | % | ||||||||||||||||||||||
| % | |||||||||||||||||||||||
| US Multifamily, LLC | Banking, Finance, Insurance & Real Estate | Equity - | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| Subtotal Affiliated Investments | $ | $ | $ | % | |||||||||||||||||||
| 9 |
PHENIXFIN CORPORATION
Consolidated Schedule of Investments
As of June 30, 2023
(Unaudited)
| Company(1) | Industry | Type of Investment | Maturity | Par
Amount/ Shares/Units(2) | Amortized Cost(3) | Fair
Value(4) | %
of Net Assets(5) | ||||||||||||||||
| Controlled Investments:(7) | |||||||||||||||||||||||
| FlexFIN, LLC | Services: Business | Equity Interest | $ | $ | $ | % | |||||||||||||||||
| % | |||||||||||||||||||||||
| Kemmerer Holdings, LLC | Metals & Mining | Senior Secured First Lien Term Loan ( | % | ||||||||||||||||||||
| Equity - | % | ||||||||||||||||||||||
| % | |||||||||||||||||||||||
| NVTN LLC | Hotel, Gaming & Leisure | Senior Secured First Lien Delayed Draw Term Loan (LIBOR + | % | ||||||||||||||||||||
| Senior Secured First Lien Term Loan B (LIBOR + | % | ||||||||||||||||||||||
| Senior Secured First Lien Term Loan C (LIBOR + | % | ||||||||||||||||||||||
| Equity - | % | ||||||||||||||||||||||
| % | |||||||||||||||||||||||
| Subtotal Control Investments | $ | $ | $ | % | |||||||||||||||||||
| Total Investments, June 30, 2023 | $ | $ | $ | % | |||||||||||||||||||
| 10 |
PHENIXFIN CORPORATION
Consolidated Schedule of Investments
As of June 30, 2023
(Unaudited)
| (1) | Most of our investments are domiciled in the United States. See Note 3 for a summary of portfolio composition by geographic location. Certain investments also have international operations. |
| (2) | Par amount is presented for debt investments and the amount includes accumulated payment-in-kind (“PIK”) interest, as applicable, and is net of repayments, while the number of shares or units owned is presented for equity investments. Par amount is denominated in U.S. Dollars (“$”) unless otherwise noted. |
| (3) | Net unrealized depreciation for U.S. federal income tax purposes totaled $(53,411,797). |
| The tax cost basis of investments is $272,098,415 as of June 30, 2023. | |
| The amortized cost represents the original cost adjusted for the amortization or accretion of premium or discount, as applicable, on debt investments using the effective interest method. | |
| (4) | Unless otherwise indicated, all securities are valued using significant unobservable inputs, which are categorized as Level 3 assets under the definition of ASC 820 fair value hierarchy (see Note 4). |
| (5) | Percentage is based on net assets of $139,954,664 as of June 30, 2023. |
| (6) | Affiliated Investments are defined by the 1940 Act as investments in companies in which the Company owns between 5% and 25% outstanding voting securities or is under common control with such portfolio company. |
| (7) | Control Investments are defined by the Investment Company Act of 1940, as amended (the “1940 Act”), as investments in companies in which the Company owns more than 25% of the voting securities or maintains greater than 50% of the board representation. |
| (8) | The investment has an unfunded commitment as of June 30, 2023 (see Note 8), and fair value includes the value of any unfunded commitments. The negative cost, if applicable, is the result of the capitalized discount being greater than the principal amount outstanding on the loan. The negative fair value, if applicable, is the result of the capitalized discount on the loan. |
| (9) | Represents 1.3% partnership interest in Watermill-QMC Partners, LP and Watermill-EMI Partners, LP. |
| (10) | The investment was on non-accrual status as of June 30, 2023. |
| (11) | The investment is not a qualifying asset as defined under Section 55(a) of 1940 Act, in a whole, or in part. As of June 30, 2023, non-qualifying assets represented 21.63% of total assets. |
| (12) | This investment earns 0.50% commitment fee on all unused commitment as of June 30, 2023, and is recorded as a component of interest income on the Consolidated Statements of Operations. |
| (13) | This investment represents a Level 1 security in the ASC 820 table as of June 30, 2023 (see Note 4). |
| (14) | This investment represents a Level 2 security in the ASC 820 table as of June 30, 2023 (see Note 4). |
| (15) | The interest rate on this investment is fixed-to-floating and will shift to 3 month LIBOR plus a 4.743% spread on 9/30/2025. |
| (16) | The interest rate on this investment is fixed-to-floating and will shift to 3 month LIBOR plus a 5.29% spread on 9/27/2027. |
| (17) | The interest rate on this investment is fixed-to-floating and will shift to 3 month LIBOR plus a 5.64% spread on 8/15/2024. |
| (18) | The interest rate on this investment is fixed-to-floating and will shift to 3 month LIBOR plus a 6.429% spread on 1/15/2025. |
| (19) | The interest rate on this preferred equity is fixed-to-floating and will shift to 3 month LIBOR plus a 5.345% spread on 3/31/2025. |
| (20) | Credit Spread Adjustment (“CSA”) |
| (21) | Non-income producing security. |
| (22) | The interest rate on these loans is subject to 1 month LIBOR, which as of June 30, 2023 was 5.22%. |
| (23) | The interest rate on these loans is subject to 3 month LIBOR, which as of June 30, 2023 was 5.55%. |
| (24) | The interest rate on these loans is subject to 1 month SOFR, which as of June 30, 2023 was 5.07%. |
| (25) | The interest rate on these loans is subject to 3 month SOFR, which as of June 30, 2023 was 5.00%. |
| (26) | The interest rate on these loans is subject to 6 month SOFR, which as of June 30, 2023 was 4.78%. |
| (27) | The interest rate on this investment is fixed-to-floating and will shift to 3 month LIBOR plus a 5.791% spread on 3/31/2024. |
| (28) | The Company filed for bankruptcy and PhenixFIN provided DIP Financing as of June 30, 2023. |
The accompanying notes are an integral part of these consolidated financial statements.
| 11 |
PHENIXFIN CORPORATION
Consolidated Schedule of Investments
As of September 30, 2022
| Company(1) | Industry | Type of Investment | Maturity | Par Amount/ Shares/Units(2) | Amortized Cost(3) | Fair Value(4) | % of Net Assets(5) | ||||||||||||||||
| Non-Controlled/Non-Affiliated Investments: | |||||||||||||||||||||||
| Services: Business | Senior Secured First Lien Term Loan B (LIBOR + | $ | $ | $ | % | ||||||||||||||||||
| % | |||||||||||||||||||||||
| Be Green Packaging, LLC | Containers, Packaging & Glass | Equity - | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| Boostability Seotowncenter, Inc. | Services: Business | Equity - | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| Chimera Investment Corp.(11) | Banking, Finance, Insurance & Real Estate | Equity - | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| Copper Property CTL Pass Through Trust | Banking, Finance, Insurance & Real Estate | Equity Certificates(14) | % | ||||||||||||||||||||
| CPI International, Inc. | Aerospace & Defense | Senior Secured Second Lien Term Loan (LIBOR + | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| DataOnline Corp. | High Tech Industries | Senior Secured First Lien Term Loan (LIBOR + | % | ||||||||||||||||||||
| Revolving Credit Facility (LIBOR + | % | ||||||||||||||||||||||
| % | |||||||||||||||||||||||
| DirecTV Financing, LLC | Media: Broadcasting & Subscription | Senior Secured First Lien Term Loan (LIBOR + | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| Dream Finders Homes, LLC | Construction & Building | Preferred Equity ( | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| 12 |
PHENIXFIN CORPORATION
Consolidated Schedule of Investments
September 30, 2022
| Company(1) | Industry | Type of Investment | Maturity | Par
Amount/ Shares/Units(2) | Amortized Cost(3) | Fair Value(4) | %
of Net Assets(5) | ||||||||||||||||
| First Brands Group, LLC | Automotive | Senior Secured First Lien Term Loan (SOFR + | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| Footprint Holding Company Inc. | Services: Business | Equity - | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| Franklin BSP Realty Trust, Inc.(11) | Banking, Finance, Insurance & Real Estate | Equity - | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| Global Accessories Group, LLC | Consumer goods: Non-durable | Equity - | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| Banking, Finance, Insurance & Real Estate | Equity - 254,922 Common Units(13) | % | |||||||||||||||||||||
| % | |||||||||||||||||||||||
| Innovate Corp. | Construction & Building | % | |||||||||||||||||||||
| % | |||||||||||||||||||||||
| Invesco Mortgage Capital, Inc.(11) | Banking, Finance, Insurance & Real Estate | Equity - | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| JFL-NGS-WCS Partners, LLC | Construction & Building | Senior Secured First Lien Term Loan B (LIBOR + | % | ||||||||||||||||||||
| Equity - | % | ||||||||||||||||||||||
| % | |||||||||||||||||||||||
| Lighting Science Group Corporation | Containers, Packaging & Glass | Warrants - | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| Lucky Bucks, LLC | Consumer Discretionary | Senior Secured First Lien Term Loan(LIBOR + | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| 13 |
PHENIXFIN CORPORATION
Consolidated Schedule of Investments
September 30, 2022
| Company(1) | Industry | Type of Investment | Maturity | Par
Amount/ Shares/Units(2) | Amortized Cost(3) | Fair Value(4) | % of Net Assets(5) | ||||||||||||||||
| Maritime Wireless Holdings LLC | Hotel, Gaming & Leisure | Senior Secured First Lien Term Loan A (SOFR + CSA + | % | ||||||||||||||||||||
| Senior Secured First Lien Term Loan B (SOFR + CSA + | % | ||||||||||||||||||||||
| Convertible Promissory Note | % | ||||||||||||||||||||||
| % | |||||||||||||||||||||||
| McKissock Investment Holdings, LLC (dba Colibri) | Services: Consumer | Senior Secured First Lien Term Loan (SOFR + CSA + | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| MFA Financial, Inc.(11) | Banking, Finance, Insurance & Real Estate | Equity - | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| New York Mortgage Trust, Inc.(11) | Banking, Finance, Insurance & Real Estate | Equity - | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| PennyMac Financial Services, Inc.(11) | Banking, Finance, Insurance & Real Estate | Equity - | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| Point.360 | Services: Business | Senior Secured First Lien Term Loan (LIBOR + | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| Power Stop LLC | Automotive | Senior Secured First Lien Term Loan(LIBOR + | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| Rithm Capital Corp.(11) | Banking, Finance, Insurance & Real Estate | Equity - | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| Secure Acquisition Inc. (dba Paragon Films)(8) | Packaging | Senior Secured First Lien Term Loan(LIBOR + | % | ||||||||||||||||||||
| Senior Secured First Lien Delayed Draw Term Loan (LIBOR + | ( | ) | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| 14 |
PHENIXFIN CORPORATION
Consolidated Schedule of Investments
September 30, 2022
| Company(1) | Industry | Type of Investment | Maturity | Par
Amount/ Shares/Units(2) | Amortized Cost(3) | Fair Value(4) | % of Net Assets(5) | ||||||||||||||||
| Sendero Drilling Company, LLC | Energy: Oil & Gas | Unsecured Debt ( | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| SS Acquisition, LLC (dba Soccer Shots Franchising)(8) | Services: Consumer | Senior Secured First Lien Term Loan (LIBOR + | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| SMART Financial Operations, LLC | Retail | Equity - | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| Stancor (dba Industrial Flow Solutions Holdings, LLC) | Services: Business | Equity - | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| Staples, Inc. | Services: Consumer | First Lien Term Loan (LIBOR + | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| Thryv Holdings, Inc.(11) | Services: Consumer | Senior Secured First Lien Term Loan B (LIBOR + | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| Velocity Pooling Vehicle, LLC | Automotive | Equity - | % | ||||||||||||||||||||
| Warrants - | % | ||||||||||||||||||||||
| % | |||||||||||||||||||||||
| Walker Edison Furniture Company LLC | Consumer goods: Durable | Equity - | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| Automotive | Equity - 1.30% Partnership Interest(9) | % | |||||||||||||||||||||
| % | |||||||||||||||||||||||
| Wingman Holdings, Inc. | Aerospace & Defense | Equity - | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| Subtotal Non-Controlled/Non-Affiliated Investments | $ | $ | $ | % | |||||||||||||||||||
| 15 |
PHENIXFIN CORPORATION
Consolidated Schedule of Investments
As of September 30, 2022
| Company(1) | Industry | Type of Investment | Maturity | Par
Amount/ Shares/Units(2) | Amortized Cost(3) | Fair Value(4) | % of Net Assets(5) | ||||||||||||||||
| Affiliated Investments:(6) | |||||||||||||||||||||||
| 1888 Industrial Services, LLC(8) | Energy: Oil & Gas | Senior Secured First Lien Term Loan A (LIBOR + | $ | $ | $ | % | |||||||||||||||||
| Senior Secured First Lien Term Loan C(LIBOR + | % | ||||||||||||||||||||||
| Revolving Credit Facility (LIBOR + | % | ||||||||||||||||||||||
| Equity - | |||||||||||||||||||||||
| % | |||||||||||||||||||||||
| Black Angus Steakhouses, LLC(8) | Hotel, Gaming & Leisure | Senior Secured First Lien Delayed Draw Term Loan (SOFR + CSA + | % | ||||||||||||||||||||
| Senior Secured First Lien Term Loan (SOFR + CSA + | % | ||||||||||||||||||||||
| Senior Secured First Lien Super Priority Delayed Draw Term Loan (SOFR + CSA + | % | ||||||||||||||||||||||
| Equity - | % | ||||||||||||||||||||||
| % | |||||||||||||||||||||||
| Kemmerer Operations, LLC(8) | Metals & Mining | Senior Secured First Lien Term Loan( | % | ||||||||||||||||||||
| Equity - | % | ||||||||||||||||||||||
| % | |||||||||||||||||||||||
| US Multifamily, LLC | Banking, Finance, Insurance & Real Estate | Equity - | % | ||||||||||||||||||||
| % | |||||||||||||||||||||||
| Subtotal Affiliated Investments | $ | $ | $ | % | |||||||||||||||||||
| 16 |
PHENIXFIN CORPORATION
Consolidated Schedule of Investments
As of September 30, 2022
| Company(1) | Industry | Type of Investment | Maturity | Par
Amount/ Shares/Units(2) | Amortized Cost(3) | Fair
Value(4) | %
of Net Assets(5) | ||||||||||||||||
| Controlled Investments:(7) | |||||||||||||||||||||||
| FlexFIN, LLC | Services: Business | Equity Interest | $ | $ | $ | % | |||||||||||||||||
| % | |||||||||||||||||||||||
| NVTN LLC(8) | Hotel, Gaming & Leisure | Senior Secured First Lien Delayed Draw Term Loan (LIBOR + | % | ||||||||||||||||||||
| Senior Secured First Lien Term Loan B (LIBOR + | % | ||||||||||||||||||||||
| Senior Secured First Lien Term Loan C(LIBOR + | % | ||||||||||||||||||||||
| Equity - | % | ||||||||||||||||||||||
| % | |||||||||||||||||||||||
| Subtotal Control Investments | $ | $ | $ | % | |||||||||||||||||||
| Total Investments, September 30, 2022 | $ | $ | $ | % | |||||||||||||||||||
| 17 |
PHENIXFIN CORPORATION
Consolidated Schedule of Investments
As of September 30, 2022
| (1) | All of our investments are domiciled in the United States. Certain investments also have international operations. |
| (2) | Par amount is presented for debt investments and the amount includes accumulated payment-in-kind (“PIK”) interest, as applicable, and is net of repayments, while the number of shares or units owned is presented for equity investments. Par amount is denominated in U.S. Dollars (“$”) unless otherwise noted. |
| (3) | Net unrealized depreciation for U.S. federal income tax purposes totaled $(69,642,639). |
| The tax cost basis of investments is $262,599,288 as of September 30, 2022. | |
| (4) | Unless otherwise indicated, all securities are valued using significant unobservable inputs, which are categorized as Level 3 assets under the definition of ASC 820 fair value hierarchy (see Note 4). |
| (5) | Percentage is based on net assets of $120,845,408 as of September 30, 2022. |
| (6) | Affiliated Investments are defined by the 1940 Act as investments in companies in which the Company owns between 5% and 25% outstanding voting securities or is under common control with such portfolio company. |
| (7) | Control Investments are defined by the Investment Company Act of 1940, as amended (the “1940 Act”), as investments in companies in which the Company owns more than 25% of the voting securities or maintains greater than 50% of the board representation. |
| (8) | The investment has an unfunded commitment as of September 30, 2022 (see Note 8), and fair value includes the value of any unfunded commitments. The negative cost, if applicable, is the result of the capitalized discount being greater than the principal amount outstanding on the loan. The negative fair value, if applicable, is the result of the capitalized discount on the loan. |
| (9) | Represents 1.3% partnership interest in Watermill-QMC Partners, LP and Watermill-EMI Partners, LP. |
| (10) | The investment was on non-accrual status as of September 30, 2022. |
| (11) | The investment is not a qualifying asset as defined under Section 55(a) of 1940 Act, in a whole, or in part. As of September 30, 2022, 17.24% of the Company’s portfolio investments were non-qualifying assets. |
| (12) | This investment earns 0.50% commitment fee on all unused commitment as of September 30, 2022, and is recorded as a component of interest income on the Consolidated Statements of Operations. |
| (13) | This investment represents a Level 1 security in the ASC 820 table as of September 30, 2022 (see Note 4). |
| (14) | This investment represents a Level 2 security in the ASC 820 table as of September 30, 2022 (see Note 4). |
| (15) | The interest rate on this loan is fixed-to-floating and will shift to 3 month LIBOR plus a 4.743% spread on 9/30/2025. |
| (16) | The interest rate on this loan is fixed-to-floating and will shift to 3 month LIBOR plus a 5.29% spread on 9/27/2027. |
| (17) | The interest rate on this loan is fixed-to-floating and will shift to 3 month LIBOR plus a 5.64% spread on 8/15/2024. |
| (18) | The interest rate on this loan is fixed-to-floating and will shift to 3 month LIBOR plus a 6.429% spread on 1/15/2025. |
| (19) | The interest rate on this preferred equity is fixed-to-floating and will shift to 3 month LIBOR plus a 5.345% spread on 3/31/2025. |
| (20) | Credit Spread Adjustment (“CSA”) |
The accompanying notes are an integral part of these consolidated financial statements.
| 18 |
PHENIXFIN
CORPORATION
Notes to Consolidated Financial Statements
June 30, 2023
(Unaudited)
Note 1. Organization
PhenixFIN Corporation (“PhenixFIN.” the “Company,” “we” and “us”) is an internally-managed non-diversified closed end management investment company incorporated in Delaware that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). We completed our initial public offering (“IPO”) and commenced operations on January 20, 2011. The Company has elected, and intends to qualify annually, to be treated, for U.S. federal income tax purposes, as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). On November 18, 2020, the board of directors of the Company approved the adoption of an internalized management structure, effective January 1, 2021. Until close of business on December 31, 2020 we were externally managed and advised by MCC Advisors LLC (“MCC Advisors”), pursuant to an investment management agreement. MCC Advisors is a wholly owned subsidiary of Medley LLC, which is controlled by Medley Management Inc. (OTCM: MDLM), a publicly traded asset management firm, which in turn is controlled by Medley Group LLC, an entity wholly owned by the senior professionals of Medley LLC. We use the term “Medley” to refer collectively to the activities and operations of Medley Capital LLC, Medley LLC, MDLY, Medley Group LLC, MCC Advisors, associated investment funds and their respective affiliates. Since January 1, 2021 the Company has been managed pursuant to an internalized management structure.
The Company has formed and expects to continue to form certain taxable subsidiaries (the “Taxable Subsidiaries”), which are taxed as corporations for federal income tax purposes. These Taxable Subsidiaries allow us to, among other things, hold equity securities of portfolio companies organized as pass-through entities while continuing to satisfy the requirements of a RIC under the Code.
The Company’s investment objective is to generate current income and capital appreciation. The management team seeks to achieve this objective primarily through making loans, private equity or other investments in privately-held companies. The Company may also make debt, equity or other investments in publicly-traded companies. (These investments may also include investments in other BDCs, closed-end funds or REITs.) We may also pursue other strategic opportunities and invest in other assets or operate other businesses to achieve our investment objective, such as operating and managing an asset-based lending business. The portfolio generally consists of senior secured first lien term loans, senior secured second lien term loans, senior secured bonds, preferred equity and common equity. Occasionally, we will receive warrants or other equity participation features which we believe will have the potential to increase total investment returns. Our loan and other debt investments are primarily rated below investment grade or are unrated. Investments in below investment grade securities are considered predominantly speculative with respect to the issuer’s capacity to pay interest and repay principal when due.
Since January 4, 2021, the common stock trades on the NASDAQ Global Market under the trading symbol “PFX.”
Note 2. Significant Accounting Policies
Basis of Presentation
The Company is an investment company following the accounting and reporting guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 946 (“ASC 946”), Financial Services – Investment Companies. The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles (“GAAP”) and include the consolidated accounts of the Company and its wholly owned subsidiaries PhenixFIN Small Business Fund, LP (“PhenixFIN Small Business Fund”) and PhenixFIN SLF Funding I LLC (“PhenixFIN SLF”), and its wholly owned Taxable Subsidiaries. All references made to the “Company,” “we,” and “us” herein include PhenixFIN Corporation and its consolidated subsidiaries, except as stated otherwise. Additionally, the accompanying consolidated financial statements of the Company and related financial information have been prepared pursuant to the requirements for reporting on Form 10-K and Article 10 of Regulation S-X. In the opinion of management, the consolidated financial statements reflect all adjustments and reclassifications, which are of a normal recurring nature, that are necessary for the fair presentation of financial results as of and for the periods presented. Therefore, this Form 10-Q should be read in conjunction with the Company’s annual report on Form 10-K for the year ended September 30, 2022. The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ending September 30, 2023. Certain prior period information has been reclassified to conform to the current period presentation. These reclassifications have no effect on the Company’s financial position or its results of operations as previously reported.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
| 19 |
PHENIXFIN
CORPORATION
Notes to Consolidated Financial Statements
June 30, 2023
(Unaudited)
(continued)
Cash, Restricted Cash and Cash Equivalents
The
Company considers cash equivalents to be highly liquid investments with original maturities of three months or less. Cash and cash equivalents
include deposits in a money market account. The Company deposits its cash in financial institutions and, at times, such balances may
be in excess of the Federal Deposit Insurance Corporation insurance limits. As of June 30, 2023 and September 30, 2022, we had $
Debt Issuance Costs
Debt issuance costs, incurred in connection with any credit facilities and unsecured notes (see Note 5) are deferred and amortized over the life of the respective credit facility or instrument. Debt issuance costs related to any credit facilities and unsecured notes are presented net against the outstanding debt balance on the Consolidated Statements of Assets and Liabilities.
Indemnification
In the normal course of business, the Company enters into contractual agreements that provide general indemnifications against losses, costs, claims and liabilities arising from the performance of individual obligations under such agreements. The Company has had no material claims or payments pursuant to such agreements. The Company’s individual maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. However, based on management’s experience, the Company expects the risk of loss to be remote.
Revenue Recognition
Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis. Discounts and premiums to par value on investments purchased are accreted and amortized into interest income over the life of the respective investment. Loan origination fees, original issue discount (“OID”) and market discounts or premiums are capitalized and amortized into interest income using the effective interest method or straight-line method, as applicable.
The
Company holds debt investments in its portfolio that contain a payment-in-kind (“PIK”) interest provision. PIK interest,
which represents contractually deferred interest added to the investment balance that is generally due at maturity, is recorded on the
accrual basis to the extent such amounts are expected to be collected. PIK interest is not accrued if the Company does not expect the
issuer to be able to pay all principal and interest when due. For the three and nine months ended June 30, 2023, the Company earned approximately
$
Amendment
and transaction break-up fees associated with investments in portfolio companies are recognized as income when we become entitled to
such fees. Prepayment penalties received by the Company for debt instruments paid back to the Company prior to the maturity date are
recorded as income upon repayment of debt. Administrative agent fees received by the Company are capitalized as deferred revenue and
recorded as fee income when the services are rendered. For the three and nine months ended June 30, 2023, fee income was approximately
$
Investment
transactions are accounted for on a trade date basis. Realized gains or losses on investments are measured by the difference between
the net proceeds from the disposition and the amortized cost basis of investment, without regard to unrealized gains or losses previously
recognized. During the three and nine months ended June 30, 2023, $
Management
reviews all loans that become 90 days or more past due on principal or interest or when there is reasonable doubt that principal or interest
will be collected for possible placement on management’s designation of non-accrual status. Interest receivable is analyzed regularly
and may be reserved against when deemed not collectible. Interest payments received on non-accrual loans may be recognized as income
or applied to principal depending upon management’s judgment regarding collectability. Non-accrual loans are restored to accrual
status when past due principal and interest is paid and, in management’s judgment, are likely to remain current, although we may
make exceptions to this general rule if the loan has sufficient collateral value and is in the process of collection. At June 30, 2023,
certain investments in six portfolio companies held by the Company were on non-accrual status with a combined fair value of approximately
$
| 20 |
PHENIXFIN
CORPORATION
Notes to Consolidated Financial Statements
June 30, 2023
(Unaudited)
(continued)
Investment Classification
The
Company classifies its investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, we would be deemed to “control”
a portfolio company if we owned more than
Valuation of Investments
The Company applies fair value accounting to all of its financial instruments in accordance with the 1940 Act and ASC Topic 820 - Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework used to measure fair value and requires disclosures for fair value measurements. In accordance with ASC 820, the Company has categorized its financial instruments carried at fair value, based on the priority of the valuation technique, into a three-level fair value hierarchy as discussed in Note 4. Fair value is a market-based measure considered from the perspective of a market participant rather than an entity specific measure. Therefore, when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that management believes market participants would use in pricing the financial instrument at the measurement date.
Investments for which market quotations are readily available are valued at such market quotations, which are generally obtained from an independent pricing service or multiple broker-dealers or market makers. We weight the use of third-party broker quotations, if any, in determining fair value based on our understanding of the level of actual transactions used by the broker to develop the quote and whether the quote was an indicative price or binding offer. However, debt investments with remaining maturities within 60 days that are not credit impaired are valued at cost plus accreted discount, or minus amortized premium, which approximates fair value. Investments for which market quotations are not readily available are valued at fair value as determined by our Chief Financial Officer, the Company’s Valuation Designee, based upon input from management and third-party valuation firms. Because these investments are illiquid and because there may not be any directly comparable companies whose financial instruments have observable market values, these loans are valued using a fundamental valuation methodology, consistent with traditional asset pricing standards, that is objective and consistently applied across all loans and through time.
Investments in investment funds are valued at fair value. Fair values are generally determined utilizing the NAV supplied by, or on behalf of, management of each investment fund, which is net of management and incentive fees or allocations charged by the investment fund and is in accordance with the “practical expedient”, as defined by FASB Accounting Standards Update (“ASU”) 2009-12, Investments in Certain Entities that Calculate Net Asset Value per Share. NAVs received by, or on behalf of, management of each investment fund are based on the fair value of the investment funds’ underlying investments in accordance with policies established by management of each investment fund, as described in each of their financial statements and offering memorandum. If the Company is in the process of the sale of an investment fund, fair value will be determined by actual or estimated sale proceeds.
The methodologies utilized by the Company in estimating the fair value of its investments categorized as Level 3 generally fall into the following two categories:
| ● | The “Market Approach” uses prices and other relevant information generated by market transactions involving identical or comparable (that is, similar) assets, liabilities, or a group of assets and liabilities, such as a business. |
| ● | The “Income Approach” converts future amounts (for example, cash flows or income and expenses) to a single current (that is, discounted) amount. When the Income Approach is used, the fair value measurement reflects current market expectations about those future amounts. |
The Company has engaged third-party valuation firms (the “Valuation Firms”) to assist it and its Valuation Designee (the Chief Financial Officer) in the valuation of its portfolio investments. The valuation reports generated by the Valuation Firms consider the evaluation of financing and sale transactions with third parties, expected cash flows and market-based information, including comparable transactions, performance multiples, and movement in yields of debt instruments, among other factors. The Company uses a market yield analysis under the Income Approach or an enterprise model of valuation under the Market Approach, or a combination thereof. In applying the market yield analysis, the value of the Company’s loans are determined based upon inputs such as the coupon rate, current market yield, interest rate spreads of similar securities, the stated value of the loan, and the length to maturity. In applying the enterprise model, the Company uses a waterfall analysis, which takes into account the specific capital structure of the borrower and the related seniority of the instruments within the borrower’s capital structure into consideration. To estimate the enterprise value of the portfolio company, we weigh some or all of the traditional market valuation methods and factors based on the individual circumstances of the portfolio company in order to estimate the enterprise value.
| 21 |
PHENIXFIN
CORPORATION
Notes to Consolidated Financial Statements
June 30, 2023
(Unaudited)
(continued)
The methodologies and information that the Company utilizes when applying the Market Approach for performing investments include, among other things:
| ● | valuations of comparable public companies (“Guideline Comparable Approach”); |
| ● | recent sales of private and public comparable companies (“Guideline Comparable Approach”); |
| ● | recent acquisition prices of the company, debt securities or equity securities (“Recent Arms-Length Transaction”); |
| ● | external valuations of the portfolio company, offers from third parties to buy the company (“Estimated Sales Proceeds Approach”); |
| ● | subsequent sales made by the company of its investments (“Expected Sales Proceeds Approach”); and |
| ● | estimating the value to potential buyers. |
The methodologies and information that the Company utilizes when applying the Income Approach for performing investments include:
| ● | discounting the forecasted cash flows of the portfolio company or securities (Discounted Cash Flow (“DCF”) Approach); and |
| ● | Black-Scholes model or simulation models or a combination thereof (Income Approach - Option Model) with respect to the valuation of warrants. |
For non-performing investments, we may estimate the liquidation or collateral value of the portfolio company’s assets and liabilities using an expected recovery model (Market Approach - Expected Recovery Analysis or Estimated Liquidation Proceeds).
We undertake a multi-step valuation process each quarter when valuing investments for which market quotations are not readily available, as described below:
| ● | our quarterly valuation process generally begins with each portfolio investment being initially valued by a Valuation Firm; |
| ● | Available third-party market data will be reviewed by company personnel designated by the Valuation Designee (“Fair Value Personnel”) and the Valuation Firm. |
| ● | Available portfolio company data and general industry data are then reviewed by the Fair Value Personnel. |
| ● | Preliminary valuation conclusions are then documented and discussed with the Fair Value Personnel. |
| ● | The Valuation Designee then determines the fair value of each investment in the Company’s portfolio in good faith based on such discussions, the Company’s Valuation Policy and the Valuation Firms’ final estimated valuations. |
| ● | The Valuation Designee’s report is then presented to the Board of Directors and the Audit Committee. |
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 from the values that would have been used had a readily available market value existed for such investments, and the differences could be material. In addition, changes in the market environment (including the impact of COVID-19 on financial markets), portfolio company performance, and other events may occur over the lives of the investments that may cause the gains or losses ultimately realized on these investments to be materially different than the valuations currently assigned.
Fair Value of Financial Instruments
The carrying amounts of certain of our financial instruments, including cash and cash equivalents, accounts payable and accrued expenses, approximate fair value due to their short-term nature. The carrying amounts and fair values of our long-term obligations are discussed in Note 5.
| 22 |
PHENIXFIN
CORPORATION
Notes to Consolidated Financial Statements
June 30, 2023
(Unaudited)
(continued)
Recent Accounting Pronouncements
In March 2020, the FASB issued ASU 2020-04, “Reference rate reform (Topic 848)—Facilitation of the effects of reference rate reform on financial reporting.” The amendments in this update provide optional expedients and exceptions for applying U.S. GAAP to certain contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform and became effective upon issuance for all entities. The Company has agreements that have LIBOR as a reference rate with certain portfolio companies and also with certain lenders. Many of these agreements include language for choosing an alternative successor rate if LIBOR reference is no longer considered to be appropriate. Contract modifications are required to be evaluated in determining whether the modifications result in the establishment of new contracts or the continuation of existing contracts. In January 2021, the FASB issued ASU 2021-01, “Reference rate reform (Topic 848),” which expanded the scope of Topic 848. ASU 2020-04 and ASU 2021-01 are effective through December 31, 2022 when the Company plans to apply the amendments in this update to account for contract modifications due to changes in reference rates. On December 21, 2022, the Financial Accounting Standards Board (FASB) issued a new Accounting Standards Update ASU 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848,” that extends the sunset (or expiration) date of Accounting Standards Codification (ASC) Topic 848 to December 31, 2024. This gives reporting entities two additional years to apply the accounting relief provided under ASC Topic 848 for matters related to reference rate reform.
Federal Income Taxes
The
Company has elected, and intends to qualify annually, to be treated as a RIC under Subchapter M of the Code. In order to continue to
qualify as a RIC and be eligible for tax treatment under Subchapter M of the Code, among other things, the Company is required to meet
certain source of income and asset diversification requirements and timely distribute to its stockholders at least
The Company is subject to a nondeductible U.S.
federal excise tax of
The Company’s Taxable Subsidiaries accrue income taxes payable based on the applicable corporate rates on the unrealized gains generated by the investments held by the Taxable Subsidiaries. As of June 30, 2023 and September 30, 2022, the Company did not record a deferred tax liability on the Consolidated Statements of Assets and Liabilities. The change in provision for deferred taxes is included as a component of net realized and unrealized gain/(loss) on investments in the Consolidated Statements of Operations. For the three and nine months ended June 30, 2023 and June 30, 2022, the Company did not record a change in provision for deferred taxes on the unrealized (appreciation)/depreciation on investments.
As
of June 30, 2023 and September 30 2022, the Company had a deferred tax asset of $
ICTI generally differs from net investment income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses. The Company may be required to recognize ICTI in certain circumstances in which it does not receive cash. For example, if the Company holds debt obligations that are treated under applicable tax rules as having original issue discount, the Company must include in ICTI each year a portion of the original issue discount that accrues over the life of the obligation, regardless of whether cash representing such income is received by the Company in the same taxable year. The Company may also have to include in ICTI other amounts that it has not yet received in cash, such as 1) PIK interest income and 2) interest income from investments that have been classified as non-accrual for financial reporting purposes. Interest income on non-accrual investments is not recognized for financial reporting purposes, but generally is recognized in ICTI. Because any original issue discount or other amounts accrued will be included in the Company’s ICTI for the year of accrual, the Company may be required to make a distribution to its stockholders in order to satisfy the minimum distribution requirements, even though the Company will not have received and may not ever receive any corresponding cash amount. ICTI also excludes net unrealized appreciation or depreciation, as investment gains or losses are not included in taxable income until they are realized.
The Company accounts for income taxes in conformity with ASC Topic 740 - Income Taxes (“ASC 740”). ASC 740 provides guidelines for how uncertain tax positions should be recognized, measured, presented and disclosed in financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions deemed to meet a “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current period. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the Consolidated Statements of Operations. There were no material uncertain income tax positions at June 30, 2023. Although we file federal and state tax returns, our major tax jurisdiction is federal. The Company’s federal and state tax returns for the prior three fiscal years remain open, subject to examination by the Internal Revenue Service and applicable state tax authorities.
| 23 |
PHENIXFIN
CORPORATION
Notes to Consolidated Financial Statements
June 30, 2023
(Unaudited)
(continued)
Segments
The Company invests in various industries. The Company separately evaluates the performance of each of its investment relationships. However, because each of these investment relationships has similar business and economic characteristics, they have been aggregated into a single investment segment. All applicable segment disclosures are included in or can be derived from the Company’s financial statements. See Note 3 for further information.
Company Investment Risk, Concentration of Credit Risk, and Liquidity Risk
The Company has broad discretion in making investments. Investments generally consist of debt instruments that may be affected by business, financial market or legal uncertainties. Prices of investments may be volatile, and a variety of factors that are inherently difficult to predict, such as domestic or international economic and political developments, may significantly affect the results of the Company’s activities and the value of its investments. In addition, the value of the Company’s portfolio may fluctuate as the general level of interest rates fluctuate.
The value of the Company’s investments in loans may be detrimentally affected to the extent, among other things, that a borrower defaults on its obligations, there is insufficient collateral and/or there are extensive legal and other costs incurred in collecting on a defaulted loan, observable secondary or primary market yields for similar instruments issued by comparable companies increase materially or risk premiums required in the market between smaller companies, such as our borrowers, and those for which market yields are observable increase materially.
The Company’s assets may, at any time, include securities and other financial instruments or obligations that are illiquid or thinly traded, making purchase or sale of such securities and financial instruments at desired prices or in desired quantities difficult. Furthermore, the sale of any such investments may be possible only at substantial discounts, and it may be extremely difficult to value any such investments accurately.
Note 3. Investments
| Amortized Cost | Percentage | Fair Value | Percentage | |||||||||||||
| Senior Secured First Lien Term Loans | $ | % | $ | % | ||||||||||||
| Senior Secured Notes | ||||||||||||||||
| Unsecured Debt | ||||||||||||||||
| Fund Investment | ||||||||||||||||
| Equity/Warrants | ||||||||||||||||
| Total Investments | $ | % | $ | % | ||||||||||||
The composition of our investments as of September 30, 2022 as a percentage of our total portfolio, at amortized cost and fair value were as follows (dollars in thousands):
| Amortized Cost | Percentage | Fair Value | Percentage | |||||||||||||
| Senior Secured First Lien Term Loans | $ | % | $ | % | ||||||||||||
| Senior Secured Second Lien Term Loans | ||||||||||||||||
| Senior Secured Notes | ||||||||||||||||
| Unsecured Debt | ||||||||||||||||
| Equity/Warrants | ||||||||||||||||
| Total Investments | $ | % | $ | % | ||||||||||||
In
connection with certain of the Company’s investments, the Company receives warrants that are obtained for the objective of increasing
the total investment returns and are not held for hedging purposes. At June 30, 2023 and September 30, 2022, the total fair value of
warrants was $
| 24 |
PHENIXFIN
CORPORATION
Notes to Consolidated Financial Statements
June 30, 2023
(Unaudited)
(continued)
For
the three and nine months ended June 30, 2023, there was $
| Fair Value | Percentage | |||||||
| Services: Business | $ | % | ||||||
| Banking, Finance, Insurance & Real Estate | ||||||||
| Hotel, Gaming & Leisure | ||||||||
| Services: Consumer | ||||||||
| Construction & Building | ||||||||
| Metals & Mining | ||||||||
| Media: Broadcasting & Subscription | ||||||||
| Automotive | ||||||||
| High Tech Industries | ||||||||
| Energy: Oil & Gas | ||||||||
| Consumer Discretionary | ||||||||
| Packaging | ||||||||
| Aerospace & Defense | ||||||||
| Retail | ||||||||
| Total | $ | % | ||||||
The following table shows the portfolio composition by industry grouping at fair value at September 30, 2022 (dollars in thousands):
| Fair Value | Percentage | |||||||
| Services: Business | $ | % | ||||||
| Hotel, Gaming & Leisure | ||||||||
| Banking, Finance, Insurance & Real Estate | ||||||||
| Services: Consumer | ||||||||
| Construction & Building | ||||||||
| Automotive | ||||||||
| Consumer Discretionary | ||||||||
| High Tech Industries | ||||||||
| Media: Broadcasting & Subscription | ||||||||
| Energy: Oil & Gas | ||||||||
| Packaging | ||||||||
| Metals & Mining | ||||||||
| Aerospace & Defense | ||||||||
| Retail | ||||||||
| Total | $ | % | ||||||
The Company invests in portfolio companies principally located in the United States. The geographic composition is determined by the location of the corporate headquarters of the portfolio company, which may not be indicative of the primary source of the portfolio company’s business.
| 25 |
PHENIXFIN
CORPORATION
Notes to Consolidated Financial Statements
June 30, 2023
(Unaudited)
(continued)
| Fair Value | Percentage | |||||||
| Northeast | $ | % | ||||||
| Southeast | ||||||||
| Midwest | ||||||||
| West | ||||||||
| Southwest | ||||||||
| Mid-Atlantic | ||||||||
| International | ||||||||
| Total | $ | % | ||||||
The following table shows the portfolio composition by geographic location at fair value at September 30, 2022 (dollars in thousands):
| Fair Value | Percentage | |||||||
| Northeast | $ | % | ||||||
| Southeast | ||||||||
| West | ||||||||
| Midwest | ||||||||
| Southwest | ||||||||
| Mid-Atlantic | ||||||||
| International | ||||||||
| Total | $ | % | ||||||
| 26 |
PHENIXFIN
CORPORATION
Notes to Consolidated Financial Statements
June 30, 2023
(Unaudited)
(continued)
Transactions With Affiliated/Controlled Companies
| Name of Investment(1)(2) | Type of Investment | Fair Value at September 30, 2022 | Purchases/ (Sales) of or Advances/ (Distributions) | Transfers In/(Out) of Affiliates | Unrealized Gain/(Loss) | Realized Gain/(Loss) | Fair Value at June 30, 2023 | Earned Income | ||||||||||||||||||||||
| Affiliated Investments | ||||||||||||||||||||||||||||||
| 1888 Industrial Services, LLC | Senior Secured First Lien Term Loan C | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
| Revolving Credit Facility | ||||||||||||||||||||||||||||||
| Black Angus Steakhouses, LLC | Senior Secured First Lien Delayed Draw Term Loan | |||||||||||||||||||||||||||||
| Senior Secured First Lien Term Loan | ( | ) | ||||||||||||||||||||||||||||
| Senior Secured First Lien Super Priority DDTL | ||||||||||||||||||||||||||||||
| FST Holdings Parent, LLC | Equity | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
| Kemmerer Operations, LLC | Senior Secured First Lien Term Loan | ( | ) | |||||||||||||||||||||||||||
| Equity | ( | ) | ||||||||||||||||||||||||||||
| Maritime Wireless Holdings LLC | Senior Secured First Lien Term Loan A | $ | $ | ( | ) | $ | $ | $ | $ | $ | ||||||||||||||||||||
| Senior Secured First Lien Term Loan B | $ | $ | ( | ) | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Convertible Promissory Note | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
| US Multifamily, LLC | Equity | ( | ) | ( | ) | |||||||||||||||||||||||||
| Total Affiliated Investments | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
| Name of Investment(1)(2) | Type of Investment | Fair Value at September 30, 2022 | Purchases/ (Sales) of or Advances/ (Distributions) | Transfers In/(Out) of Affiliates | Unrealized Gain/(Loss) | Realized Gain/(Loss) | Fair Value at June 30, 2023 | Earned Income | ||||||||||||||||||||||
| Controlled Investments | ||||||||||||||||||||||||||||||
| FlexFIN, LLC | Equity Interest | $ | $ | ( | ) | $ | $ | $ | $ | |||||||||||||||||||||
| Kemmerer Operations, LLC | Senior Secured First Lien Term Loan | ( | ) | |||||||||||||||||||||||||||
| Equity | ||||||||||||||||||||||||||||||
| NVTN LLC | Senior Secured First Lien Delayed Draw Term Loan | |||||||||||||||||||||||||||||
| Senior Secured First Lien Term Loan B | ||||||||||||||||||||||||||||||
| Senior Secured First Lien Term Loan C | ||||||||||||||||||||||||||||||
| Total Controlled Investments | $ | $ | ( | ) | $ | $ | $ | $ | $ |
| 27 |
PHENIXFIN
CORPORATION
Notes to Consolidated Financial Statements
June 30, 2023
(Unaudited)
(continued)
| Name of Investment(1)(2) | Type of Investment | Fair Value at September 30, 2021 | Purchases/ (Sales) of or Advances/ (Distributions) | Transfers In/(Out) of Affiliates | Unrealized Gain/(Loss) | Realized Gain/(Loss) | Fair Value at June 30, 2022 | Earned Income | ||||||||||||||||||||||
| Affiliated Investments | ||||||||||||||||||||||||||||||
| 1888 Industrial Services, LLC | Senior Secured First Lien Term Loan B | $ | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||
| Senior Secured First Lien Term Loan C | ||||||||||||||||||||||||||||||
| Revolving Credit Facility | ( | ) | ||||||||||||||||||||||||||||
| Black Angus Steakhouses, LLC | Senior Secured First Lien Delayed Draw Term Loan | |||||||||||||||||||||||||||||
| Senior Secured First Lien Term Loan | ( | ) | ||||||||||||||||||||||||||||
| Senior Secured First Lien Super Priority DDTL | ||||||||||||||||||||||||||||||
| Caddo Investors Holdings 1 LLC | Equity | ( | ) | ( | ) | |||||||||||||||||||||||||
| Dynamic Energy Services International LLC | Senior Secured First Lien Term Loan | ( | ) | ( | ) | |||||||||||||||||||||||||
| JFL-NGS Partners, LLC | Equity | ( | ) | ( | ) | |||||||||||||||||||||||||
| JFL-WCS Partners, LLC | Equity | ( | ) | ( | ) | |||||||||||||||||||||||||
| Kemmerer Operations, LLC | Senior Secured First Lien Term Loan | |||||||||||||||||||||||||||||
| Senior Secured First Lien Delayed Draw Term Loan | ( | ) | ||||||||||||||||||||||||||||
| Equity | ||||||||||||||||||||||||||||||
| Path Medical, LLC | Senior Secured First Lien Term Loan A | ( | ) | |||||||||||||||||||||||||||
| Senior Secured First Lien Term Loan B | ( | ) | ||||||||||||||||||||||||||||
| URT Acquisition Holdings Corporation | Warrants | ( | ) | ( | ) | |||||||||||||||||||||||||
| US Multifamily, LLC | Senior Secured First Lien Term Loan | ( | ) | |||||||||||||||||||||||||||
| Equity | ||||||||||||||||||||||||||||||
| Total Affiliated Investments | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||||
| Name of Investment(1)(2) | Type of Investment | Fair Value at September 30, 2021 | Purchases/ (Sales) of or Advances/ (Distributions) | Transfers In/(Out) of Affiliates | Unrealized Gain/(Loss) | Realized Gain/(Loss) | Fair Value at June 30, 2022 | Earned Income | ||||||||||||||||||||||
| Controlled Investments | ||||||||||||||||||||||||||||||
| FlexFIN, LLC | Equity Interest | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
| NVTN LLC | Senior Secured First Lien Delayed Draw Term Loan | |||||||||||||||||||||||||||||
| Super Priority Senior Secured First Lien Term Loan | ( | ) | ||||||||||||||||||||||||||||
| Senior Secured First Lien Term Loan B | ||||||||||||||||||||||||||||||
| Total Controlled Investments | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
| (1) |
| (2) |
| 28 |
PHENIXFIN
CORPORATION
Notes to Consolidated Financial Statements
June 30, 2023
(Unaudited)
(continued)
Purchases/(sales) of or advances to/(distributions) from Affiliated Investments and Controlled Investments represent the proceeds from sales and settlements of investments, purchases, originations and participations, investment increases due to PIK interest as well as net amortization of premium/(discount) on investments and are included in the purchases and sales presented on the Consolidated Statements of Cash Flows for the nine months ended June 30, 2023 and 2022. Transfers in/(out) of Affiliated Investments and Controlled Investments represent the fair value for the month an investment became or was removed as an Affiliated Investment or a Controlled Investment. Income received from Affiliated Investments and Controlled Investments is included in total investment income on the Consolidated Statements of Operations for the nine months ended June 30, 2023 and 2022.
Unconsolidated Significant Subsidiaries
| Balance Sheet | June 30, 2023 (Unaudited) | September 30, 2022 (Audited) | ||||||
| Total Assets | $ | $ | ||||||
| Total Liabilities | ||||||||
| Income Statement | For the Nine Months Ended June 30, 2023 (Unaudited) | For the Year Ended September 30, 2022 (Audited) | ||||||
| Total Income | $ | $ | ||||||
| Total Expenses | ||||||||
| Net Income | $ | $ | ||||||
| 29 |
PHENIXFIN
CORPORATION
Notes to Consolidated Financial Statements
June 30, 2023
(Unaudited)
(continued)
Note 4. Fair Value Measurements
The Company follows ASC 820 for measuring the fair value of portfolio investments. Fair value is the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters, or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation models involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity. The Company’s fair value analysis includes an analysis of the value of any unfunded loan commitments. Financial investments recorded at fair value in the consolidated financial statements are categorized for disclosure purposes based upon the level of judgment associated with the inputs used to measure their value. The valuation hierarchical levels are based upon the transparency of the inputs to the valuation of the investment as of the measurement date. Investments which are valued using NAV as a practical expedient are excluded from this hierarchy, and certain prior period amounts have been reclassified to conform to the current period presentation. The three levels are defined below:
| ● | Level 1 - Valuations based on quoted prices in active markets for identical assets or liabilities at the measurement date. |
| ● | Level 2 - Valuations based on inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable at the measurement date. This category includes quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in non-active markets including actionable bids from third parties for privately held assets or liabilities, and observable inputs other than quoted prices such as yield curves and forward currency rates that are entered directly into valuation models to determine the value of derivatives or other assets or liabilities. |
| ● | Level 3 - Valuations based on inputs that are unobservable and where there is little, if any, market activity at the measurement date. The inputs for the determination of fair value may require significant management judgment or estimation and are based upon management’s assessment of the assumptions that market participants would use in pricing the assets or liabilities. These investments include debt and equity investments in private companies or assets valued using the Market or Income Approach and may involve pricing models whose inputs require significant judgment or estimation because of the absence of any meaningful current market data for identical or similar investments. The inputs in these valuations may include, but are not limited to, capitalization and discount rates, beta and EBITDA multiples. The information may also include pricing information or broker quotes which include a disclaimer that the broker would not be held to such a price in an actual transaction. The non-binding nature of consensus pricing and/or quotes accompanied by disclaimer would result in classification as Level 3 information, assuming no additional corroborating evidence. |
In addition to using the above inputs in investment valuations, the Company continues to employ a valuation policy approved by the board of directors that is consistent with ASC 820 (see Note 2). Consistent with our valuation policy, we evaluate the source of inputs, including any markets in which our investments are trading, in determining fair value.
| Fair Value Hierarchy as of June 30, 2023 | ||||||||||||||||
| Investments: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Senior Secured First Lien Term Loans | $ | $ | $ | $ | ||||||||||||
| Senior Secured Notes | ||||||||||||||||
| Unsecured Debt | ||||||||||||||||
| Equity/Warrants | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| Investments measured at net asset value(1) | ||||||||||||||||
| Total Investments, at fair value | $ | |||||||||||||||
| (1) |
The following table presents the fair value measurements of our investments, by major class according to the fair value hierarchy, as of September 30, 2022 (dollars in thousands):
| Fair Value Hierarchy as of September 30, 2022 | ||||||||||||||||
| Investments: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Senior Secured First Lien Term Loans | $ | $ | $ | $ | ||||||||||||
| Senior Secured Second Lien Term Loans | ||||||||||||||||
| Senior Secured Notes | ||||||||||||||||
| Unsecured Debt | ||||||||||||||||
| Equity/Warrants | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| 30 |
PHENIXFIN
CORPORATION
Notes to Consolidated Financial Statements
June 30, 2023
(Unaudited)
(continued)
| Senior Secured First Lien Term Loans | Senior Secured Second Lien Term Loans | Unsecured Debt | Equities/ Warrants | Fund Investment | Total | |||||||||||||||||||
| Balance as of September 30, 2022 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Purchases and other adjustments to cost | ||||||||||||||||||||||||
| Sales (including repayments or maturities) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Net realized gains/(losses) from investments | ( | ) | ( | ) | ||||||||||||||||||||
| Net unrealized gains/(losses) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Transfer in/(out) | ||||||||||||||||||||||||
| Balance as of June 30, 2023 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the nine months ended June 30, 2022 (dollars in thousands):
| Senior Secured First Lien Term Loans | Senior Secured Second Lien Term Loans | Senior Secured Notes | Unsecured Debt | Equities/ Warrants | Total | |||||||||||||||||||
| Balance as of September 30, 2021 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Purchases and other adjustments to cost | ||||||||||||||||||||||||
| Sales (including repayments or maturities) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Net realized gains/(losses) from investments | ( | ) | ( | ) | ||||||||||||||||||||
| Net unrealized gains/(losses) | )(1) | )(1) | ( | ) | ||||||||||||||||||||
| Transfer in/(out) | ( | ) | ( | ) | ||||||||||||||||||||
| Balance as of June 30, 2022 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| (1) |
Net change in unrealized gain (loss) for the nine
months ended June 30, 2023 and 2022 included in earnings related to Level 3 investments still held as of June 30, 2023 and 2022 was approximately
$
Purchases and other adjustments to cost include purchases of new investments at cost, effects of refinancing/restructuring, accretion/amortization of income from discount/premium on debt securities, and PIK.
Sales represent net proceeds received from investments sold, including any repayments or maturities.
A
review of the fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs
may result in a reclassification for certain financial assets or liabilities.
| 31 |
PHENIXFIN
CORPORATION
Notes to Consolidated Financial Statements
June 30, 2023
(Unaudited)
(continued)
| Fair Value | Valuation Methodology | Unobservable Input | Range (Weighted Average) | |||||||
| Senior Secured First Lien Term Loans | $ | |||||||||
| Senior Secured First Lien Term Loans | ||||||||||
| Senior Secured First Lien Term Loans | ||||||||||
| Senior Secured First Lien Term Loans | ||||||||||
| Senior Secured Notes | ||||||||||
| Unsecured Debt | ||||||||||
| Equity/Warrants | ||||||||||
| Equity/Warrants | ||||||||||
| Equity/Warrants | ||||||||||
| Equity/Warrants | ||||||||||
| Equity/Warrants | ||||||||||
| Equity/Warrants | ||||||||||
| Equity/Warrants | ||||||||||
| Total | $ | |||||||||
The following table presents the quantitative information about Level 3 fair value measurements of our investments, as of September 30, 2022 (dollars in thousands):
| Fair Value | Valuation Methodology | Unobservable Input | Range (Weighted Average) | |||||||
| Senior Secured First Lien Term Loans | $ | |||||||||
| Senior Secured First Lien Term Loans | ||||||||||
| Senior Secured First Lien Term Loans | ||||||||||
| Senior Secured First Lien Term Loans | ||||||||||
| Senior Secured Second Lien Term Loans | ||||||||||
| Equity/Warrants | ||||||||||
| Equity/Warrants | ||||||||||
| Equity/Warrants | ||||||||||
| Equity/Warrants | ||||||||||
| Total | $ | |||||||||
The significant unobservable inputs used in the fair value measurement of the Company’s debt and derivative investments are market yields. Increases in market yields would result in lower fair value measurements.
The significant unobservable inputs used in the fair value measurement of the Company’s equity/warrants investments are comparable company multiples of revenue or EBITDA for the latest twelve months (“LTM”), next twelve months (“NTM”) or a reasonable period a market participant would consider. Increases in EBITDA multiples in isolation would result in higher fair value measurement.
In
September 2017, the Company entered into an agreement with Global Accessories Group, LLC (“Global Accessories”), in which
the Company exchanged its full position in Lydell Jewelry Design Studio, LLC for a
| 32 |
PHENIXFIN
CORPORATION
Notes to Consolidated Financial Statements
June 30, 2023
(Unaudited)
(continued)
Note 5. Borrowings
As
a BDC, we are generally only allowed to employ leverage to the extent that our asset coverage, as defined in the 1940 Act, equals at
least
However,
in March 2018, the Small Business Credit Availability Act modified the 1940 Act by allowing a BDC to increase the maximum amount of leverage
it may incur from
As of June 30, 2023 and September 30, 2022, the
Company’s asset coverage was
| June 30, 2023 | September 30, 2022 | |||||||||||||||||||||||||||||||
| Aggregate Principal Available | Principal Amount Outstanding | Carrying Value | Fair Value | Aggregate Principal Available | Principal Amount Outstanding | Carrying Value | Fair Value | |||||||||||||||||||||||||
| 2023 Notes | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| 2028 Notes | ||||||||||||||||||||||||||||||||
| Revolving Credit Facility | ||||||||||||||||||||||||||||||||
| Total debt | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Credit Facility
On
December 15, 2022, the Company entered into a
Under the Credit Facility, the Company is required to comply with various covenants, reporting requirements and other customary requirements for similar revolving credit facilities, including, without limitation, covenants related to: (a) limitations on the incurrence of additional indebtedness and liens, (b) limitations on certain investments, (c) limitations on certain restricted payments, (d) maintaining a certain minimum stockholders’ equity, (e) maintaining a ratio of total assets to total indebtedness of the Company and its consolidated subsidiaries (subject to certain exceptions) of not less than 2.0:1.0, (f) limitations on pledging certain unencumbered assets, and (g) limitations on the creation or existence of agreements that prohibit liens on certain properties of the Company and certain of its subsidiaries. These covenants are subject to important limitations and exceptions that are described in the documents governing the Credit Facility. Amounts available to borrow under the Credit Facility (and the incurrence of certain other permitted debt) are also subject to compliance with a borrowing base that applies different advance rates to different types of assets (based on their value as determined pursuant to the Credit Facility) that are pledged as collateral. As of June 30, 2023, the Company was in compliance in all respects with the terms of the Credit Facility.
As
of June 30, 2023 and September 30, 2022, there was $
Outstanding
loans under the Credit Facility bear a monthly interest rate at Term SOFR +
On
January 17, 2023,
| 33 |
PHENIXFIN
CORPORATION
Notes to Consolidated Financial Statements
June 30, 2023
(Unaudited)
(continued)
Unsecured Notes
2023 Notes
On
March 18, 2013, the Company issued $
On
December 12, 2016, the Company entered into an “At-The-Market” (“ATM”) debt distribution agreement with FBR Capital
Markets & Co., through which the Company could offer for sale, from time to time, up to $
On
March 10, 2018, the Company redeemed $
On December 21, 2020, the Company announced that it completed the application process for and was authorized to transfer the listing of the 2023 Notes to the NASDAQ Global Market. The listing and trading of the 2023 Notes on the NYSE ceased at the close of trading on December 31, 2020. Effective January 4, 2021, the 2023 Notes began trading on the NASDAQ Global Market under the trading symbol “PFXNL.”
On
November 15, 2021, the Company caused notices to be issued to the holders of the 2023 Notes regarding the Company’s exercise of
its option to redeem $
On
December 15, 2022, the Company caused notices to be issued to the holders of its 2023 Notes regarding the Company’s exercise of
its option to redeem $
2028 Notes
On
November 9, 2021, the Company entered into an underwriting agreement, by and between the Company and Oppenheimer & Co. Inc., as representative
of the several underwriters, in connection with the issuance and sale (the “Offering”) of $
On November 15, 2021, the Company and U.S. Bank National Association, as trustee, entered into a Fourth Supplemental Indenture to its base Indenture, dated February 7, 2012, between the Company and the Trustee. The Fourth Supplemental Indenture relates to the Offering of the 2028 Notes.
Fair Value of Debt Obligations
The fair values of our debt obligations are determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Notes, which are publicly traded, is based upon closing market quotes as of the measurement date. As of June 30, 2023 and September 30, 2022, the Notes would be deemed to be Level 1 in the fair value hierarchy, as defined in Note 4. As of June 30, 2023, the Credit Facility would be deemed to be Level 3 in the fair value hierarchy, as defined in Note 4.
| June 30, 2023 | September 30, 2022 | |||||||||||||||||||||||
| 2023 Notes | 2028 Notes | Total | 2023 Notes | 2028 Notes | Total | |||||||||||||||||||
| Total debt issuance cost at the beginning of the period | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Amortized debt issuance costs | ||||||||||||||||||||||||
| Unamortized debt issuance costs | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| 34 |
PHENIXFIN
CORPORATION
Notes to Consolidated Financial Statements
June 30, 2023
(Unaudited)
(continued)
| For the Three Months Ended June 30, | For the Nine Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| 2023 Notes Interest | $ | $ | $ | $ | ||||||||||||
| 2028 Notes Interest | ||||||||||||||||
| Credit facility interest | ||||||||||||||||
| Amortization of debt issuance costs | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| Weighted average stated interest rate | % | % | % | % | ||||||||||||
| Weighted average debt outstanding | $ | $ | $ | $ | ||||||||||||
For the three and nine months ended June 30,
2023, Interest and financing expenses on the Consolidated Statements of Operations include $
Note 6. Agreements
Administration Agreement
In
connection with the adoption by the board of directors of an internalized management structure, on November 19, 2020, the Company entered
into a Fund Accounting Servicing Agreement and an Administration Servicing Agreement on customary terms with U.S. Bancorp Fund Services,
LLC d/b/a U.S. Bank Global Fund Services (“U.S. Bancorp”). A U.S. Bancorp affiliate also served as the Company’s custodian.
The Company’s administrative and custodial relationship with U.S. Bancorp terminated on August 9, 2022. SS&C Technologies,
Inc. (“SS&C”) has since served as administrator of the Company and has provided the Company with fund accounting and
financial reporting services pursuant to the services agreement with the Company. Effective September 12, 2022, Computershare Trust Company,
N.A. (“Computershare”) serves as custodian for the Company pursuant to its Loan Administration and Custodial Agreement with
the Company. For the three and nine months ended June 30, 2023, we incurred approximately $
As
of June 30, 2023 and September 30, 2022, $
2022 Long-Term Cash Incentive Plan
On May 9, 2022, the board of directors of the Company adopted the PhenixFIN 2022 Long-Term Cash Incentive Plan (the “CIP”) pursuant to the recommendation by the Compensation Committee of the board of directors. The CIP provides for performance-based cash awards to key employees of the Company, as approved by the Compensation Committee, based on the achievement of pre-established financial goals for the approved performance period. The performance goals may be expressed as one or a combination of net asset value of the Company, net asset value per share of the Company’s common stock, changes in the market price of shares of the Company’s common stock, individual performance metrics and/or such other goals and objectives the Committee considers relevant in connection with accomplishing the purposes of the CIP.
In connection with the approval of the CIP, the
Compensation Committee in April 2022, approved awards for the three year performance period commencing on January 1, 2022 and ending on
December 31, 2024 (the “2022 LTIP Plan”). Each participant is eligible to receive an amount of cash equal to
| 35 |
PHENIXFIN
CORPORATION
Notes to Consolidated Financial Statements
June 30, 2023
(Unaudited)
(continued)
In December 2022, pursuant to the CIP, the Compensation Committee approved awards for Mr. Lorber and Ms. McMillan for the three-year performance period commencing on January 1, 2023 and ending on December 31, 2025 (the “2023 LTIP Plan”). Each participant is eligible to receive an amount of cash equal to a percentage of the target award amount set forth above based on the factors described above. The Compensation Committee, in approving the awards, evaluated each Performance Goal separately.
| Name and Title | Dollar Value of Target Award | |||
| David Lorber, Chairman of the Board and Chief Executive Officer | $ | |||
| Ellida McMillan, Chief Financial Officer | ||||
During the three and nine months ended June 30,
2023, the Company recorded an accrual of $
Pledge and Security Agreement
In connection with the Credit Facility discussed in Note 5, the Company has entered into a Pledge and Security Agreement with the Lenders pursuant to which the Company and its wholly owned subsidiaries have pledged all their assets, including the cash and securities held in the Company’s custodial account with Computershare Trust Company, N.A., as collateral for any borrowings made by the Company pursuant to the Credit Agreement. The Lenders have the typical rights and remedies of a secured lender under the Uniform Commercial Code, including the right to foreclose on the collateral pledged by the Company.
Note 7. Related Party Transactions
Due from Affiliates
Due from affiliates at June 30, 2023 and September 30, 2022 consists of certain legal and general and administrative expenses paid by the Company on behalf of certain of its affiliates.
Note 8. Commitments
Unfunded commitments
As of June 30, 2023 and September 30, 2022, we
had commitments under loan and financing agreements to fund up to $
| June 30, 2023 | September 30, 2022 | |||||||
| SS Acquisition, LLC (dba Soccer Shots Franchising) - Senior Secured First Lien Delayed Draw Term Loan | $ | $ | ||||||
| Kemmerer Operations, LLC - Senior Secured First Lien Delayed Draw Term Loan | ||||||||
| Secure Acquisition Inc. (dba Paragon Films) - Senior Secured First Lien Delayed Draw Term Loan | ||||||||
| NVTN LLC - Senior Secured First Lien Delayed Draw Term Loan | ||||||||
| Black Angus Steakhouses, LLC Senior Secured First Lien Super Priority Delayed Draw Term Loan | ||||||||
| 1888 Industrial Services, LLC - Revolving Credit Facility | ||||||||
| Deer Management Systems LLC – Senior Secured First Lien Delayed Draw Term Loan | ||||||||
| Tamarix Capital Partners II, L.P. - Fund Investment | ||||||||
| Total unfunded commitments | ||||||||
Lease obligations
The
Company evaluates its leases to determine whether they should be classified as operating or financing leases. PhenixFIN identified one
operating lease for its office space.
Upon entering into the lease on September 1, 2021, PhenixFIN recorded a right-of-use asset and a lease liability as of that date.
| 36 |
PHENIXFIN
CORPORATION
Notes to Consolidated Financial Statements
June 30, 2023
(Unaudited)
(continued)
As of June 30, 2023 and September 30, 2022, the
asset related to the operating lease was $
| For the Years Ended September 30, | Amount | |||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Difference between undiscounted and discounted cash flows | ( | ) | ||
| $ | ||||
Note 9. Fee Income
Fee
income consists of origination/closing fees, amendment fees, prepayment penalty and other miscellaneous fees which are non-recurring
in nature, as well as administrative agent fees, which are recurring in nature.
| For the Three Months Ended June 30, | For the Nine Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Prepayment fee | $ | $ | $ | $ | ||||||||||||
| Administrative agent fee | ||||||||||||||||
| Amendment fee | ||||||||||||||||
| Other fees | ||||||||||||||||
| Fee income | $ | $ | $ | $ | ||||||||||||
Note 10. Directors Fees
For each of calendar year 2022 and 2023 (through
April 30, 2023), the Company’s independent directors each receive an annual fee of $
Effective
May 1, 2023, the Company’s independent directors each receive an annual fee of $
No
board service compensation is paid to directors who are “interested persons” of the Company (as such term is defined in the
1940 Act). For the three and nine months ended June 30, 2023, the Company recognized $
| 37 |
PHENIXFIN
CORPORATION
Notes to Consolidated Financial Statements
June 30, 2023
(Unaudited)
(continued)
Note 11. Earnings Per Share
In accordance with the provisions of ASC Topic 260 - Earnings per Share, basic earnings per share is computed by dividing earnings available to common stockholders by the weighted average number of shares outstanding during the period. Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis. The Company does not have any potentially dilutive common shares as of June 30, 2023.
| For the Three Months Ended June 30, | For the Nine Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Basic and diluted: | ||||||||||||||||
| Net increase (decrease) in net assets resulting from operations | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| $ | $ | ( | ) | $ | $ | ( | ) | |||||||||
Note 12. Financial Highlights
| For the Nine Months Ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Per share data | ||||||||
| Net Asset Value per share at Beginning of Period | $ | $ | ||||||
| Results of Operations: | ||||||||
| Net Investment Income/(Loss) | ||||||||
| Net Realized Gain/(Loss) on Investments | ( | ) | ||||||
| Net Unrealized Gain/(Loss) on Investments | ( | ) | ||||||
| Net loss on extinguishment of debt | ( | ) | ||||||
| Net Increase (Decrease) in Net Assets Resulting from Operations | ( | ) | ||||||
| Capital Share Transactions | ||||||||
| Distributions declared | ( | ) | ||||||
| Repurchase of common stock under stock repurchase program | ||||||||
| Net Increase (Decrease) Resulting from Capital Share Transactions | ||||||||
| Net Asset Value per share at End of Period | $ | $ | ||||||
| Net Assets at End of Period | $ | $ | ||||||
| Shares Outstanding at End of Period | ||||||||
| Per share market value at end of period | $ | $ | ||||||
| Total return based on market value(1) | % | ( | )% | |||||
| Total return based on net asset value per share(2) | % | % | ||||||
| Portfolio turnover rate | % | % | ||||||
| 38 |
PHENIXFIN
CORPORATION
Notes to Consolidated Financial Statements
June 30, 2023
(Unaudited)
(continued)
| Ratios: | ||||||||
| Ratio of net investment/(loss) income to average net assets(3) | % | % | ||||||
| Ratio of total expenses to average net assets(3) | % | % | ||||||
| (1) | |
| (2) | |
| (3) |
Note 13. Dividends
Dividends and distributions to common stockholders are recorded on the ex-dividend date. The amount to be paid out as a dividend is determined by our board of directors.
We have adopted an “opt out” dividend reinvestment plan for our common stockholders. As a result, if we declare a cash dividend or other distribution, each stockholder that has not “opted out” of our dividend reinvestment plan will have its dividends automatically reinvested in additional shares of our common stock rather than receiving cash dividends. Stockholders who receive distributions in the form of shares of common stock will be subject to the same federal, state and local tax consequences as if they received cash distributions.
The Company did not declare any distribution payments
during the three and nine months ended June 30, 2023. During the three and nine months ended June 30, 2022 a special dividend was declared
in the amount of $
Note 14. Share Transactions
On February 8, 2023, the Board of Directors approved
the expansion of the amount authorized for repurchase under the Company’s share repurchase program from $
| 39 |
PHENIXFIN
CORPORATION
Notes to Consolidated Financial Statements
June 30, 2023
(Unaudited)
(continued)
| Month Ended | Shares Repurchased | Repurchase Price Per Share | Aggregate Consideration for Repurchased Shares | |||||||
| February 2021 | $ | |||||||||
| March 2021 | $ | |||||||||
| April 2021 | $ | |||||||||
| May 2021 | $ | |||||||||
| August 2021 | $ | |||||||||
| January 2022 | $ | |||||||||
| February 2022 | $ | |||||||||
| March 2022 | $ | |||||||||
| April 2022 | $ | |||||||||
| May 2022 | $ | |||||||||
| June 2022 | $ | |||||||||
| July 2022 | $ | |||||||||
| August 2022 | $ | |||||||||
| September 2022 | $ | |||||||||
| October 2022 | $ | |||||||||
| November 2022 | $ | |||||||||
| December 2022 | $ | |||||||||
| January 2023 | $ | |||||||||
| February 2023 | $ | |||||||||
| March 2023 | $ | |||||||||
| April 2023 | $ | |||||||||
| May 2023 | $ | |||||||||
| June 2023 | $ | |||||||||
| Total | $ | |||||||||
During the nine months ended June 30, 2023,
Note 15. Subsequent Events
Management has evaluated subsequent events through the date of issuance of the consolidated financial statements included herein. Other than the items disclosed herein, there have been no subsequent events that occurred during such period that would require disclosure in this Form 10-Q or would be required to be recognized in the Consolidated Financial Statements as of and for the three and nine months ended June 30, 2023.
| 40 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our financial statements and related notes and other financial information appearing elsewhere in this quarterly report on Form 10-Q.
Except as otherwise specified, references to “we,” “us,” “our,” or the “Company,” refer to PhenixFIN Corporation.
Forward-Looking Statements
Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements, which relate to future events or our performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties, including statements as to:
| ● | the introduction, withdrawal, success and timing of business initiatives and strategies; |
| ● | changes in political, economic or industry conditions, the interest rate environment or conditions affecting the financial and capital markets, which could result in changes in the value of our assets; |
| ● | the impact of increased competition; |
| ● | the impact of future acquisitions and divestitures; |
| ● | our business prospects and the prospects of our portfolio companies; |
| ● | the impact of legislative and regulatory actions and reforms and regulatory, supervisory or enforcement actions of government agencies relating to us; |
| ● | our contractual arrangements and relationships with third parties; |
| ● | any future financings by us; |
| ● | fluctuations in foreign currency exchange rates; |
| ● | the impact of changes to tax legislation and, generally, our tax position; |
| ● | our ability to locate suitable investments for us and to monitor and administer our investments; |
| ● | our ability to attract and retain highly talented professionals; |
| ● | market conditions and our ability to access alternative debt markets and additional debt and equity capital; |
| ● | the unfavorable resolution of legal proceedings; |
| ● | uncertainties associated with the impact from the COVID-19 pandemic: including its impact on the global and U.S. capital markets and the global and U.S. economy; the length and duration of the COVID-19 outbreak in the United States as well as worldwide and the magnitude of the economic impact of that outbreak; the effect of the COVID-19 pandemic on our business prospects and the operational and financial performance of our portfolio companies, including our and their ability to achieve their respective objectives; and the effect of the disruptions caused by the COVID-19 pandemic on our ability to continue to effectively manage our business; and |
| ● | risks and uncertainties relating to the possibility that the Company may explore strategic alternatives, including, but are not limited to: the timing, benefits and outcome of any exploration of strategic alternatives by the Company; potential disruptions in the Company’s business and stock price as a result of our exploration of any strategic alternatives; the ability to realize anticipated efficiencies, or strategic or financial benefits; potential transaction costs and risks; and the risk that any exploration of strategic alternatives may have an adverse effect on our existing business arrangements or relationships, including our ability to retain or hire key personnel. There is no assurance that any exploration of strategic alternatives will result in a transaction or other strategic change or outcome. |
| 41 |
Such forward-looking statements may include statements preceded by, followed by or that otherwise include the words “trend,” “opportunity,” “pipeline,” “believe,” “comfortable,” “expect,” “anticipate,” “current,” “intention,” “estimate,” “position,” “assume,” “potential,” “outlook,” “continue,” “remain,” “maintain,” “sustain,” “seek,” “achieve,” and similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “may,” or similar expressions. The forward looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth as “Risk Factors” and elsewhere in this quarterly report on Form 10-Q.
We have based the forward-looking statements included in this report on information available to us on the date of this report, and we assume no obligation to update any such forward-looking statements. Actual results could differ materially from those anticipated in our forward-looking statements, and future results could differ materially from historical performance. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with the Securities and Exchange Commission (“SEC”), including annual reports on Form 10-K, registration statements on Form N-2, quarterly reports on Form 10-Q and current reports on Form 8-K.
War in Ukraine
In February 2022, Russia launched a large-scale invasion of Ukraine. The extent and duration of Russian military action in the Ukraine, resulting sanctions and resulting future market disruptions, including declines in stock markets in Russia and elsewhere and the value of the ruble against the U.S. dollar, are impossible to predict, but have been and could continue to be significant. Any such disruptions caused by Russian military or other actions (including cyberattacks and espionage) or resulting from actual or threatened responses to such actions have caused and could continue to cause disruptions to portfolio companies located in Europe or that have substantial business relationships with European or Russian companies. The extent and duration of the military action, sanctions and resulting market disruptions are impossible to predict, but have been and could continue to be substantial. Any such market disruptions could affect our portfolio companies’ operations and, as a result, could have a material adverse effect on our business, financial condition and results of operations.
We have evaluated subsequent events from June 30, 2023 through the filing date of this quarterly report on Form 10-Q. However, as the discussion in this Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations relates to the Company’s financial statements for the quarterly period ended June 30, 2023, the analysis contained herein may not fully account for market event impacts. As of June 30, 2023, the Company valued its portfolio investments in conformity with U.S. generally accepted accounting principles (“GAAP”) based on the facts and circumstances known by the Company at that time, or reasonably expected to be known at that time. Due to the overall volatility that market events may have caused during the months following our most recent valuation (as of June 30, 2023), any valuations conducted now or in the future in conformity with U.S. GAAP could result in a lower fair value of our portfolio.
Interest Rate Environment
In 2022, the Federal Reserve raised short-term interest rates and has indicated additional interest rate increases may come. Changing interest rates may have unpredictable effects on markets, may result in heightened market volatility and may detract from our performance to the extent we are exposed to such interest rates and/or volatility. In periods of rising interest rates, such as the current interest rate environment, to the extent we borrow money subject to a floating interest rate, our cost of funds would increase, which could reduce our net investment income. Further, rising interest rates could also adversely affect our performance if such increases cause our borrowing costs to rise at a rate in excess of the rate that our investments yield. Further, rising interest rates could also adversely affect our performance if we hold investments with floating interest rates, subject to specified minimum interest rates (such as a LIBOR or SOFR floor, as applicable), while at the same time engaging in borrowings subject to floating interest rates not subject to such minimums. In such a scenario, rising interest rates may increase our interest expense, even though our interest income from investments is not increasing in a corresponding manner as a result of such minimum interest rates.
If general interest rates continue to rise, there is a risk that the portfolio companies in which we hold floating rate securities will be unable to pay escalating interest amounts, which could result in a default under their loan documents with us. Rising interest rates could also cause portfolio companies to shift cash from other productive uses to the payment of interest, which may have a material adverse effect on their business and operations and could, over time, lead to increased defaults. In addition, rising interest rates may increase pressure on us to provide fixed rate loans to our portfolio companies, which could adversely affect our net investment income, as increases in our cost of borrowed funds would not be accompanied by increased interest income from such fixed-rate investments.
A change in the general level of interest rates can be expected to lead to a change in the interest rates we receive on many of our debt investments.
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Overview
We are an internally-managed non-diversified closed-end management investment company that has elected to be regulated as a BDC under the 1940 Act. In addition, we have elected, and intend to qualify annually, to be treated for U.S. federal income tax purposes as a RIC under Subchapter M of the Code. Through December 31, 2020, we were an externally managed company. On November 18, 2020, the board of directors of the Company approved the adoption of an internalized management structure, effective January 1, 2021. Since January 1, 2021, we have operated under such internalized management structure.
We commenced operations and completed our initial public offering on January 20, 2011. Under our internalized management structure, our activities are managed by our senior professionals and are supervised by our board of directors, of which a majority of the members are independent of us.
The Company’s investment objective is to generate current income and capital appreciation. The management team seeks to achieve this objective primarily through making loans, private equity or other investments in privately-held companies. The Company may also make debt, equity or other investments in publicly-traded companies. (These investments may also include investments in other BDCs, closed-end funds or REITS.) We may also pursue other strategic opportunities and invest in other assets or operate other businesses to achieve our investment objective (such as our asset-based lending business). The portfolio generally consists of senior secured first lien term loans, senior secured second lien term loans, senior secured bonds, preferred equity and common equity. Occasionally, we will receive warrants or other equity participation features which we believe will have the potential to increase total investment returns. Our loan and other debt investments are primarily rated below investment grade or are unrated. Investments in below investment grade securities are considered predominantly speculative with respect to the issuer’s capacity to pay interest and repay principal when due.
As a BDC, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in “qualifying assets,” including securities of private or thinly traded public U.S. companies, cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less. In addition, we are only allowed to borrow money such that our asset coverage, as defined in the 1940 Act, equals at least 200% (or 150% if, pursuant to the 1940 Act, certain requirements are met) after such borrowing, with certain limited exceptions. To maintain our RIC tax treatment, we must meet specified source-of-income and asset diversification requirements. In addition, to maintain our RIC tax treatment, we must timely distribute at least 90% of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, for the taxable year.
Reverse Stock Split; Authorized Share Reduction
At the Company’s 2020 Annual Meeting of Stockholders held on June 30, 2020 (the “Annual Meeting”), stockholders approved a proposal to grant discretionary authority to the Company’s board of directors to amend the Company’s Certificate of Incorporation (the “Certificate of Incorporation”) to effect a reverse stock split of its common stock, of 1-20 (the “Reverse Stock Split”) and with the Reverse Stock Split to be effective at such time and date, if at all, as determined by the board of directors, but not later than 60 days after stockholder approval thereof and, if and when the reverse stock split is effected, reduce the number of authorized shares of common stock by the approved reverse stock split ratio (the “Authorized Share Reduction”).
Following the Annual Meeting, on July 7, 2020, the board of directors determined that it was in the best interests of the Company and its stockholders to implement the Reverse Stock Split and the Authorized Share Reduction. Accordingly, on July 13, 2020, the Company filed a Certificate of Amendment (the “Certificate of Amendment”) to the Certificate of Incorporation with the Secretary of State of the State of Delaware to effect the Reverse Stock Split and the Authorized Share Reduction.
Pursuant to the Certificate of Amendment, effective as of 5:00 p.m., Eastern Time, on July 24, 2020 (the “Effective Time”), each twenty (20) shares of common stock issued and outstanding, immediately prior to the Effective Time, automatically and without any action on the part of the respective holders thereof, were combined and converted into one (1) share of common stock. In connection with the Reverse Stock Split, the Certificate of Amendment provided for a reduction in the number of authorized shares of common stock from 100,000,000 to 5,000,000 shares of common stock. No fractional shares were issued as a result of the Reverse Stock Split. Instead, any stockholder who would have been entitled to receive a fractional share as a result of the Reverse Stock Split received cash payments in lieu of such fractional shares (without interest and subject to backup withholding and applicable withholding taxes).
On December 21, 2020, the Company announced that it completed the application process for and was authorized to transfer the listing of its shares of common stock to the NASDAQ Global Market. The listing and trading of the common stock on the NYSE ceased at the close of trading on December 31, 2020. Since January 4, 2021, the common stock trades on the NASDAQ Global Market under the trading symbol “PFX.”
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Revenues
We generate revenue in the form of interest income on the debt that we hold and capital gains, if any, on warrants or other equity interests that we may acquire in portfolio companies. We invest our assets primarily in privately held companies with enterprise or asset values between $25 million and $250 million and generally focus on investment sizes of $10 million to $50 million. We believe that pursuing opportunities of this size offers several benefits including reduced competition, a larger investment opportunity set and the ability to minimize the impact of financial intermediaries. We expect our debt investments to bear interest at either a fixed or floating rate. Interest on debt will be payable generally either monthly or quarterly. In some cases our debt investments may provide for a portion of the interest to be PIK. To the extent interest is PIK, it will be payable through the increase of the principal amount of the obligation by the amount of interest due on the then-outstanding aggregate principal amount of such obligation. The principal amount of the debt and any accrued but unpaid interest will generally become due at the maturity date. In addition, we may generate revenue in the form of commitment, origination, structuring or diligence fees, fees for providing managerial assistance or investment management services and possibly consulting fees. Any such fees will be recognized as earned.
Expenses
In periods prior to December 31, 2020, our primary operating expenses included management and incentive fees pursuant to the investment management agreement we had with MCC Advisors and overhead expenses, including our allocable portion of our administrator’s overhead under the administration agreement, which were paid during the quarter ended March 31, 2021. Our management and incentive fees compensated MCC Advisors for its work in identifying, evaluating, negotiating, closing and monitoring our investments. On November 18, 2020, the board of directors adopted an internally managed structure, effective January 1, 2021, under which we bear all costs and expenses of our operations and transactions, including those relating to:
| ● | our organization and continued corporate existence; |
| ● | calculating our NAV (including the cost and expenses of any independent valuation firms); |
| ● | expenses incurred in monitoring our financial and legal affairs and in monitoring our investments and performing due diligence on our prospective portfolio companies; |
| ● | interest payable on debt, if any, incurred to finance our investments; |
| ● | the costs of all offerings of common stock and other securities, if any; |
| ● | operating costs associated with employing investment professionals and other staff; |
| ● | distributions on our shares; |
| ● | administration fees payable under our administration agreement; |
| ● | Custodial fees related to our assets |
| ● | amounts payable to third parties relating to, or associated with, making investments; |
| ● | transfer agent and custodial fees; |
| ● | registration fees and listing fees; |
| ● | U.S. federal, state and local taxes; |
| ● | independent director fees and expenses; |
| ● | costs of preparing and filing reports or other documents with the SEC or other regulators; |
| ● | the costs of any reports, proxy statements or other notices to our stockholders, including printing costs; |
| ● | our fidelity bond; |
| ● | directors and officers/errors and omissions liability insurance, and any other insurance premiums; |
| ● | the operating lease of our office space; |
| ● | indemnification payments; and |
| ● | direct costs and expenses of administration, including audit and legal costs. |
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2022 Long-Term Cash Incentive Plan
On May 9, 2022, the board of directors of the Company adopted the PhenixFIN 2022 Long-Term Cash Incentive Plan (the “CIP”) pursuant to the recommendation by the Compensation Committee of the board of directors. The CIP provides for performance-based cash awards to key employees of the Company, as approved by the Compensation Committee, based on the achievement of pre-established financial goals for the approved performance period. The performance goals may be expressed as one or a combination of net asset value of the Company, net asset value per share of the Company’s common stock, changes in the market price of shares of the Company’s common stock, individual performance metrics and/or such other goals and objectives the Committee considers relevant in connection with accomplishing the purposes of the CIP. A form of Award Agreement to be used under the CIP was also approved.
In connection with the approval of the CIP, the Compensation Committee in April 2022 approved awards for the executive officers named in the table below for the three year performance period commencing on January 1, 2022 and ending on December 31, 2024 (the “2022 LTIP Plan”). Each participant is eligible to receive an amount of cash equal to 0%-200% of the target award set forth in the table below (“Target Performance Award”), based on the achievement of net asset value (“NAV”) and NAV per share goals (weighted at 30% and 70%, respectively) as of the end of the performance period (the “Performance Goals”). Performance is evaluated separately for each Performance Goal. No payment is made with respect to a Performance Goal if a threshold level of performance is not achieved. Each Performance Goal is subject to (i) a threshold level of performance at which a percentage of the Target Performance Award attributable to that Performance Goal may be paid and below which no payment is made pursuant to an Award, (ii) a target level of performance at which 100% of the Target Performance Award attributable to that Performance Goal may be paid and (iii) a maximum level of performance, at which 200% of the Target Performance Award attributable to that Performance Goal may be paid, in each case subject to such other terms and conditions of an Award. Between threshold, target and maximum performance levels for each Performance Goal, the portion of that Award attributed to the Performance Goal shall be interpolated in a linear progression.
In December 2022, pursuant to the CIP, the Compensation Committee approved awards for Mr. Lorber and Ms. McMillan for the three-year performance period commencing on January 1, 2023 and ending on December 31, 2025 (the “2023 LTIP Plan”). Each participant is eligible to receive an amount of cash equal to a percentage of the target award amount set forth above based on the factors described above. The Compensation Committee, in approving the awards, evaluated each Performance Goal separately.
The Target Performance Award for each executive officer for both the 2022 LTIP plan and 2023 LTIP plan is set forth in the table below:
| Name and Title | Dollar Value of Target Award | |||
| David Lorber, Chairman of the Board and Chief Executive Officer | $ | 890,000 | ||
| Ellida McMillan, Chief Financial Officer | 380,000 | |||
During the three and nine months ended June 30, 2023, the Company recorded an accrual of $159,000 and $159,000, respectively, for these awards. During the three and nine months ended June 30, 2022, the Company did not record an accrual.
Portfolio and Investment Activity
As of June 30, 2023 and September 30, 2022, our portfolio had a fair market value of approximately $218.7 million and $193.0 million, respectively.
During the nine months ended June 30, 2023, we received proceeds from sale and settlements of investments of $39.8 million, including principal and dividend proceeds, realized net losses on investments of $2.1 million, and invested $49.3 million.
During the nine months ended June 30, 2022, we received proceeds from sale and settlements of investments of $104.5 million including principal and dividend proceeds, net realized gains (losses) on investments of $(15.5) million, and invested $137.6 million.
The following table summarizes the amortized cost and the fair value of our average portfolio company (dollars in thousands):
| June 30, 2023 | September 30, 2022 | |||||||||||||||
| Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||
| Average portfolio company | $ | 3,909 | $ | 3,088 | $ | 3,560 | $ | 2,608 | ||||||||
| Largest portfolio company | 34,124 | 34,124 | 47,136 | 47,136 | ||||||||||||
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The following table summarizes the amortized cost and the fair value of investments as of June 30, 2023 (dollars in thousands):
| Amortized Cost | Percentage | Fair Value | Percentage | |||||||||||||
| Senior Secured First Lien Term Loans | $ | 148,558 | 54.5 | % | $ | 104,961 | 48.0 | % | ||||||||
| Senior Secured Notes | 2,616 | 1.0 | 2,138 | 1.0 | ||||||||||||
| Unsecured Debt | 154 | 0.1 | 161 | 0.1 | ||||||||||||
| Fund Investment | 1,027 | 0.4 | 962 | 0.4 | ||||||||||||
| Equity/Warrants | 119,743 | 44.0 | 110,465 | 50.5 | ||||||||||||
| Total Investments | $ | 272,098 | 100.0 | % | $ | 218,687 | 100.0 | % | ||||||||
The following table summarizes the amortized cost and the fair value of investments as of September 30, 2022 (dollars in thousands):
| Amortized Cost | Percentage | Fair Value | Percentage | |||||||||||||
| Senior Secured First Lien Term Loans | $ | 128,482 | 48.7 | % | $ | 88,248 | 45.6 | % | ||||||||
| Senior Secured Second Lien Term Loans | 2,603 | 1.0 | 2,607 | 1.4 | ||||||||||||
| Senior Secured Notes | 2,252 | 0.9 | 1,659 | 0.9 | ||||||||||||
| Unsecured Debt | 182 | 0.1 | - | - | ||||||||||||
| Equity/Warrants | 129,929 | 49.3 | 100,443 | 52.1 | ||||||||||||
| Total Investments | $ | 263,448 | 100.0 | % | $ | 192,957 | 100.0 | % | ||||||||
As of June 30, 2023, our income-bearing investment portfolio based upon cost represented 65.1% of our total portfolio of which 81.3% bore interest based on floating rates, such as the London Interbank Offering Rate (“LIBOR”) or the Secured Overnight Financing Rate (“SOFR”), while 18.7% bore interest at fixed rates. As of June 30, 2023, the Company had a weighted average yield of 12.2% on debt and other income producing investments. This yield does not represent the total return to our stockholders.
We rate the risk profile of each of our investments based on the following categories:
| Credit | ||
| Rating | Definition | |
| 1 | Investments that are performing above expectations. | |
| 2 | Investments that are performing within expectations, with risks that are neutral or favorable compared to risks at the time of origination. All new loans are rated ’2’. | |
| 3 | Investments that are performing below expectations and that require closer monitoring, but where no loss of interest, dividend or principal is expected. Companies rated ’3’ may be out of compliance with financial covenants, however, loan payments are generally not past due. | |
| 4 | Investments that are performing below expectations and for which risk has increased materially since origination. Some loss of interest or dividend is expected but no loss of principal. In addition to the borrower being generally out of compliance with debt covenants, loan payments may be past due (but generally not more than 180 days past due). | |
| 5 | Investments that are performing substantially below expectations and whose risks have increased substantially since origination. Most or all of the debt covenants are out of compliance and payments are substantially delinquent. Some loss of principal is expected. |
The following table shows the distribution of our investments on the 1 to 5 investment performance rating scale at fair value as of June 30, 2023 and September 30, 2022 (dollars in thousands):
| June 30, 2023 | September 30, 2022 | |||||||||||||||
| Fair Value | Percentage | Fair Value | Percentage | |||||||||||||
| 1 | $ | - | 0.0 | % | $ | - | 0.0 | % | ||||||||
| 2 | 192,660 | 88.1 | % | 159,279 | 82.6 | % | ||||||||||
| 3 | 13,541 | 6.2 | % | 22,183 | 11.5 | % | ||||||||||
| 4 | 5,524 | 2.5 | % | 6,250 | 3.2 | % | ||||||||||
| 5 | 6,962 | 3.2 | % | 5,245 | 2.7 | % | ||||||||||
| Total | $ | 218,687 | 100.0 | % | $ | 192,957 | 100.0 | % | ||||||||
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Results of Operations
Operating results for three and nine months ended June 30, 2023 and 2022 are as follows (dollars in thousands):
| For
the Three Months Ended June 30, | For
the Nine Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Total investment income | $ | 4,839 | $ | 3,659 | $ | 14,454 | $ | 10,449 | ||||||||
| Less: Net expenses | 3,620 | 3,451 | 9,812 | 8,891 | ||||||||||||
| Net investment income/(loss) | 1,219 | 208 | 4,642 | 1,558 | ||||||||||||
| Net realized gains (losses) on investments | (1,343 | ) | (188 | ) | (2,145 | ) | 15,489 | |||||||||
| Net change in unrealized gains (losses) on investments | 9,041 | (9,249 | ) | 17,080 | (18,205 | ) | ||||||||||
| Loss on extinguishment of debt | - | - | - | (296 | ) | |||||||||||
| Net increase (decrease) in net assets resulting from operations | $ | 8,917 | $ | (9,229 | ) | $ | 19,577 | $ | (1,454 | ) | ||||||
Investment Income
For the three months ended June 30, 2023, investment income totaled $4.8 million, of which $2.7 million was attributable to portfolio interest, $1.9 million was attributable to dividend income, $0.1 million was attributable to fee income and $0.1 million was attributable to interest from cash and cash equivalents. For the nine months ended June 30, 2023, investment income totaled $14.5 million, of which $8.0 million was attributable to portfolio interest, $5.5 million was attributable to dividend income, $0.3 million was attributable to fee income, $0.4 million was attributable to other income and $0.3 million was attributable to interest from cash and cash equivalents. Dividend income was received from 10 investments during the nine months ended June 30, 2023.
For the three months ended June 30, 2022, investment income totaled $3.7 million, of which $1.6 million was attributable to portfolio interest, $1.9 million was attributable to dividend income, and $0.2 million was attributable to fee income. For the nine months ended June 30, 2022, investment income totaled $10.4 million, of which $6.2 million was attributable to portfolio interest, $3.5 million was attributable to dividend income, $0.4 million was attributable to fee income, and $0.3 million was attributable to other income. Dividend income was received from 11 investments during the nine months ended June 30, 2022.
Operating Expenses
Operating expenses for the three and nine months ended June 30, 2023 and 2022 are as follows (dollars in thousands):
| For
the Three Months Ended June 30, | For
the Nine Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Interest and financing expenses | $ | 1,415 | $ | 1,202 | $ | 4,031 | $ | 3,910 | ||||||||
| Professional fees, net | 311 | 470 | 1,036 | 937 | ||||||||||||
| Salaries and benefits | 1,278 | 1,038 | 2,937 | 1,974 | ||||||||||||
| General and administrative | 253 | 363 | 674 | 850 | ||||||||||||
| Directors fees | 171 | 164 | 541 | 540 | ||||||||||||
| Insurance | 116 | 155 | 361 | 470 | ||||||||||||
| Administrator expenses | 76 | 59 | 232 | 210 | ||||||||||||
| Total Expenses | $ | 3,620 | $ | 3,451 | $ | 9,812 | $ | 8,891 | ||||||||
For the three months ended June 30, 2023, total operating expenses increased by $0.2 million, or 4.9% compared to the three months ended June 30, 2022. For the nine months ended June 30, 2023, total operating expenses increased by $0.9 million, or 10.4% compared to the nine months ended June 30, 2022.
Interest and Financing Expenses
Interest and financing expenses for the three months ended June 30, 2023 increased by $0.2 million, or 17.7% compared to the three months ended June 30, 2022. Interest and financing expenses for the nine months ended June 30, 2023 increased by $0.1 million, or 3.1% compared to the nine months ended June 30, 2022. The increase in interest and financing expenses for the nine months ended June 30, 2023 was primarily due to increased borrowings on Credit Facility.
Professional Fees and General and Administrative Expenses
Professional fees and general and administrative expenses for the three months ended June 30, 2023 decreased by $0.3 million, or 64.1% compared to the three months ended June 30, 2022. Professional fees and general and administrative expenses for the nine months ended June 30, 2023 decreased by $0.1 million, or 10.1% compared to the nine months ended June 30, 2022.
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Net Realized Gains/Losses from Investments
We measure realized gains or losses by the difference between the net proceeds from the disposition and the amortized cost basis of an investment, without regard to unrealized gains or losses previously recognized.
During the three and nine months ended June 30, 2023, we recognized $1.3 million and $2.1 million of realized losses, respectively on our portfolio investments. The realized losses were primarily due to losses on the sale of Franklin BSP Realty Trust and Great AJAX Corp for $1.3 million, the write off of Walker Edison Furniture Company for $2.1 million and proceeds from Footprint for $1.2 million of a gain.
During the three months ended June 30, 2022, we recognized $0.2 million of realized losses on our portfolio investments. The realized losses were primarily due to the sale of two investments and the repayment of three investments. During the nine months ended June 30, 2022, we recognized $15.5 million of realized gains on our portfolio investments. The realized gains were primarily due to the partial repayment of one investment and the restructuring of three investments, offset by realized losses due to the sale of two investments and the repayment of three investments.
Realized loss on extinguishment of debt
In the event that we modify or extinguish our debt prior to maturity, we account for it in accordance with ASC 470-50, Modifications and Extinguishments, in which we measure the difference between the reacquisition price of the debt and the net carrying amount of the debt, which includes any unamortized debt issuance costs.
Net Unrealized Appreciation/Depreciation on Investments
Net change in unrealized appreciation or depreciation on investments reflects the net change in the fair value of our investment portfolio.
For the three months ended June 30, 2023, we had $9.0 million of net unrealized appreciation on investments. The net unrealized appreciation resulted from fair market value appreciation primarily attributable to Kemmerer Operations, Maritime Wireless, the reversal of the realized loss on Walker Edison which was offset by the unrealized depreciation on Lucky Bucks.
For the nine months ended June 30, 2023, we had $17.1 million of net unrealized appreciation on investments. The net unrealized appreciation resulted from fair market value appreciation primarily attributable to Level One asset along with Kemmerer Operations, Maritime Wireless, the reversal of the realized loss on Walker Edison which was offset by the unrealized depreciation on Lucky Bucks.
For the three months ended June 30, 2022, we had $9.2 million of net unrealized depreciation on investments. The net unrealized depreciation resulted from the reversal of previously recorded unrealized appreciation primarily due to net mark-to-market adjustments on investments.
For the nine months ended June 30, 2022, we had $18.2 million of net unrealized depreciation on investments. The net unrealized depreciation resulted from the reversal of previously recorded net unrealized appreciation on investments that were realized, partially sold, or written-off during the year and net mark-to-market adjustments on investments.
Provision for Deferred Taxes on Unrealized Depreciation on Investments
Certain consolidated subsidiaries of ours are subject to U.S. federal and state income taxes. These taxable subsidiaries are not consolidated with the Company for income tax purposes, but are consolidated for GAAP purposes, and may generate income tax liabilities or assets from temporary differences in the recognition of items for financial reporting and income tax purposes at the subsidiaries. For the three and nine months ended June 30, 2023 and 2022, the Company did not record a change in provision for deferred taxes on the unrealized (appreciation)/depreciation on investments.
Changes in Net Assets from Operations
For the three months ended June 30, 2023, we recorded a net increase in net assets resulting from operations of $8.9 million compared to a net decrease in net assets resulting from operations of $9.2 million for the three months ended June 30, 2022. Total Net Assets increased from the last quarter primarily due to share repurchases in the amount of $0.1 million and the net change in unrealized gains on investments of $9.0 million. Based on 2,090,691 and 2,202,115 weighted average common shares outstanding for the three months ended June 30, 2023 and 2022, respectively, our per share net increase/(decrease) in net assets resulting from operations was $4.26 for the three months ended June 30, 2023 and $(4.19) for the three months ended June 30, 2022.
For the nine months ended June 30, 2023, we recorded a net increase in net assets resulting from operations of $19.6 million compared to a net decrease in net assets resulting from operations of $1.5 million for the nine months ended June 30, 2022. Total Net Assets decreased from the last quarter primarily due to share repurchases in the amount of $0.5 million and the net change in unrealized gains on investments of $17.1 million. Based on 2,095,591 and 2,372,849 weighted average common shares outstanding for the nine months ended June 30, 2023 and 2022, respectively, our per share net increase/(decrease) in net assets resulting from operations was $9.34 for the nine months ended June 30, 2023 and $(0.61) for the nine months ended June 30, 2022.
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Financial Condition, Liquidity and Capital Resources
As a RIC, we distribute substantially all of our net income to our stockholders and have an ongoing need to raise additional capital for investment purposes. To fund growth, we have a number of alternatives available to increase capital, including raising equity, increasing debt, and funding from operational cash flow.
Our liquidity and capital resources historically have been generated primarily from the net proceeds of public offerings of common stock, advances from the Credit Facility and net proceeds from the issuance of notes as well as cash flows from operations. In the future, we may generate cash from future offerings of securities, future borrowings and cash flows from operations, including interest earned from the temporary investment of cash in U.S. government securities and other high-quality debt investments that mature in one year or less. Our primary use of funds is investments in our targeted asset classes, cash distributions to our stockholders, and other general corporate purposes.
As of June 30, 2023, we had $10.9 million in cash and cash equivalents.
In order to maintain our RIC tax treatment under the Code, we intend to distribute to our stockholders substantially all of our taxable income, but we may also elect to periodically spill over certain excess undistributed taxable income from one tax year into the next tax year. In addition, as a BDC, for each taxable year we generally are required to meet a coverage ratio of total assets to total senior securities, which include borrowings and any preferred stock we may issue in the future, of at least 200% (or 150% if, pursuant to the 1940 Act, certain requirements are met). This requirement limits the amount that we may borrow.
On January 11, 2021, the Company announced that its board of directors approved a share repurchase program. On February 9, 2022, the Board of Directors approved the expansion of the amount authorized for repurchase under the Company’s share repurchase program from $15 million to $25 million. On February 8, 2023, the Board of Directors approved the further expansion of the amount authorized for repurchase under the Company’s share repurchase program from $25 million to $35 million. Under the share repurchase program, the Company repurchased an aggregate of 635,120 shares of common stock through June 30, 2023, or 23.3% of shares outstanding as of the program’s inception, with a total cost of $25.2 million. The total remaining amount authorized under the expanded share repurchase program at June 30, 2023 was approximately $9.8 million.
Credit Facility
On December 15, 2022, the Company and its wholly-owned subsidiaries executed a three-year, $50 million revolving credit facility (the “Credit Facility”) with WoodForest Bank, N.A. (“WoodForest”), Valley National Bank, and Axiom Bank, (collectively, the “Lenders”). WoodForest is the administrative agent, sole bookrunner and sole lead arranger. As of June 30, 2023, there was $28.2 million outstanding borrowings by the Company under the Credit Facility.
Outstanding loans under the Credit Facility will bear a monthly interest rate at Term SOFR + 2.90%. The Company is also subject to a commitment fee of 0.25%, which shall accrue on the actual daily amount of the undrawn portion of the revolving credit. The Credit Facility contains customary representations and warranties and affirmative and negative covenants. The Credit Facility contains customary events of default for credit facilities of this type, including (without limitation): nonpayment of principal, interest, fees or other amounts after a stated grace period; inaccuracy of material representations and warranties; change of control; violations of covenants, subject in certain cases to stated cure periods; and certain bankruptcies and liquidations. If an event of default occurs and is continuing, the Company may be required to repay all amounts outstanding under the Credit Facility.
Unsecured Notes
2023 Notes
On March 18, 2013, the Company issued $60.0 million in aggregate principal amount of 2023 Notes. As of March 30, 2016, the 2023 Notes may be redeemed in whole or in part at any time or from time to time at the Company’s option. On March 26, 2013, the Company closed an additional $3.5 million in aggregate principal amount of 2023 Notes, pursuant to the partial exercise of the underwriters’ option to purchase additional notes. The 2023 Notes bore interest at a rate of 6.125% per year, payable quarterly on March 30, June 30, September 30 and December 30 of each year, beginning June 30, 2013.
On December 12, 2016, the Company entered into an “At-The-Market” (“ATM”) debt distribution agreement with FBR Capital Markets & Co., through which the Company could offer for sale, from time to time, up to $40.0 million in aggregate principal amount of the 2023 Notes. The Company sold 1,573,872 of the 2023 Notes at an average price of $25.03 per note, and raised $38.6 million in net proceeds, through the ATM debt distribution agreement.
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On March 10, 2018, the Company redeemed $13.0 million in aggregate principal amount of the 2023 Notes. The redemption was accounted for as a debt extinguishment in accordance with ASC 470-50, Modifications and Extinguishments, which resulted in a realized loss of $0.3 million and was recorded on the Consolidated Statements of Operations as a loss on extinguishment of debt.
On December 31, 2018, the Company redeemed $12.0 million in aggregate principal amount of the 2023 Notes. The redemption was accounted for as a debt extinguishment in accordance with ASC 470-50, Modifications and Extinguishments, which resulted in a realized loss of $0.2 million and was recorded on the Consolidated Statements of Operations as a loss on extinguishment of debt.
On December 21, 2020, the Company announced that it completed the application process for and was authorized to transfer the listing of the 2023 Notes to the NASDAQ Global Market. The listing and trading of the 2023 Notes on the NYSE ceased at the close of trading on December 31, 2020. Effective January 4, 2021, the 2023 Notes trade on the NASDAQ Global Market under the trading symbol “PFXNL.”
On November 15, 2021, the Company caused notices to be issued to the holders of the 2023 Notes regarding the Company’s exercise of its option to redeem $55,325,000 in aggregate principal amount of the issued and outstanding 2023 Notes on December 16, 2021. The redemption was accounted for as a debt extinguishment in accordance with ASC 470-50, Modifications and Extinguishments, which resulted in a realized loss of $0.3 million and was recorded on the Consolidated Statements of Operations as a loss on extinguishment of debt.
On December 15, 2022, the Company caused notices to be issued to the holders of its 2023 Notes regarding the Company’s exercise of its option to redeem $22,521,800 in aggregate principal amount of issued and outstanding 2023 Notes, comprising all issued and outstanding 2023 Notes, at a price equal to 100% of the principal amount of the 2023 Notes, plus accrued and unpaid interest thereon from September 30, 2022, through, but excluding, January 17, 2023 in accordance with the terms of the indenture governing the 2023 Notes. The redemption was completed on January 17, 2023. The Company funded the redemption of the 2023 Notes with loans obtained under the Credit Facility, as described earlier in this section.
2028 Notes
On November 9, 2021, the Company entered into an underwriting agreement, by and between the Company and Oppenheimer & Co. Inc., as representative of the several underwriters named in Exhibit A thereto, in connection with the issuance and sale (the “Offering”) of $57,500,000 (including the underwriters’ option to purchase up to $7,500,000 aggregate principal amount) in aggregate principal amount of its 5.25% Notes due 2028 (the “2028 Notes”). The Offering occurred on November 15, 2021, pursuant to the Company’s effective shelf registration statement on Form N-2 previously filed with the SEC, as supplemented by a preliminary prospectus supplement dated November 8, 2021, the pricing term sheet dated November 9, 2021 and a final prospectus supplement dated November 9, 2021. Effective November 16, 2021, the 2028 Notes began trading on the NASDAQ Global Market under the trading symbol “PFXNZ.”
On November 15, 2021, the Company and U.S. Bank National Association, as trustee entered into a Fourth Supplemental Indenture to its base Indenture, dated February 7, 2012, between the Company and the Trustee. The Fourth Supplemental Indenture relates to the Offering of the 2028 Notes.
Contractual Obligations and Off-Balance Sheet Arrangements
As of June 30, 2023 and September 30, 2022, we had commitments under loan and financing agreements to fund up to $2.9 million to four portfolio companies and $6.0 million to six portfolio companies, respectively. These commitments are primarily composed of senior secured term loans and revolvers, and the determination of their fair value is included in the Consolidated Schedule of Investments. The commitments are generally subject to the borrowers meeting certain criteria such as compliance with covenants and certain operational metrics. The terms of the borrowings and financings subject to commitment are comparable to the terms of other loan and equity securities in our portfolio. A summary of the composition of the unfunded commitments as of June 30, 2023 and September 30, 2022 is shown in the table below (dollars in thousands):
| June
30, 2023 | September 30, 2022 | |||||||
| SS Acquisition, LLC (dba Soccer Shots Franchising) - Senior Secured First Lien Delayed Draw Term Loan | $ | - | $ | 4,000 | ||||
| Kemmerer Operations, LLC - Senior Secured First Lien Delayed Draw Term Loan | - | 908 | ||||||
| Secure Acquisition Inc. (dba Paragon Films) - Senior Secured First Lien Delayed Draw Term Loan | 517 | 517 | ||||||
| NVTN LLC - Senior Secured First Lien Delayed Draw Term Loan | 220 | 220 | ||||||
| Black Angus Steakhouses, LLC Senior Secured First Lien Super Priority Delayed Draw Term Loan | 166 | 167 | ||||||
| 1888 Industrial Services, LLC - Revolving Credit Facility | - | 216 | ||||||
| Tamarix Capital Partners II, L.P. - Fund Investment | 2,038 | - | ||||||
| Total unfunded commitments | $ | 2,941 | $ | 6,028 | ||||
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The following table shows our payment obligations for repayment of debt and other contractual obligations at June 30, 2023 (dollars in thousands):
| Payments Due by Period | ||||||||||||||||||||||||||||
| 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter | Total | ||||||||||||||||||||||
| Revolving Credit Facility | $ | - | $ | - | $ | (28,241,941 | ) | $ | - | $ | - | $ | - | $ | (28,241,941 | ) | ||||||||||||
| 2028 Notes | - | - | - | - | - | (57,500,000 | ) | (57,500,000 | ) | |||||||||||||||||||
| Operating Lease Obligation (1) | (74,160 | ) | (152,399 | ) | (156,971 | ) | (161,680 | ) | (27,417 | ) | - | (572,627 | ) | |||||||||||||||
| Total contractual obligations | $ | (74,160 | ) | $ | (152,399 | ) | $ | (28,398,912 | ) | $ | (161,680 | ) | $ | (27,417 | ) | $ | (57,500,000 | ) | $ | (86,314,568 | ) | |||||||
| (1) | Operating Lease Obligation means a rent payment obligation under a lease classified as an operating lease and disclosed pursuant to ASC 842, as may be modified or supplemented. |
Distributions
We have elected, and intend to qualify annually, to be treated for U.S. federal income tax purposes as a RIC under Subchapter M of the Code. As a RIC, in any taxable year with respect to which we timely distribute at least 90 percent of the sum of our (i) investment company taxable income (which is generally our net ordinary income plus the excess of realized net short-term capital gains over realized net long-term capital losses) determined without regard to the deduction for dividends paid and (ii) net tax exempt interest income (which is the excess of our gross tax exempt interest income over certain disallowed deductions), we (but not our stockholders) generally will not be subject to U.S. federal income tax on investment company taxable income and net capital gains that we distribute to our stockholders. We intend to distribute annually all or substantially all of such income, but we may also elect to periodically spill over certain excess undistributed taxable income from one tax year to the next tax year. To the extent that we retain our net capital gains or any investment company taxable income, we will be subject to U.S. federal income tax. We may choose to retain our net capital gains or any investment company taxable income, and pay the associated federal corporate income tax or excise tax, described below.
Amounts not distributed on a timely basis in accordance with a calendar year distribution requirement are subject to a nondeductible 4% U.S. federal excise tax payable by us. To avoid this tax, we must distribute (or be deemed to have distributed) during each calendar year an amount equal to the sum of:
| 1) | at least 98.0% of our ordinary income (not taking into account any capital gains or losses) for the calendar year; |
| 2) | at least 98.2% of the amount by which our capital gains exceed our capital losses (adjusted for certain ordinary losses) for a one-year period ending on October 31st of the calendar year; and |
| 3) | income realized, but not distributed, in preceding years and on which we did not pay federal income tax. |
While we intend to distribute any income and capital gains in the manner necessary to minimize imposition of the 4% U.S. federal excise tax, sufficient amounts of our taxable income and capital gains may not be distributed to avoid entirely the imposition of the tax. In that event, we will be liable for the tax only on the amount by which we do not meet the foregoing distribution requirement.
We intend to pay quarterly dividends to our stockholders out of assets legally available for distribution. We cannot assure you that we will achieve investment results that will allow us to pay a specified level of dividends or year-to-year increases in dividends. In addition, the inability to satisfy the asset coverage test applicable to us as a BDC could limit our ability to pay dividends. All dividends will be paid at the discretion of our board of directors and will depend on our earnings, our financial condition, maintenance of our RIC tax treatment, compliance with applicable BDC regulations and such other factors as our board of directors may deem relevant from time to time. We cannot assure you that we will pay dividends to our stockholders in the future.
To the extent our taxable earnings fall below the total amount of our distributions for a taxable year, a portion of those distributions may be deemed a return of capital to our stockholders for U.S. federal income tax purposes. Stockholders should read any written disclosure accompanying a distribution carefully and should not assume that the source of any distribution is our ordinary income or gains.
We have adopted an “opt out” dividend reinvestment plan for our common stockholders. As a result, if we declare a cash dividend or other distribution, each stockholder that has not “opted out” of our dividend reinvestment plan will have their dividends automatically reinvested in additional shares of our common stock rather than receiving cash dividends. Stockholders who receive distributions in the form of shares of common stock will be subject to the same federal, state and local tax consequences as if they received cash distributions.
The Company did not declare any distribution payments during the three and nine months ended June 30, 2023. During the three and nine months ended June 30, 2022 a special dividend was declared in the amount of $265,798 on June 24, 2022 payable on July 13, 2022 to Stockholders of record on July 5, 2022.
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Financial Highlights Supplemental Data
| Supplemental Data: | ||||||||
| Percentage of non-recurring fee income | 2.35 | % | 4.02 | |||||
| Average debt outstanding(1) | $ | 81,227,306 | $ | 87,235,771 | ||||
| Average debt outstanding per weighted average common share | $ | 38.85 | $ | 36.76 | ||||
| Asset coverage ratio per unit(2) | $ | 2,632 | $ | 2,658 | ||||
| Senior Securities Outstanding(3) | ||||||||
| 2023 Notes | $ | - | $ | 22,521,800 | ||||
| 2028 Notes | $ | 57,500,000 | $ | 57,500,000 | ||||
| Revolving Credit Facility | $ | 28,241,941 | - | |||||
| Average market value per unit: | ||||||||
| 2023 Notes | $ | 25.10 | $ | 25.35 | ||||
| 2028 Notes | $ | 23.02 | $ | 24.67 | ||||
| (1) | Based on daily weighted average carrying value of debt outstanding during the period. |
| (2) | Asset coverage per unit is the ratio of the carrying value of our total consolidated assets, less all liabilities and indebtedness not represented by senior securities, to the aggregate amount of senior securities representing indebtedness. Asset coverage per unit is expressed in terms of dollar amounts per $1,000 of indebtedness. |
| As of June 30, 2023, the Company’s asset coverage was 263.2% after giving effect to leverage and therefore the Company’s asset coverage was above 200%, the minimum asset coverage requirement under the 1940 Act. | |
| (3) | Total amount of each class of senior securities outstanding at the end of the period excluding debt issuance costs. |
Related Party Transactions
Concurrent with the pricing of our IPO, we entered into a number of business relationships with affiliated or related parties, including the following:
| ● | We entered into the Investment Management Agreement with MCC Advisors, which expired December 31, 2020. Mr. Brook Taube, Chairman and Chief Executive Officer through December 31, 2020 and director through January 21, 2021 and Mr. Seth Taube, director through January 21, 2021, are both affiliated with MCC Advisors and Medley. |
| ● | Through December 31, 2020, MCC Advisors provided us with the office facilities and administrative services necessary to conduct day-to-day operations pursuant to our administration agreement. We reimbursed MCC Advisors for the allocable portion (subject to the review and approval of our board of directors) of overhead and other expenses incurred by it in performing its obligations under the administration agreement, including rent, the fees and expenses associated with performing compliance functions, and our allocable portion of the cost of our Chief Financial Officer and Chief Compliance Officer and their respective staffs. |
On June 12, 2020, the Company entered into the Expense Support Agreement with MCC Advisors and Medley LLC, pursuant to which MCC Advisors and Medley LLC agreed (jointly and severally) to cap the management fee and all of the Company’s other operating expenses (except interest expenses, certain extraordinary strategic transaction and expenses, and other expenses approved by the Special Committee) at $667,000 per month (the “Cap”). Under the Expense Support Agreement, the Cap became effective on June 1, 2020 and was to expire on September 30, 2020. On September 29, 2020, the board of directors, including all of the independent directors, extended the term of the Expense Support Agreement through the end of quarter ending December 31, 2020. The Expense Support Agreement expired by its terms at the close of business on December 31, 2020, in connection with the adoption of the internalized management structure by the board of directors.
In addition, we have adopted a formal business code of conduct and ethics that governs the conduct of our CEO, CFO, chief accounting officer (which role is currently fulfilled by our CFO) and controller (Covered Officers). Our officers and directors also remain subject to the duties imposed by both the 1940 Act and the Delaware General Corporation Law. Our Code of Business Conduct and Ethics requires that all Covered Officers promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between an individual’s personal and professional relationships. Pursuant to our Code of Business Conduct and Ethics, each Covered Officer must disclose to the Company’s CCO any conflicts of interest, or actions or relationships that might give rise to a conflict. Any approvals or waivers under our Code of Business Conduct and Ethics must be considered by the disinterested directors.
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Pledge and Security Agreement
In connection with the Credit Facility discussed in Note 5, the Company has entered into a Pledge and Security Agreement with the Lenders pursuant to which the Company and its wholly owned subsidiaries have pledged all their assets, including the cash and securities held in the Company’s custodial account with Computershare Trust Company, N.A., as collateral for any borrowings made by the Company pursuant to the Credit Agreement. The Lenders have the typical rights and remedies of a secured lender under the Uniform Commercial Code, including the right to foreclose on the collateral pledged by the Company.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified the following items as critical accounting policies.
Valuation of Portfolio Investments
The Company follows ASC 820 for measuring the fair value of portfolio investments. Fair value is the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters, or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation models involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity. The Company’s fair value analysis includes an analysis of the value of any unfunded loan commitments. Financial investments recorded at fair value in the consolidated financial statements are categorized for disclosure purposes based upon the level of judgment associated with the inputs used to measure their value. The valuation hierarchical levels are based upon the transparency of the inputs to the valuation of the investment as of the measurement date. Investments which are valued using NAV as a practical expedient are excluded from this hierarchy, and certain prior period amounts have been reclassified to conform to the current period presentation. The three levels are defined below:
| ● | Level 1 - Valuations based on quoted prices in active markets for identical assets or liabilities at the measurement date. |
| ● | Level 2 - Valuations based on inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable at the measurement date. This category includes quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in non-active markets including actionable bids from third parties for privately held assets or liabilities, and observable inputs other than quoted prices such as yield curves and forward currency rates that are entered directly into valuation models to determine the value of derivatives or other assets or liabilities. |
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| ● | Level 3 - Valuations based on inputs that are unobservable and where there is little, if any, market activity at the measurement date. The inputs for the determination of fair value may require significant management judgment or estimation and are based upon management’s assessment of the assumptions that market participants would use in pricing the assets or liabilities. These investments include debt and equity investments in private companies or assets valued using the Market or Income Approach and may involve pricing models whose inputs require significant judgment or estimation because of the absence of any meaningful current market data for identical or similar investments. The inputs in these valuations may include, but are not limited to, capitalization and discount rates, beta and EBITDA multiples. The information may also include pricing information or broker quotes which include a disclaimer that the broker would not be held to such a price in an actual transaction. The non-binding nature of consensus pricing and/or quotes accompanied by disclaimer would result in classification as Level 3 information, assuming no additional corroborating evidence. |
We value investments for which market quotations are readily available at their market quotations, which are generally obtained from an independent pricing service or multiple broker-dealers or market makers. We weight the use of third-party broker quotes, if any, in determining fair value based on our understanding of the level of actual transactions used by the broker to develop the quote and whether the quote was an indicative price or binding offer. However, a readily available market value is not expected to exist for many of the investments in our portfolio, and we value these portfolio investments at fair value as determined in good faith by our board of directors under our valuation policy and process. We may seek pricing information with respect to certain of our investments from pricing services or brokers or dealers in order to value such investments.
Valuation methods may include comparisons of financial ratios of the portfolio companies that issued such private equity securities to peer companies that are public, the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings and discounted cash flows, the markets in which the portfolio company does business, and other relevant factors. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we will consider the pricing indicated by the external event to corroborate the private equity valuation. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the 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.
In December 2020, the SEC adopted Rule 2a-5 under the 1940 Act, which permits a BDC’s board of directors to designate its executive officer(s) as a valuation designee to determine the fair value of its investment portfolio, subject to the oversight of the board. The Board has approved policies and procedures pursuant to Rule 2a-5 and has designated Ellida McMillan, the Company’s CFO, to serve as the Board’s valuation designee (“Valuation Designee”), subject to the Board’s oversight, effective September 8, 2022.
With respect to investments for which market quotations are not readily available, our board oversees and our Valuation Designee undertakes a multi-step valuation process each quarter, as described below:
| ● | Our quarterly valuation process generally begins with each investment being initially valued by a Valuation Firm. |
| ● | Available third-party market data will be reviewed by company personnel designated by the Valuation Designee (“Fair Value Personnel”) and the Valuation Firm. |
| ● | Available portfolio company data and general industry data is then reviewed by the Fair Value Personnel. |
| ● | Preliminary valuation conclusions will then be documented and discussed with the Fair Value Personnel. |
| ● | The Valuation Designee then determines the fair value of each investment in the Company’s portfolio in good faith based on such discussions, the Company’s Valuation Policy and the Valuation Firms’ final estimated valuations |
| ● | The Valuation Designee’s report is then presented to the Board of Directors and the Audit Committee. |
In following these approaches, the types of factors that are taken into account in fair value pricing investments include available current market data, including relevant and applicable market trading and transaction comparables; applicable market yields and multiples; security covenants; call protection provisions; information rights; the nature and realizable value of any collateral; the portfolio company’s ability to make payments; the portfolio company’s earnings and discounted cash flows; the markets in which the portfolio company does business; comparisons of financial ratios of peer companies that are public; comparable merger and acquisition transactions; and the principal market and enterprise values.
Determination of fair values involves subjective judgments and estimates made by management. The notes to our financial statements refer to the uncertainty with respect to the possible effect of such valuations, and any change in such valuations, on our consolidated financial statements.
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Revenue Recognition
Our revenue recognition policies are as follows:
Investments and Related Investment Income: We account for investment transactions on a trade-date basis and interest income, adjusted for amortization of premiums and accretion of discounts, is recorded on an accrual basis. For investments with contractual PIK interest, which represents contractual interest accrued and added to the principal balance that generally becomes due at maturity, we will not accrue PIK interest if the portfolio company valuation indicates that the PIK interest is not collectible. Origination, closing and/or commitment fees associated with investments in portfolio companies are recognized as income when the investment transaction closes. Other fees are capitalized as deferred revenue and recorded into income over the respective period. Prepayment penalties received by the Company for debt instruments paid back to the Company prior to the maturity date are recorded as income upon receipt. Realized gains or losses on investments are measured by the difference between the net proceeds from the disposition and the amortized cost basis of investment, without regard to unrealized gains or losses previously recognized. We report changes in the fair value of investments that are measured at fair value as a component of the net change in unrealized appreciation/(depreciation) on investments in our Consolidated Statements of Operations.
Non-accrual: We place loans on non-accrual status when principal and interest payments are past due by 90 days or more, or when there is reasonable doubt that we will collect principal or interest. Accrued interest is generally reversed when a loan is placed on non-accrual. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in our management’s judgment, are likely to remain current. At June 30, 2023, certain investments in six portfolio companies held by the Company were on non-accrual status with a combined fair value of approximately $7.0 million, or 3.2% of the fair value of our portfolio. At September 30, 2022, certain investments in five portfolio companies held by the Company were on non-accrual status with a combined fair value of approximately $5.2 million, or 2.7% of the fair value of our portfolio.
Federal Income Taxes
The Company has elected, and intends to qualify annually, to be treated for U.S. federal income tax purposes as a RIC under Subchapter M of the Code and it intends to operate in a manner so as to maintain its RIC tax treatment. To do so, among other things, the Company is required to meet certain source of income and asset diversification requirements and must timely distribute to its stockholders at least 90% of the sum of investment company taxable income (“ICTI”) including PIK, as defined by the Code, and net tax exempt interest income (which is the excess of our gross tax exempt interest income over certain disallowed deductions) for each taxable year. The Company will be subject to a nondeductible U.S. federal excise tax of 4% on undistributed income if it does not distribute at least 98% of its net ordinary income for any calendar year and 98.2% of its capital gain net income for each one-year period ending on October 31 of such calendar year and any income realized, but not distributed, in preceding years and on which it did not pay federal income tax. Depending on the level of ICTI earned in a tax year, the Company may choose to carry forward ICTI in excess of current year dividend distributions into the next tax year and pay a 4% excise tax on such income, as required. 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 for excise tax purposes, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned. Any such carryover ICTI must be distributed before the end of that next tax year through a dividend declared prior to filing the final tax return related to the year which generated such ICTI.
Because federal income tax requirements differ from GAAP, distributions in accordance with tax requirements may differ from net investment income and realized gains recognized for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the consolidated financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain or loss are recognized at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are subject to financial market risks, including changes in interest rates. Changes in interest rates may affect both our cost of funding and our interest income from portfolio investments and cash and cash equivalents. Our investment income will be affected by changes in various interest rates, including LIBOR and SOFR, to the extent our debt investments include floating interest rates. In the future, we expect other loans in our portfolio will have floating interest rates. In addition, U.S. and global capital markets and credit markets have experienced a higher level of stress due to the global COVID-19 pandemic, which has resulted in an increase in the level of volatility across such markets. We may hedge against interest rate fluctuations by using standard hedging instruments such as futures, options and forward contracts subject to the requirements of the 1940 Act. For the three and nine months ended June 30, 2023, we did not engage in hedging activities.
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As of June 30, 2023, 77.1% of our income-bearing investment portfolio bore interest based on floating rates based upon fair value. A prolonged reduction in interest rates will reduce our gross investment income and could result in a decrease in our net investment income if such decreases in LIBOR, SOFR or similar reference rates are not offset by a corresponding increase in the spread over LIBOR, SOFR or similar reference rates that we earn on any portfolio investments, a decrease in our operating expenses, including with respect to any income incentive fee, or a decrease in the interest rate of our floating interest rate liabilities tied to LIBOR, SOFR or similar reference rates. In contrast, a rise in the general level of interest rates can be expected to lead to higher interest rates applicable to any variable rate investments we hold and to declines in the value of any fixed rate investments we hold. In addition, a rise in interest rates may increase the likelihood that a portfolio company defaults on a loan. However, many of our variable rate investments provide for an interest rate floor, which may prevent our interest income from increasing until benchmark interest rates increase beyond a threshold amount. The composition of our floating rate debt investments by cash interest rate LIBOR and SOFR floor as of June 30, 2023 was as follows (dollars in thousands):
| June 30, 2023 | ||||||||
| LIBOR and SOFR Floor | Fair Value | %
of Floating Rate Portfolio | ||||||
| Under 1% | $ | 17,506 | 18.8 | % | ||||
| 1% to under 2% | 68,398 | 73.7 | ||||||
| 2% to under 3% | 3,358 | 3.6 | ||||||
| No Floor | 3,619 | 3.9 | ||||||
| Total | $ | 92,881 | 100.0 | % | ||||
Based on our Consolidated Statements of Assets and Liabilities as of June 30, 2023, the following table (dollars in thousands) shows the approximate increase/(decrease) in components of net assets resulting from operations of hypothetical LIBOR and SOFR base rate changes in interest rates, assuming no changes in our investment and capital structure.
| Change in Interest Rates | Interest Income(1) | Interest Expense | Net
Increase/ (Decrease) | |||||||||
| Up 300 basis points | $ | 7,100 | $ | (1,800 | ) | $ | 5,300 | |||||
| Up 200 basis points | 4,700 | (1,200 | ) | 3,500 | ||||||||
| Up 100 basis points | 2,400 | (600 | ) | 1,800 | ||||||||
| Down 100 basis points | (2,400 | ) | 600 | (1,800 | ) | |||||||
| Down 200 basis points | (4,700 | ) | 1,200 | (3,500 | ) | |||||||
| Down 300 basis points | (7,100 | ) | 1,800 | (5,300 | ) | |||||||
| (1) | Assumes no defaults or prepayments by portfolio companies over the next twelve months. |
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2023. The term “disclosure controls and procedures” is defined under Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), as amended. Based on the evaluation of our disclosure controls and procedures as of June 30, 2023, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.
Changes in Internal Controls Over Financial Reporting
There were no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
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PART II
Item 1. Legal Proceedings
From time to time, we are involved in various legal proceedings, lawsuits and claims incidental to the conduct of our business. Our businesses are also subject to extensive regulation, which may result in regulatory proceedings against us. Except as described below, we are not currently party to any material legal proceedings.
Item 1A. Risk Factors
In addition to other information set forth in this report, you should carefully consider the “Risk Factors” discussed in our annual report on Form 10-K for the fiscal year ended September 30, 2022, filed with the SEC on December 16, 2022, which could materially affect our business, financial condition and/or operating results. Other than the items disclosed below, there have been no material changes during the nine months ended June 30, 2023 to the risk factors discussed in “Item 1A. Risk Factors” of our annual report on Form 10-K. Additional risks or uncertainties not currently known to us or that we currently deem to be immaterial also may materially affect our business, financial condition and/or operating results.
Risks Related to our Business
We may not be able to pay you distributions and our distributions may not grow over time.
When possible, we may pay quarterly distributions to our stockholders out of assets legally available for distribution. We cannot assure you that we will achieve investment results that will allow us to pay a specified level of cash distributions or year-to-year increases in cash distributions. Our ability to pay distributions might be adversely affected by, among other things, the impact of one or more of the risk factors described herein. In addition, the inability to satisfy the asset coverage test applicable to us as a BDC could limit our ability to pay distributions. As of June 30, 2023, the Company’s asset coverage was 263.2% after giving effect to leverage and therefore the Company’s asset coverage is above 200%, the minimum asset coverage requirement under the 1940 Act. All distributions will be paid at the discretion of our board of directors and will depend on our earnings, our financial condition, maintenance of our RIC tax treatment, compliance with applicable BDC regulations, and such other factors as our board of directors may deem relevant from time to time. We cannot assure you that we will pay distributions to our stockholders in the future.
Risks Related to our Operations as a BDC and RIC
Regulations governing our operation as a BDC affect our ability to, and the way in which we, raise additional capital which could have a material adverse impact on our liquidity, financial condition and results of operations.
Our business requires a substantial amount of capital to operate and grow. We may acquire additional capital from the issuance of senior securities (including debt and preferred stock), the issuance of additional shares of our common stock or from securitization transactions. However, we may not be able to raise additional capital in the future on favorable terms or at all. Additionally, we may only issue senior securities up to the maximum amount permitted by the 1940 Act. The 1940 Act permits us to issue senior securities only in amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% (or 150% if, pursuant to the 1940 Act, certain requirements are met) after such issuance or incurrence. If our assets decline in value and we fail to satisfy this test, we may be required to liquidate a portion of our investments and repay a portion of our indebtedness at a time when such sales or repayment may be disadvantageous, which could have a material adverse impact on our liquidity, financial condition and results of operations. As of June 30, 2023, the Company’s asset coverage was 263.2% after giving effect to leverage and therefore the Company’s asset coverage is above 200%, the minimum asset coverage requirement under the 1940 Act.
Risks Relating to an Investment in our Securities
The indenture under which the 2028 Notes are issued place restrictions on our and/or our subsidiaries’ activities.
The terms of the indentures under which the 2028 Notes were issued place restrictions on our and/or our subsidiaries’ ability to, among other things issue securities or otherwise incur additional indebtedness or other obligations, including (1) any indebtedness or other obligations that would be equal in right of payment to the 2028 Notes, (2) any indebtedness or other obligations that would be secured and therefore rank effectively senior in right of payment to the 2028 Notes to the extent of the values of the assets securing such debt, (3) indebtedness of ours that is guaranteed by one or more of our subsidiaries and which therefore is structurally senior to the 2028 Notes and (4) securities, indebtedness or obligations issued or incurred by our subsidiaries that would be senior to our equity interests in our subsidiaries and therefore rank structurally senior to the 2028 Notes, except as would cause our asset coverage to be below 200% as a result of such borrowings and/or issuances, whether or not we continue to be subject to the regulations of the 1940 Act. These provisions generally prohibit us from making additional borrowings, including through the issuance of additional debt or the sale of additional debt securities, unless our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowings. As of June 30, 2023, the Company’s asset coverage was 263.2% after giving effect to leverage. These provisions generally prohibit us from declaring any cash dividend or distribution upon any class of our capital stock or purchasing any such capital stock if our asset coverage, as defined in the 1940 Act, is below 200% at the time of the declaration of the dividend or distribution or the purchase and after deducting the amount of such dividend, distribution or purchase.
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The terms of the Credit Facility place restrictions on our and/or our subsidiaries activities.
The terms of the Credit Facility place restrictions on our and/or our subsidiaries’ ability to, among other things, issue securities or otherwise incur additional indebtedness or other obligations, and in certain cases we may need the approval of WoodForest, as the Administrative Agent, in order to incur further indebtedness. In addition, the Credit Facility contains customary events of default for credit facilities of this type, including (without limitation): nonpayment of principal, interest, fees or other amounts after a stated grace period; inaccuracy of material representations and warranties; change of control; violations of covenants, subject in certain cases to stated cure periods; and certain bankruptcies and liquidations. If an event of default occurs and is continuing, the Company may be required to repay all amounts outstanding under the Credit Facility, which would adversely affect our liquidity position and, in turn, could force us to dispose of investments at inopportune times at reduced prices. Repayment could also adversely affect our ability to implement our investment strategy and achieve our investment objectives.
Certain Risks in the Current Environment
We are currently operating in a period of capital markets disruptions and economic uncertainty. Such market conditions may materially and adversely affect debt and equity capital markets, which may have a negative impact on our business, financial condition and operations.
From
time to time, capital markets may experience periods of disruption and instability. The U.S. capital markets have experienced extreme
volatility and disruption following the global outbreak of coronavirus (“COVID-19”) that began in December 2019. Some economists
and major investment banks have expressed concern that the continued spread of the COVID-19 globally could lead to a world-wide economic
downturn. Even after the COVID-19 pandemic subsides, the U.S. economy, as well as most other major economies, may continue to experience
a recession, and we anticipate our businesses would be materially and adversely affected by a prolonged recession in the United States
and other major markets. Disruptions in the capital markets have increased the spread between the yields realized on risk-free and higher
risk securities, resulting in illiquidity in parts of the capital markets.
For example, between 2008 and 2009, the U.S. and global capital markets were unstable as evidenced by periodic disruptions in liquidity in the debt capital markets, significant write-offs in the financial services sector, the re-pricing of credit risk in the broadly syndicated credit market and the failure of major financial institutions. Despite actions of the U.S. federal government and foreign governments, these events contributed to worsening general economic conditions that materially and adversely impacted the broader financial and credit markets and reduced the availability of debt and equity capital for the market as a whole and financial services firms in particular.
Equity capital may be difficult to raise during periods of adverse or volatile market conditions because, subject to some limited exceptions, as a BDC, we are generally not able to issue additional shares of our common stock at a price less than NAV without first obtaining approval for such issuance from our stockholders and our independent directors. Volatility and dislocation in the capital markets can also create a challenging environment in which to raise or access debt capital. The current market and future market conditions similar to those experienced from 2008 through 2009 for any substantial length of time could make it difficult to extend the maturity of or refinance our existing indebtedness or obtain new indebtedness with similar terms and any failure to do so could have a material adverse effect on our business. The debt capital that will be available to us in the future, if at all, may be at a higher cost and on less favorable terms and conditions than what we currently experience, including being at a higher cost in a rising interest rate environment. If any of these conditions appear, they may have an adverse effect on our business, financial condition, and results of operations. These events could limit our investment originations, limit our ability to increase returns to equity holders through the effective use of leverage, and negatively impact our operating results.
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In addition, significant changes or volatility in the capital markets may also have a negative effect on the valuations of our investments. While most of our investments are not publicly traded, applicable accounting standards require us to assume as part of our valuation process that our investments are sold in a principal market to market participants (even if we plan on holding an investment through its maturity). Significant changes in the capital markets may also affect the pace of our investment activity and the potential for liquidity events involving our investments. Thus, the illiquidity of our investments may make it difficult for us to sell our investments to access capital if required, and as a result, we could realize significantly less than the value at which we have recorded our investments if we were required to sell them for liquidity purposes. An inability to raise or access capital could have a material adverse effect on our business, financial condition or results of operations.
Governmental authorities worldwide have taken increased measures to stabilize the markets and support economic growth. The success of these measures is unknown and they may not be sufficient to address the market dislocations or avert severe and prolonged reductions in economic activity.
We also face an increased risk of investor, creditor or portfolio company disputes, litigation and governmental and regulatory scrutiny as a result of the effects of COVID-19 on economic and market conditions.
Events outside of our control, including terrorist attacks, acts of war, natural disasters or public health crises, could negatively affect our portfolio companies and our results of our operations.
Periods of market volatility have occurred and could continue to occur in response to pandemics or other events outside of our control, including terrorist attacks, acts of war, natural disasters, public health crises or similar events. These types of events have adversely affected and could continue to adversely affect operating results for us and for our portfolio companies.
In February 2022, Russia launched a large-scale invasion of Ukraine. The extent and duration of Russian military action in the Ukraine, resulting sanctions and resulting future market disruptions, including declines in stock markets in Russia and elsewhere and the value of the ruble against the U.S. dollar, are impossible to predict, but have been and could continue to be significant. Any such disruptions caused by Russian military or other actions (including cyberattacks and espionage) or resulting from actual or threatened responses to such actions have caused and could continue to cause disruptions to portfolio companies located in Europe or that have substantial business relationships with European or Russian companies. The extent and duration of the military action, sanctions and resulting market disruptions are impossible to predict, but have been and could continue to be substantial. Any such market disruptions could affect our portfolio companies’ operations and, as a result, could have a material adverse effect on our business, financial condition and results of operations.
We may be subject to risks associated with significant investments in one or more economic sectors and/or industries, including the business services sector, which includes our investment in our affiliate’s asset based lending business.
At times, the Company may have a significant portion of its assets invested in securities of companies conducting business within one or more economic sectors and/or industries, including the Services: Business, which includes our investment in an asset based lending business. Companies in the same sector or industry may be similarly affected by economic, regulatory, political or market events or conditions, which may make the Company more vulnerable to unfavorable developments in that sector or industry than companies that invest more broadly. Generally, the more broadly the Company invests, the more it spreads risk and potentially reduces the risks of loss and volatility.
As of June 30, 2023, investments in our affiliate’s asset-based lending business constituted 14.7% of our total assets. Thus, the Company presently has significant exposure to its asset based lending business. This asset based lending exposure subjects the Company to the particular risks of such business to a greater degree than others not similarly concentrated. The Company’s affiliate’s asset based lending activity within the gemstone and jewelry industry is exposed to factors that can impact price of gemstones and jewelry, including supply and demand of gemstones; political, economic, and global financial events; movement of the U.S. dollar versus other currencies; and the activity of large speculators and other participants. The gemstones and jewelry industry is exposed to the risk of loss as a result of fraud in its various forms. A significant decline in market prices of gemstones could result in reduced collateral value and losses, i.e., a lower balance of asset-based loans outstanding for the Company’s affiliate (which in turn would adversely impact out net asset value). See Item 1A of our Form 10-K, filed December 16, 2022, for risk factors related to our investment in this business.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
Item 6. Exhibits
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| * | Filed herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Dated: August 10, 2023 | ||
| PhenixFIN Corporation | ||
| By | /s/ David Lorber | |
| David Lorber | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| By | /s/ Ellida McMillan | |
| Ellida McMillan | ||
| Chief Financial Officer | ||
| (Principal Accounting and Financial Officer) | ||
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